The Sunday Times - Money Questions 15/11/09
Posted by Jill Kerby on November 15 2009 @ 14:08
DC writes from Dublin:
My wife and I are looking at getting a mortgage for a house we have finally found. We are first time buyers with the deposit accumulated. We both bank with AIB who have are offered a fixed and variable mortgage. The fixed rate is 2.8% for two years and the variable is now 2.4%. I know Europe is now out of recession and the ECB will be increasing rates over the next year. Would the rate of the variable increase rapidly over the next year or would it be a slow process? AIB would like us to take a fixed rate mortgage. We would like to know what your thoughts are on the benefits of both types of mortgage.
That two year fixed rate is very low indeed. And while economic recovery is going to be tenuous and not at all consistent, either in its strength or in the number of countries involved, there is plenty of consensus that the ECB rate isn't going to go any lower than 1%.You need to keep in mind too that the Irish lenders are not constrained by the ECB rate when it comes to setting their own mortgage lending rates. The only thing that is stopping the likes of AIB and Bank of Ireland, for example,from raising their mortgage rates is the Government's share of their businesses: in return for the billions in bailout money the two received, they gave a mortgage lending commitment, and for the moment, that seems to include no increase in the interest rate. If you do accept this 2.8% fixed rate, you must also accept that the variable rate could be higher in two years time. Stress-test your ability to pay over the longer term by raising the 2.8% interest to at least 4.8%. Could you still afford to pay your mortgage? Even if you can, will you still be happy to pay a higher rate if the value of your property was to fall into negative equity? You don’t say how much your down payment will be, but if it is just 8% to 10% of the purchase price, negative equity is a real possibility. I wish you good luck in your new home, but the most important thing is to accept that this is your home, not an “investment” or a future pension. If you have serious doubts about your ability to comfortably repay this debt every month, keep renting.
WO’S writes from South Dublin:
I worked in an academic institution for 33 years. During this period I also purchased seven years pension contributions before retiring in 2004. Prior to joining the institution I worked in industry for 13 years in the UK thus entitling me to a UK social welfare pension. I’ve been granted a credit of one year by the D I T due to the system which it applies because of how I achieved my qualification prior to joining it . However , I’ve been notified that because of my UK Social Welfare Pension I will forfeit this extra year of entitlement. The information was not available to me prior to retiring. I would be most grateful on any clarification of the validity of the reduction of one year of pension.
This is an unusual case and not one that I have ever come across. I have heard about circumstances in which the integration of an occupational and state pension has resulted in disputes over the size of the final pension, but in each case these have been Irish pensions in both instances (and not a UK or EU state pension benefit.) I contacted the Pensions Board on your behalf and was told that based on the details you supplied me, it would appear that they are the agency to investigate your complaint. “If this doesn’t turn out to be so we will ensure that he is directed to thecorrect one,” - perhaps the Pensions Ombudsman. You should send a letter expaining as clearly as possible the time-line of events and include any documentation you may have to support your complaint. I’ve passed onto you the name of the Pensions Board official who will receive your correspondance.
HB writes from Dublin:
I’m writing with a question concerning the management fees on managed funds. I have three modest funds and a very small personal pension plan. The funds have taken a big hit this year and recently I calculated the actual amount of the management charges and was quite shocked. I’m aware that there has to be some charge as I expect that professionals will do a better job than I could do myself. I’m currently unemployed and living on unemployment benefit so to see an annual amount of €2,500 leaving my funds – regardless of performance - is very worrying. If the funds were to remain at their current value, fees of 1.5% or 1.75% would eat up a large chunk of money over 10 – 20 years. I’m happy enough with my financial advisor, as far as I can tell they are doing whatever they can in difficult times. My portfolio was changed in 2006 therefore there would still be early encashment charges if I switched to a different scheme now. I’m wonder if you would have any suggestion how I might reduce these fees?
Most pension funds allow for a couple of free switches between funds every year and this might be a way to reduce annual costs: cash and other fixed interest funds usually carry lower annual management fees, but you want to make sure that this is a suitable asset for your needs. (It may not be possible to switch out of a property fund as easily.) Before you do anything, speak to your advisor – or better still, to a new, fee-based one if yours is not - to review your existing asset mix and your schedule of charges. Hopefully this person can make some suggestions to improve both. It seems scandalous to me that fund managers and their sales agents don’t take some of the pain, in the form of lower annual management fees or commission rebates, when they consistently lose their client’s money through poor asset allocation and advice, as has happened with typical Irish managed pension funds for the past decade. It’s certainly a subject to which the new Financial Regulator should give some attention when he takes office next January.