Jill Kerby

RENTING VS HOME OWNERSHIP …YOU’RE LOOKING AT THE FUTURE

The last time I lived in rental accommodation was in 1986, just before my husband and I bought our first home in Dublin. The only time before that date that I lived in an family-owned home was 1968, and then, for just the previous six years.

Home ownership was not for us, but my family’s story would not be untypical for many generations of Montrealers, at least not up to the early 1990s, before the onset of condo-ization of apartment buildings and new builds.

Metropolitan Montreal (as opposed to its suburbs) still has a very large rental community and remains Canada’s most ‘European-like’ city.  Home ownership, until the first wave of cheap credit that began to sweep the western world in the 1990s, was mainly the preserve of better off professionals, the managerial class and very often, ambitious, extended immigrant families willing to get onto the property ladder quickly, no matter the neighbourhood.

Big families like ours were content to rent.

One of the tempering effects to widespread home ownership in Montreal wasn’t high prices but high property taxes, which remain to this day and were exasperated by grand (and grandiose) building projects that began in the 1960s and peaked with the bankrupting folly of the 1976 Olympics.

But the long tradition of home rental – at one time over 70% of its citizens were tenants, including my grandparents for most of their lives as well as my parents – also ensured that there was a long tradition of varied properties and flexible leases that served Montreal’s large and eclectic mix of working people, immigrants and students. 

Regulation was never as strict as tenant’s advocates wanted nor as liberal as landlords always prefer. But the strong supply of property, owned and managed by a mainly professional landlord class meant that disputes were settled not just by the city’s regulator, but by the market:  a landlord that ignored his tenants’ complaints, allowed a building to deteriorate or raised his rent beyond the market norm, lost business and tenants quickly. Rent control was reserved for city owned, social housing tenants.  

I write all this as a response to the government’s publication last week of the 117 page Action Plan for Housing and Homelessness. The section on the rental sector is far shorter than it should be, but makes a start at identifying complex, key issues: especially the immediate and obvious need for more supply, diversity and variety of rental properties, suit everyone from students and young single workers, to childless higher earners. The report recognises that families are going to be raised in apartments and more older people and pensioners are going to need – and want – to downsize their existing homes, owned or not for rental accommodation that also suits their needs.

As this lengthy report shows, there is plenty of regulation of the rental market, but it isn’t comprehensive enough, nor efficiently enforced. Sorely lacking is a basic, standard requirement for rental certainty, which is not the same as rent control.

Montreal’s tenancy success centred on the flexibility of lease-holds and landlords:  as a student I never signed anything but an annual lease because I lived on an uncertain income. But my parents, responsible for housing (and educating) their five children, my grandfather for many years and assorted pets, signed typical 4-5 year leases. When we were very young, they signed a 10 year lease that was broken in year eight when they bought their one and only house in a distant suburb.

(Home ownership was not a success and we returned to a spacious, modern, city centre apartment overlooking Montreal’s skyline with utility rooms, a rubbish shoot, parking, a heated pool and Metro access, a doorman and a ‘super’ who kept the place spotless and did minor repairs.)

Security of tenure – including remaining a sitting tenant when a property is sold or foreclosed, professional landlords, and a wide selection of affordable properties that genuinely reflect demand and what people can afford, even the poor, is what has always made Montreal such a liveable place.

That the bulk of full-time rental properties are unfurnished is another big difference between what is normal in most other vibrant renting communities and here.  Only having furnished properties to choose from not only increases the cost of renting, but it discourages a sense of a place being your actual home, and not just someone else’s property and who’s mortgage you pay.

Over 20% of the Irish population now rents their home. Home ownership has fallen below 70% here and according to the report, the average income-to-rent ratio, while very high at 40% in Dublin, averages at a reasonable 23% in the rest of the country.

Millions of Europeans (and Canadians) have lived and raised families and retired in rented accommodation. Millions of Irish people will end up doing so too some day.

Do you have a personal finance question for Jill?  Please write c/o this newspaper or by email to jill@jillkerby.ie

COLLEGE FEES ARE BEING REVIEWED:  PARENTS NEED A FUNDING PLAN NOW

A close friend of mine has three children. One is already in college, one starts in September and the third is 17 and will do her Leaving Cert next year. You can see where this is going…

My friend and her husband will have paid €11,500 just in college registration charges for child number one. Assuming the fee is capped at €3,000 – a very big if – they’ll dole out another €12,000 for child number two and in a year will start paying another €12,000 over four years if child number three also does a full, four years honours degree course. 

Thats’s grand total of €35,500 just in registration charges for their three children over less than an eight year period  – money they were unable to put away into a deposit or investment account for education purposes, “for the simple reason,” said my friend, “that we have only had one full time salary coming in since the kids were little.  My part-time work over the years paid for groceries and petrol.  The child benefit went to pay for everything school-related and if there was anything left over, for sports clubs, dancing and music lessons and later, grinds.”

Like many parents with bright kids who want to go to college, a large chunk of the cost of their third level education is being paid for from their income and from loans.  Their worry is that either they, or their children might have to pay for their future fees – real fees, not just “registration” charges -  will be in the form of bank loans.

