General Financial Advice

Drumpot

Hi,

The below posts are pieces I have been publishing in a local Magazine. I thought I would post them on one thread as a general guideline for people. I worked mostly off trying to answer frequent questions I get as a financial Advisor.

Drumpot

MORTGAGES

Home Mortgages

A mortgage is a loan that is required when there is a need to borrow a capital sum to meet some item of expenditure, for which a person does not have sufficient capital at this time and/or where the person does not want to use, for this purpose, some or all of the capital they have already accumulated.

Top up Mortgages

If you are looking to buy a new car, make home improvements or have a large expense down the road, it is a tax-efficient economical way of re-structuring your finances. Payments can be structured over a longer term to make it more affordable for your convenience. It is important that you consider how the extra expense will impact on your monthly outgoings, before committing to a larger mortgage.

Re-Mortgaging

One should always look at the possibilities of Re-mortgaging ones property, as interest rates and competition mean that individuals can reduce their mortgage with different mortgage providers. Individuals may simply be looking to re-structure their mortgage in a manner which better suits their circumstances.

By switching to a different mortgage type or provider you could save yourself thousands of Euros throughout the term of your mortgage. Whether you are switching for a better rate, better customer service, or increasing the amount of your home loan, there are many competitive re-mortgage providers in the market.

Many mortgage lenders want you to think that switching is complicated but switching mortgages need not be complex, it can be a relatively quick and easy process.

Borrowers should be periodically checking that they are getting the best mortgage deal and that their mortgage suits their current circumstances.

To begin the process of re-mortgaging you should first ask your current mortgage lender if they are prepared to offer you a more competitive deal before switching.

The most important factors when looking to take out (or alter) a Mortgage of any kind are:

• Your Salary (combined salaries)
• Ability to repay the mortgage (factor in loans and liabilities)
• Satisfactory Employment record
• Have a deposit and /or savings (min 5% first time buyers)
• Clear Credit History

Is it a good time to take out a mortgage? In terms of Interest rates on offer, it’s never been a better time to take out a mortgage. While it is more difficult to get a mortgage in the current climate, people should always weigh up the plus’s and minus’s to mortgages, whether it be taking out a new one, topping up an existing one or re-mortgaging to another provider.

Drumpot

Mortgage Protection Cover

Question: I am not sure if I have any Life Assurance. When I took out my Mortgage, the bank insisted that I take out something called a Mortgage Protection policy, what exactly is this?

A Mortgage Protection Policy is a life Assurance policy. The law states that anybody taking out a mortgage is required to take out a Mortgage Protection Policy so that their mortgage will be paid off in the event of their death.

This is the cheapest Form of Life Assurance available and starts from as little as €10 per month. The cover on these policy’s decreases over time as the policy is designed simply to pay off the balance of your Mortgage if you should pass away at any time.

At any stage during the term of a Mortgage Protection Policy, you can cancel the policy once you have a revised policy in its place. This can be handy as you may find that you can get cheaper cover or a special deal by individual Brokers at different times.

If you took out Mortgage Protection cover through the bank (as it is usually an easy option) the chances are that you may be paying more then you need to be, as banks can only offer their premium rates.

*Note: You should always have Life Assurance to cover your Mortgage as a minimum. Never cancel a Life Assurance Policy until you have a new one active and ready to take its place.

Whether it be the arrival of a New Child, a marriage or a change in your financial circumstances (for better or worse) you should always keep an eye on your Life cover. You may be under covered, have too much life Cover or you might simply be able to get a better deal through another company.

Life Assurance should be thought of like Car Insurance. The policy has no value unless you need to make a claim. While you hope that you never need to make a claim on it, the financial relief it can provide your family after such a stressful incident can seriously reduce the pain involved.

Life Assurance can be considered a luxury that many people feel they can afford to do without. The truth is that people generally don’t like to consider that they will die at some stage. As a simple test, to find out what the minimum cover you should have, just ask yourself “How will my family cope financially tomorrow, if my partner or I were to die today”.

Drumpot

Pension

Question: I am currently saving Money into a pension. I am worried about my reduction in income and the fact that my pension has lost a huge amount of money because of the stock market crash. Should I stop paying contributions now and restart when things have settled down and the markets recover?

The first thing to recognise when investing into a pension is that you are getting tax relief on your investment at your standard rate (20% or 41%). You may see €100 come out of your pay packet each month but after you have received your tax relief the real cost to you will have only been €80 or €59.

