Find Financial Freedom

When I worked as a mortgage broker, I made a substantial portion of my income from remortgaging my clients properties, mostly just helping out those rate tarts that wanted a cheaper deal for the next 2,3 or 5 years, but sometimes I would do a remortgage as part of a debt-restructuring exercise, rolling up much more expensive loans and credit cards into a cheaper rate on the new mortgage.

Now when the base rate was between for instance 5%, this pretty much always made sense, as the reversionary rate on my clients’ mortgages was usually between 1.75% and 2.25% over base, so best case 6.75% would be the standard variable rate, which I would always be able to beat, even when all costs were taken into account.

Nowadays, things are slightly different thanks to the credit crunch and the Bank of England’s decisions over the past nine months to reduce the base rate to 0.5% and maintain this unprecedented low level for the last three months.

Any mortgage holder now just about to come off a fixed rate deal will be rubbing their hands with glee at the though of potentially paying as little as 2.25% on their mortgage, assuming a similar margin over base from earlier.

It really doesn’t make much sense to consider swapping your mortgage to a new fixed rate deal when you will save considerably more money on your mortgage by simply sticking with the standard variable rate, or am I missing something? It strikes me that fixed rates should have come down significantly over the last six months, but they still seem to be hovering around the 4-5% mark. If you could find a three or five year deal at around 3%, then it would make sense to remortgage onto that, such that when the base rate does start to rise, you will have locked in cheap money for 3-5 years.

Clearly, this all hinges on the Bank of England and what they decide to do with the base rate, though, as I wrote in an article earlier in the week, it seems that at least one big high street bank thinks that the base rate won’t rise until late 2010.

I’m in the lucky position that my mortgage reverted to SVR just as the Bank of England started drastically reducing the base rate late in 2008, such that I’m paying about £600 less each month than I thought I would be once the mortgage had reverted to SVR, which saved me needing to remortgage. Although, with everything that has happened in the last year, the lesson I’ve learnt is that our society is so burdoned with debt that even if you stuck on a variable rate mortgage and didn’t go shopping around for a good fixed rate deal every 2-3 years, you will be better off.

The reason for this is simple – too many people with too much debt will stop the Bank of England from raising rates too high, most likely by causing another credit crunch / recession just as it looks like inflation requires a period of sustained high interest rates.

When I worked as a mortgage broker I dealt with a broad cross section of society on a daily basis, some professionals, some civil servants and teachers and quite a few tradesmen.

Now you would think that the more educated the clients were the better they would be with their personal finances, not so. What I discovered whilst dealing with the various clients I dealt with was that some people just seem to have a natural instinct for personal finances, and others seemed to need a helping hand.

The lesson I tried to instil in all of my clients that fell into this latter category was the importance of budgeting. This seemed quite alien to some of them, and it was only when I went through their monthly income and outgoings, to create a monthly budget for them that they realised why they were so often getting into debt.

By preparing a family budget, where you know exactly what your necessary outgoings (mortgage/rent, utilities, insurance, food, petrol/diesel) are each month allows you to then see what you have left over each month to spend and save.

If you only vaguely know how much you have on a week-by-week or monthly basis to spend, then it’s very easy to overspend, or worse if you have overestimated, get into debt on a credit card or overdraft.

If you can work out your family budget well for the month, and know exactly how much money you have to spend, then you can avoid going into debt, and it’s this that is the key to budgeting. I helped many clients realise that the reason they were getting into debt each month was that they were overspending on unnecessary items, such as expensive mobile phone contracts, over priced insurance, expensive utilities, expensive sky tv or cable, and generally spending a lot of money shopping at the supermarket.

By helping these people to understand their budget, they were able to make cuts that saved them money each month which they could then spend guilt free, knowing that they were now not getting into debt because they had made a family budget, and most importantly were sticking to it!

In my quest for financial freedom, I have chosen to achieve this by being an entrepreneur and starting my own business. This is nothing new to me having been involved in a successful internet business during 2004/2005 and then running my own mortgage brokerage business from 2006-2008.

However, I’m sure there are many out there that have always had jobs, and though they may have no desire to run their own business, if their ultimate goal is financial freedom, then I would suggest that this could be achieved quicker by setting up and running your own business.

Before you do though, take a bit of time to evaluate a potential business opportunity to see if it is right for you, as well as evaluating the business to ensure that it is actually a business and not just self-employment – a mistake I was guilty of making with my mortgage brokerage!