The government is just starting to explore this funding issue and seem to be leaning towards some kind of student loan option over raising general taxation or simply charging real ‘market’ fees (as in the United States) and then relying on the universities to subsidise students who cannot afford the fees/loans with bursaries and endowments.

With a decision unlikely too soon  – this government is precarious enough – parents with children approaching college age still have a little breathing space in which to try and put a realistic funding plan of their own in place if UK style college fees are introduced here.

KBC Bank recently produced the results of a personal borrowing survey. It found that 9% of the adults questioned said they were borrowing for education purposes. Another 10% were borrowing for “refinancing” reasons. 

I’ve spoken to many parents over the years – especially pre-2008 - who used refinancing loans to clear or reduce high cost credit card, store card or hire purchase loans in order to then be able to borrow to pay for third level costs. Some even did so in order to act as guarantor for post-graduate loans taken out by their older children. Most were refinancing at very low mortgage borrowing rates, which are, unfortunately, no longer available.

And while refinancing at lower repayment rates is a very good idea, the KBC survey threw up one very alarming result:  53% of those surveyed, who currently have a personal loan, have no idea what interest they are paying though 73% of respondents sensibly opted for fixed repayments and just 27% for variable ones.

Understanding the impact of compound interest is a key step in being a successful, sustainable borrower. For example, the difference between paying 7.49% (KBC Bank, Ulster Bank, Bank of Ireland) and 12.5.% (Permanent TSB) for a €10,000 personal loan over a five year period, an overlap period my friends face, is the difference between paying €3,297 interest and €1,940. This is highly significant if you have this kind of potential borrowing requirement over a number of different three or five year periods as one child graduates and another enters third level.

KBC Bank has become one of the most competitive lenders, especially to current account customers, but parents/young people should also be looking into credit union rates that are calculated on diminishing balances rather than via compounding repayments which can make for a very competitive total repayment cost.

The ideal way to meet the cost of higher education, is to save and invest from their early age. Scholarships, bursaries and grants are very helpful too, but if they aren’t available you need a plan of your own:

-       Aim, where possible to pay at least half of the ongoing annual costs from savings and earnings. This might involve some serious budgeting measures and encouraging your children to get summer/part-time jobs.

-       Shop around for the best borrowing rates, usually offered for amounts of €10,000 and more. Always check comparison sites like www.bonkers.ie and www.consumerhelp.ie

-       Check your credit score at www.icb.ie, the Irish Credit Bureau. Your chances of getting any loan is poor if you’ve an impaired credit record.

Do you have a personal finance question for Jill?  Please write c/o this newspaper or by email to jill@jillkerby.ie

MORE letters…as the Brexit fall-out continues

BMcC writes:  I read your answer last week about the converting a euro inheritance to Sterling. I have a pension lump sum that could clear a mortgage that I took out 10 years ago when I lived in Glasgow. The apartment is rented and I was thinking of keeping it. But now that the euro is worth 10% more and there’s so much uncertainty about what will happen in Scotland, I’m wondering if I should clear the loan.

Right now you know that clearing this mortgage early – especially if you can do so without a penalty – will result in a 10% cash bonus due to fall in the sterling/euro exchange rate. However, the rent will now buy you 10% less if you are redeeming it home. Ditto for any capital gain from a sale. You need to weigh up the uncertainty of the Brexit fall-out with the certainty of an immediate exchange rate savings if you pay off the mortgage tomorrow. This is the only event you can control. Whether Scotland separates from the UK and joins the EU is anyone’s guess. 

MC writes: My defined benefit pension scheme was wound up in 2011. I was 66 in February and was advised to take a tax free lump sum instead of buying a pension.  I received a cheque worth just over €57,000 but I don’t really know what to do with this money to get the best return. I want access to some of this money, but want the rest as a pension top up.

If the €57,000 is your entire pension-related payment from your job, then I will assume that the pension to which you refer, is your state pension, worth €12,220 a year. What is less clear is by how much you want to top up your pension income of €235 a week. Do you need an extra €50 a week? €100? (ie €2,600 to €5,200 after tax, charges)  This represents a net (after tax and charges) annual return from €57,000 of c4.6% or 9.2% respectively.

Returns like this require considerable risk to the capital, which you don’t appear to be able to afford. As I have written a number of times before, deposit returns are so low these days, with even the best longer term fixed accounts only paying c2% per annum (or €1,140 on a €57,000 balance) you may have to draw down your capital sooner than you expect. To avoid depleting it entirely, you should start thinking of ways to earn more, whether from direct employment or self-employment. If you own your home, the tax-free Rent-a-Room scheme should be investigated or even down-sizing.

MF writes:  I would like to know what happens to my husband’s occupational pension if he predeceases me?

You might be entitled to either a lump sum payment or a pension for life if your husband dies while in service. If he is already getting his pension and predeceases you, then you may be entitled to a widow’s pension.  This is usually half the value of his pension, but it will depend on the rules of his pension scheme and whether or not he opted for such a benefit to be paid to you when he retired. You and your husband need to check the retirement beneficiary options available at retirement and/or speak to a pension scheme trustee if you do not have this information to hand.