Taking into account that the recent global crisis is being compared to the 1920’s crash (and is described as the perfect financial storm), it would be fair to expect that we would not encounter the same dramatic falls in our pension Investment in our lifetime (not impossible, just improbable). On top of this, if you even lost 50% of your investment, if you were getting Tax relief of 41%, your overall Loss on your investment would be 9%.

The next thing to consider is how much you can afford to put into your pension at any given time. Put simply, the more money you put in now, the more you will get at retirement. A pension is a flexible savings vehicle and you are within your rights to increase, alter or cancel your contributions.

Most people between the ages of 20 – 55 will have their Pension Monies invested in some sort of Balance Managed fund that will have lost a lot over the last year and a half. This would still be widely recognised as the best fund to remain in during these ages. Nobody can predict when the worst is over and when the recovery will start. Trying to time the markets is extremely difficult, as the last few years have shown even professional investors can get it completely wrong.

A pension is a long term savings vehicle designed to provide you with a replacement income when you have retired. For most of us, we should think of it like our own deposit account with limitations on our access to the funds. The more active a role you take in your pension, the better you can plan for a well earned carefree retirement. For most of us, you get out of a Pension, what you put in to it.

Drumpot

Regular Savings

Question: I am looking towards saving money regularly for an emergency fund. I’m not sure if I should save regularly on deposit or invest in regular investment policies.

Two important factors to consider when deciding how much you should save, is how much you can afford and how much you wish to make on your investment. Ideally we could all save enough to cover all expenses down the road but for many of us we need our money to work for us while we try to increase our wealth.

The amount we should save is a question that we can only answer ourselves as each individual has their own priorities. The simple answer is that we should all save as much as we can afford. It is important to set out a monthly budget in any household and we should all try to make a savings provision.

So, where should I invest my money? This is where people need to weigh up the principle of risk versus reward.

At the moment most people are putting their money on deposit in the banks. The security of knowing that their original contributions are protected is their main motivation. Your main risk is that you do not make enough on your investment to counteract the effect inflation will have on your deposit money.

Inflation is the general rise of goods and services over a period of time. For example - €1 might buy me a can of coke today, but I might need €1.15 to buy the same can of coke in 5 years time. If I put my €1 under my mattress I will not have enough to buy a can of coke, which is why I need my money to grow over any given time.

Putting money in a regular savings policy with the intention of investing in funds is a riskier choice. Your main goal is to get a greater return on your investment (more than deposit). Generally it’s acknowledged that Equities (in investment funds) outperform deposits in the long term. As such many people consider this to be a better long term alternative to deposit savings. You should be aware that you are not guaranteed your original investment back.

Whatever you decide to invest your money in, it is important that you are comfortable with the risk involved, irrespective of your choice.

Drumpot

Life Assurance

Question: We are a Married couple with one income earner; the other minds our young child. We currently have Mortgage Protection Assurance on our house that we took out with our Mortgage. We are just wondering if we should review our existing Life Cover Provisions.

Mortgage Protection Assurance is Life Assurance designed to pay off your mortgage in the event of the death (or Serious Illness if included on policy) of either party on the policy. Right now, your family relies on one income earner. We need to consider how you can make provisions for any potential loss of income due to Illness or Death of the main financial provider.

You should consider upgrading your Mortgage protection cover to include Critical Illness Protection cover on both your lives. This way, if either of you die or get critically Ill your mortgage will be paid off completely, taking this financial burden off your family.

If you have any other loans or Liabilities you should consider taking out life Assurance to pay these bills off in the event of death or Illness. This should, at the very least be considered by the income earner, as without their income the family is liable for these debts.

Remember, your house Partner provides a valuable service to the family and their “income” should be acknowledged. How much will it cost for a child minder if they are not able to take care of the children?

Most people do not consider the ramifications of not covering yourself against unforeseen events. If you have a very sick partner, the fewer bills you have, the more you can attend to their needs.

This example is designed to get people thinking about their own specific financial commitments and how the impact of a death or serious illness could have on a family.

Most people consider Car /Travel /House Insurances vital for the peace of mind of knowing that if something bad should happen, at least they have some sort of financial backup.

With Life Assurance, it’s a similar principle, but so many people feel that life Assurance or Critical Illness cover is a waste of money because there is only a monetary value when something awful happens. Like other Insurances, we take this out for peace of mind, after properly reviewing how a major shift in our finances could affect the lives of our family.