Evaluation criteria for a business opportunity

1. Is the opportunity you are considering something you have an interest in? If not, it may be best to steer clear of it, as you will be putting in the hours for this, so it better be something that you have some passion for.

2. Do you have something unique to offer the marketplace? If the answer is no, then it will be harder to make it a success – essentially you will be just another player in a crowded marketplace with little to make you stand out from the crowd, and don’t think that your pricing strategy is enough to make you unique – it isn’t!

3. Is there sufficient demand in the marketplace to sustain your new business? Especially important if it is already a mature marketplace with existing businesses already thriving, even more so if the market is not growing rapidly. Essentially, if you are entering a market that is mature and not growing, then to make your business a success, you will have to steal the customers from other businesses, and you can be sure that your competitors will not like this and most likely take action to counter this. This makes customer acquisition and retention much more costly.

4. What demographic trends are going to help your business? Clearly starting a pie shop in a wealthy, health conscious marketplace will probably not do that well. However, starting an organic farm shop will probably thrive, firstly because of the demographic trend on your side, and secondly because organic products are premium products, which makes them less price sensitive and theoretically higher margins.

5. What risks are there that are totally out of your control? I speak from experience, I have seen my ability to trade wiped out because I didn’t understand the risks that were inherent in being a middle man or a broker in the mortgage intermediary market – the lenders control the market by way of the products they make available to brokers, if they decide to sell their own products cheaper than brokers can, it undermines ones ability to trade. This is pretty much what put me out of business as a mortgage broker, and is a lesson I will never forget. Take great care in evaluating any business idea to ensure that have as much control as possible, don’t rely on another business(es) being able to continue to supply you with anything.

As well as these five points that will help you to evaluate a business opportunity, I would also advise you to think about these other factors:

1. Are you willing to do what it takes to become a successful business person? It may involve taking drastic measures, like selling your home, living in a caravan, living on a tiny amount of money while you get the business going, doing without nice holidays, cars or even designer labels! If you want to continue to live a high consumption lifestyle while trying to get a business of the ground, I can tell you that this will make it almost impossible, so it’s better to change your way of thinking (and spending) before starting your business.

2. Are you willing to deal with all the negativity and scorn that others, sometimes those closest you, will deal you? You’d be amazed at how closed minded people are when it comes to entrepreneurs, although in my experience this is only when you are starting out. Once you start showing a profit, suddenly everyone becomes a believer! This is simply a result of the fact that most people do not have the imagination to think “outside the box”, and therefore cannot comprehend starting a business. Most people need to see to believe, to be a successful entrepreneur, you need to believe before you see – can you do this? Do you have the ability to visualize your future, a future where you are running a successful business? Does the thought of making more money than you ever did as an employee excite, rather than intimidate you? If you answered yes to these questions, then you probably have what it takes to be a success, if you answered no, then don’t bother, you will fail and lots of people who said “I told you so” will be smug that they knew better.

3. Are you in a stable relationship, with a partner that supports your dreams and is prepared to stand by you come thick and thin? If not, then be prepared to walk away from them should they not be supportive or be prepared to fail in your endeavour because having an unsupportive partner will do nothing other than undermine your efforts, most likely resulting in your business not succeeding.

I know this is quite blunt and to the point, but it has to be. Starting your own business is not something to be taken lightly, you need nerves of steel, determination and most of all, the ability to learn, quickly. In addition there are probably a bunch of other critical attributes that are needed that I will go into in another post.

I was in my local branch of Natwest Bank today, I won’t bore  you with the mudanity of what I was doing – opening a business savings account if you must know – but I had a very interesting chat with the business adviser in the branch who deals with all aspects of their products, savings, investments, mortgages and so on.

He informed me that he had received an internal memo recently from Natwests’ in house economic forecasters stating that they felt the current low interest rates which most of us borrowers are benefitting from should last until the end of 2010.

I was quite shocked, but very pleasantly surprised by this, as I had predicted that interest rates would rise during 2010. If we do see the current 0.5% BoE base rate until the end of next year, then my predictions will be completely wrong – not that I mind, I have a mortgage and am quite enjoying paying just over 2% on my mortgage.

This will mean misery for the hundreds of thousands of pensioners who have significant savings in their savings accounts, and in fact, while I was in Natwest sorting out a savings account for my corporation tax, I was rather amazed to find out that I will be getting a whopping 1.25% interest on my savings – hardly seems worth it really!

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