Opinion Piece by Edward Downpatrick: The Road Ahead – Light at the End of the Tunnel
2021 – THE ROAD AHEAD
Light at the end of the tunnel
Piece has been authored by Edward Downpatrick, Head of Strategy, Fintuity
With the Prime Minister’s recent roadmap out of this latest and no less punishing lockdown there is at least some cause for optimism. The renewed sense of hope should be mitigated by the reality that this iteration, despite children going back to school faster than last time, will have endured longer than last year’s. As human beings we crave the security of certainty. The steps outlined give us a teasing glimmer of that, but it will have been almost four months before, the bellwether for many, we can have a pint in a pub garden.
Two months after that watershed, the flood gates theoretically open and nightclub bacchanalian bananas we can all go. Poor old festival managers having to make their calls to cancel their summer events in the first month of the year. That said, there is still no guarantee weddings, festivals, parties, crowds at sports fixtures, the list goes on will all be possible.
Will the vaccine continue to be distributed without hurdles, potholes, and speedbumps as it hitherto has? Will it protect us, the more vulnerable especially, from new iterations emerging from parts of the world whence vaccine programmes have been slow, non-existent, or debunked, e.g., Brazil? Anyway, the Prime Minister would not be the first politician to overpromise and underdeliver. Quite aside from having made something of a habit of it himself, there are forces beyond the control of all and tough, polarising decisions that need to be made in an environment where there has been so much suffering, so much hardship, so many lives put on hold, so little interaction with loved ones.
Those who have remained salaried over the year have a very different set of complaints to those of us self-employed or running businesses that have not had the good and rare fortune of benefitting from the ground-to-a-halt year. One of my best friends runs an events business, main source of revenue from weddings, and another best mate is in the holiday accommodation game. Both have been hammered. Both have had their personal lives set back by years.
To take an example, if you are a business owner who has borrowed money for that business, one year of losses (which as we have seen these past 10 months, may be in no way the fault of the business) means that the business needs to show two years of subsequent profitable accounts before the owner(s) of the business can borrow money personally, e.g., for a home, but a bank may need to see a two-year positive balance sheet too, much more of a challenge. My mate with the events business was on the verge of moving his growing family into the slightly bigger home they so desperately needed before the interdict on social gatherings carried on beyond even worst expectations.
This brings me to the lay of the land for mortgages, pensions, and a brief investment outlook for 2021.
Let’s start here because there’s been all manner of controversy in the news of late. Will the pensions tax relief be raided by Rishi? The experts agree that this an obvious area to target given the Treasury’s need to significantly boost the public coffers and it will mean reduction in the relief rather than wholesale removal. How are pension funds getting away with investing so much in fossil fuel businesses? This is perhaps a rather bleak prognosis for the species, all the more so given the US re-entering the Paris Agreement and a Biden administration due to spend over a trillion on green industry and climate change-busting technologies.
If you missed it, the state pension age continues to increase with most us currently being able to retire at 67 or 68 depending on your date of birth. The Pensions Act 2014 means the state pension age will rise from 66 to 67 between 2026 and 2028. This first affects people born on or after April 6, 1960. Under the Pensions Act 2007, the state pension age for men and women will increase from 67 to 68 between 2044 and 2046, based on the current law. There is another way to check how a person may be affected by the changes to the state pension age. This is via the online “Check your State Pension age” tool. You can also find out your Pension Credit qualifying age. https://www.gov.uk/state-pension-age
There is an awful lot more to say on this area of personal finance and multiple articles emerge daily in our newsfeeds but for the information most relevant to you, talk to an expert advisor.
One of the UK’s biggest lenders has cut rates across its range of two- and five-year mortgages by as much as 0.4%. Despite the inescapable challenges, the housing and mortgage markets are remarkably lively. Among the packages with reduced rates are the all-important for most first-time buyers 90% loan-to-value proposition, meaning getting onto or up the property ladder is not only still feasible but might also be more affordable. But readers should restrain at least some of their excitement because this is not the story across the spectrum of lenders.
Figures released this month revealed a post-March lockdown 2020 high for new mortgage deals on the market. The big increase in availability of 90% loan-to-value deals, 248 this month compared with 70 last July, could be an indication that lenders are feeling more confident. Aside from this being good news for buyers and sellers alike, it is an encouraging barometer of national economic health. The rates and terms on offer to different types of borrower differ enormously and our advice on approach is outlined below.
Self-Employed: lenders are generally tightening the reins with this category of borrower and they are being especially harshly judged if they had to close their business during lockdowns or were forced to accept financial support from the government. Upshot is that there are more hoops than ever before for them to jump through.
Our advice: Speak to an independent mortgage broker because there are lenders much better positioned to serve the self-employed. Get your documents in order well ahead of time and if possible, reduce your debts, as this will affect how much you can borrow.
Furloughed: Some lenders will not accept income from those on furlough when working out the affordability assessment. Others require that the applicant has either returned to work or has a fixed date to return.
Our advice: get a letter from your employer confirming your basic salary, return to work date, and any other terms of return.
Re-mortgaging: a lot of people rightly asking how they will afford their existing mortgage given the lack of total certainty ahead.
Our advice: you could save a fair wedge by switching now given lenders’ often expensive standard variable rates and availability of less-pricey deals from lenders such as Barclays, NatWest, and Platform (arm of the Co-Operative Bank).
First-time buyers: many more 90% loan-to-value deals available than a few months ago and they have even become slightly cheaper over the past few weeks. Unfortunately, they are still way more expensive than a year ago. The average two-year fixed rate for someone who can only manage a 10% deposit is priced at about 3.56%, while for a five-year deal it is 3.72%. Availability, frustratingly, does not necessarily mean accessibility as credit scoring is currently tougher.
Our advice: it may not be feasible for many, but whilst reducing your loan-to-value to 85% may not get you the house you want right now, you will save upwards of 100 basis points (1%) on your rate.
Professionals and higher earners: In early February, Platform (Co-Operative Bank) launched a “professional mortgage” allowing people in certain jobs such as accountants, architects, dentists, solicitors, and vets to borrow up to 5.5 times their income. Meanwhile, Barclays has just pushed up its maximum income multiple to 5.5 where one applicant earns £75,000-plus or where there is a joint income of £100,000-plus.
Our advice: if you happen to be part of this borrowing category, leap on a good deal. Lenders are keenest of all to lend to you.
Short of being the next Oracle of Delphi it is hard to know for sure what will happen this year, but it is likely it won’t be as bumpy and that we will see a sustained recovery wherein sectors affected by the pandemic will improve. There are enough positives to suggest that equities will outperform bonds and cash as corporate profits rebound and central banks remain on hold. There is a lot of value in Emerging Market equities. China’s early exit from lockdown and stimulus measures will likely benefit Emerging Markets more broadly, as should the recovery in global demand for goods and a weaker US dollar.
If last year taught us anything, predicting the fate of a pandemic-stricken world is difficult, even for those widely regarded as oracles. While a plethora of hurdles remain, we advise investors to seize the opportunities these present whilst being wary of the challenges nipping at their heels. That is why we encourage investors to diversify their portfolios across asset classes and geographical regions to secure opportunities from market corrections or price shifts in particular assets and changing investment trends. We also encourage those fortunate enough to be in such a position to take full advantage of ISA allowances.
We are here to serve you and to give you the most affordable advice on the market without compromising an iota on quality. We will continue to keep you updated and look forward to a beer, G&T etc with you in a pub garden a week or so after Easter!