DL writes: In 2004 we bought a leaseback apartment in France. The rental income was fine until the 2008 crash. Even though my husband lost his job (he’s back working now) we managed to scrape together the repayments to the French bank until two years ago when we asked them for a payment break. We ended up missing three payments and they handed our loan to a debt collection agency that is now demanding the outstanding €50,000. My husband wants to raise an Irish loan – that’s if we get one - because he thinks the property will be worth more in a few years. I think we should sell -  our children start college in two years and we need to pay this expense. 

You don’t say how much the apartment is worth, or your own home in Ireland, but unless you have a huge amount of equity in these properties, your chance of getting a €50,000 loan from an Irish bank to clear your French arrears are probably quite slim. Unless you can find the money you owe from somewhere else, you may have no choice but to sell the French apartment. You can then start working on repairing your impaired credit record.

Finally, leaseback holiday properties often included VAT subsidies that could be clawed back if you sold the property before the repayment contract ended. You might have to pay the French government such a refund. Any capital gain will be subject to 33% tax in Ireland, less your annual CGT allowances of €1,270 and sales costs.

BREXIT BLUES APPEAR IN THIS MONTH’S POST BAG

The anti-Brexit referendum result means that quite a few readers, who were worried about their UK pensions, properties, bank accounts and even whether they would end up paying higher university fees for their children could end up worse off financially. We’ll answer some of these and other questions this week and next. 

What to do with cash was of particular interest to several readers:

Ms JN writes: I live and work in Northern Ireland. I will soon receive an inheritance of €50,000 from the sale of my late parents’ house (in the South). Is it better to open a bank account in the Republic or get it transferred directly into my bank account in the North? I'm a bit worried about exchange rates right now. I don’t want to lose too much in the transfer.

Sterling had been weakening against the euro this year, mainly due to concerns about Brexit. The ‘Leave’ vote further weakened the euro/sterling price – at time of writing it was 83 cent to the pound; the day before the referendum it was 77 cent so there has been a 10% shift. But this rate means that your transferred euro inheritance will buy you more in the North and is good news for visitors to the UK, for parents supporting children studying in the UK or for any of us who buy sterling denominated goods and services.(It’s bad news for anyone selling stuff into the UK or for Irish tourism.)

Transferring this €50,000 inheritance to your account in the North will boost its spending power by about €5,000, but sterling has fallen heavily against the US dollar as well and Britain is a huge importer. This will eventually be reflected in the price of your high street goods, the cost of oil and petrol in the North.

Ends

Mr SK writes:  I lived and worked in Birmingham receive both a UK old age pension and a small occupational one as I lived for more than 20 years in Birmingham. What is going to happen to my pensions?

Your pensions will continue to be paid. However, the fall in the value of sterling is going to impact on your spending power. But interest rates don’t stand still; they fluctuate all the time and a 10% “loss” today is not written in stone. The euro is not immune to falls either and could happen if EU recession returns or from Brexit contagion risk. A fall in the euro will counterbalance the sterling drop.

Since you can’t impact or even accurately time exchange rates, you need to concentrate on what you can do:  review your finances, especially if you have investment funds. You need to find 10% more spending power. Are you paying too much tax? Claiming all eligible social welfare benefits? Have you a spare room you could rent out via the tax-free Rent a Room Scheme or even AirBnB. Try to squeeze out more deposit interest you (see www.bonkers.ie for deposit rate comparisons). Could you get a part-time or casual job? Do you have stuff your could sell on Buy‘nSell, eBay or at your local car boot sale? Ever considered barter?  I know a retired accountant, a widower, who helps his family and friends (and their family and friends – word gets around)  prepare their tax returns in exchange for DIY jobs around his house, home cooked meals and baking that goes into his freezer. One ‘client’ even lends him their holiday apartment in Spain where he goes hill walking with his buddies every year.

Ends

Mr DR writes:  My girlfriend and I both have rented properties that are covering our repayments, and we are getting married in 2018. We both live at home with our parents and we are both working with a joint income of about €70,000.  I’m from a farming background and own a share of the farm and earn some farm income.  How favourable would a bank be to lend for a self-build on my own land, taking all this into account. Selling either of our houses would mean selling at a loss.

You don’t say how much you think it would cost to build your new home, but with a joint income of €70,000, under the new Central Bank rules, your mortgage limit would be €245,000. As existing owner you would have to produce a 20% downpayment on the total build price, or €49,000. However, the fact that both your properties are in negative equity and you are servicing two mortgages is not going to help your case, said Michael Dowling, a well known mortgage and financial adviser (www.mdowlingfinancialservices.ie).

According to Dowling the lender must stress-test their existing loans, even if they are cheap trackers, as well as any new one and the stress rate is between 5%-7%. “That alone might disqualify them from a new loan for their self-build.”He suggested that if you want to start the new build anytime soon, that you first pay off one of the existing negative equity houses with your existing (and ongoing) savings and then apply for a negative equity loan. Hopefully you will be in a position to start building your new home by your wedding day.

Next week:  More of your letters

Do you have a personal finance question for Jill?  Please write c/o this newspaper or by email to jill@jillkerby.ie