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Variable / Tracker Mortgages

• Northern Rock 2.79% 2 year deal with £595 arrangement fee, 4% ERC until 1st March 2012, max 70% LTV
• ING Direct 2.79% (BoEBR + 2.29%) 2 year deal (24 months exactly) with £795 arrangement fee (£195 booking fee), 2% ERC for 24 months, max 75% LTV
• Co-Op Bank 2.99% 3 year deal with £199 application fee, 3% ERC until 31 January 2013, max 60% LTV
• Woolwich 3.19% for term, no arrangement fee, 1% ERC until 31 January 2012, max 70% LTV

All of these deals look relatively good at the moment, but bear in mind that the base rate will eventually start to rise to combat inflation. Though this may be well into next year, it will still hurt your finances if you’re locked into a deal with an ERC until 2012 - you could well end up paying 6-7% on your mortgage if the base rate rises to 3.5-5%, which is its’ typical level over the course of this decade.

Fixed Rate Mortgages

• First Direct 3.64% fixed for 2 years, £199 arrangement fee + £299 booking fee, ERC 3% yr1 - 2% yr2, max 60% LTV
• Chorley & District BS 4.99% for 2 years, 0.75% arrangement fee, ERC 3% for three years, max 90% LTV
• Mansfield BS 4.39% fixed for 3 years, £999 arrangement fee, ERC 3% for three years, max 75% LTV
• Newcastle BS 4.99% fixed until 31.12.2014, £994 arrangement fee, ERC 3% until 31.12.2014, max 75% LTV
• Chelsea BS 5.69% fixed until 31.12.2019, £995 arrangement fee, ERC from 8% yr 1 to 4% final year

Of these fixed rate deals the First Direct deal looks ok, but none of them are particularly good when you consider the base rate is at 0.5%. We really should be seeing some fixed rate deals below 3% considering the billions of taxpayers money that has been poured into the banks to ease liquidity, but as per usual the UK govt has been stiched up by the bankers who and it’s joe public that feels it.

I came across this CPA Arbitrage e-learning product today whilst browsing Click Bank. I had a good read of the website, watched a few of the videos that were on there, mostly they just showed affiliate accounts with lots of money in them that the owner of the CPA Arbitrage system was running.

In fairness to the chap, he had made well over $500,000 in the last few years from internet marketing, but that was just his turnover, I wonder what he spent on advertising? You see that’s the thing with arbitrage, by its very nature, you are usually only making a small margin between what something costs versus what it can be sold for, and this differential should only be available for a short period of time - market forces should mean that over the long term the opportunity for arbitrage dissappears.

So how does the program work exactly? From what I could tell by reading the website and watching the promotional videos, they are buying up cheap traffic on Google then directing it to websites that are full of affiliate links for information products. These information products sell via online networks such as Click Bank, usually for a decent commission, sometimes as much as 75% commission!

The general premise is that if you make $10 commission, and you can buy a click for $1, and every 5 clicks you make a commission, then each click is worth $2, but is only costing you $1. You have therefore made an arbitrary profit of $1 per click. To make some decent money, just increase the number of clicks, simple!

I can hardly believe that next month is December, which means that 2010 is nearly upon us. At the start of this year I assumed that interest rates would only be low for a few months before rising sharply, back to a more normal range of 3-5% - how wrong I have been!

With the economy still not fully recovered from the effects of the credit crunch, and many experts believing that we still have more doom and gloom to come, I can only imagine that the Bank of England base rate will not be rising for a long time to come.

The worst case scenario from what I can make of it all is that the base rate will start to rise sometime in the 2nd quarter of 2010, but the best case scenario is that all through 2010 the base rate will remain at it’s current low level.

For the base rate to rise, the economy has to start inflating again, something that it shows no signs of doing just yet. And even when the economy does start to grow, it will be quite a while before the inflation rate exceeds the 3% maximum target set by the Bank of England. With that in mind I think I have to revise my earlier interest rate predictions for 2009 - 2010, which I predicted the base rate would rise steadily during 2010. I believe the economy hasn’t recovered as quickly as was predicted back in January of this year, and as such the base rate will have to remain at its current level for quite some time to come.

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Buy to let mortgages work very similarly to regular mortgages, with the distinction mainly being that the property being used as security for the mortgage is an investment property and not your home. Yes there are some other subtle differences and a vast array of regulations that govern the transaction, which I will cover here.

For a start, on a conventional mortgage the ability to borrow is governed by the deposit you can put down and your income. The larger the deposit, as a percentage of the property value, a reduced interest rate is available to the borrower. The income multiple is usually a multiple of the borrowers income, for example three times salary less annualised non-mortgage debt repayments.

With a buy to let mortgage, the income multiple is governed not by your income as the borrower, but is calculated by the interest payments that can be covered by the annualised rental income of the property. For example, if the property is rented for £795 a month, or £9,540 a year, and the rental cover is 100%, as long as the interest on the mortgage is no more than £9,540 a year, the lender will accept the deal.

In most cases, the rental cover is usually more than 100%, typically 125%, so in the above example, the annualised interest on the mortgage could be no more than £7,632, as once this is multiplied by 125% it would be £9,540.

How do you work this all out? I’ll give you an example:

Property Value: £180,000
Mortgage Size: £120,000
Pay Rate: 4.5%
Rental Cover: 130%
Monthly Rent: £795

Annualised interest: (£120,000 x 4.5%) £5,400
Rental cover: (£5,400 x 130%) £7,020
Annualised rent: (£795 x 12) £9,540

So in this case the annualised rent is greater than the required rental cover, so the lender would accept the case.

The other main consideration when looking at buy to let mortgages is that can cannot rent it to any immediate family.

I read an interesting article in yesterdays paper (not sure which one, think it was the Gaurdian) about a London based financial advisor that specifically helps his clients to maximise their investment returns solely by holding and trading gilts.

He is a very cautious investor/advisor and stated in his bio that he hasn’t been invested in the stock market since 1986, when at which point he was invested in the Nikkei at around 40,000, and got out at the right time. Currently as I write this, the Nikkei is at 9770.31, and this is 23 years later?

He states in the article that although there are big gains to be made in the stock market, there have also been big losses during the 23 years in which he has not been “in the market” and firmly believes that it is too risky right now to be piling money into the market.

However, I’m sure some people will have noticed that the FTSE 100 has risen from a low of around 3000 at the bottom of this current trough to a rather more healthy 5296 today. But what has driven this recovery?

According to this investor, the same problems that caused the credit crunch, i.e. abundance of cheap credit are causing the rapid recovery we are seeing now, except the difference being that the cheap credit prior to the credit crunch was being pumped into the housing market, whereas now it is being pumped into the stock market, thanks largely to the central government bailouts that we have seen across the major developed economies.

I’m fairly certain that this is not individuals who are pumping in lots of money into the stock markets, more likely it will be the banks speculating with the money they have received in handouts from the govt. Though I’m sure some of this investment in the stock market will be driven by canny investors looking to take advantage of depressed asset prices, using either their own capital or capital they may be able to borrow. Lest we forget that not everyone struggles to borrow money at times like these, just those that need to borrow…those that don’t have a need to borrow will find that there is plenty of credit available to them, rather ironically.

The feeling I got from reading this article is that the recession is not over, far from it in fact, and that we as a society are not learning from our mistakes. Any growth in the stock market in the next few months will largely because of demand driven by credit, rather than because the fundamentals of the stocks being purchased are improving vastly.

I recently read The Richest Man In Babylon by Charles S Clason and was absolutely engrossed in it for about a week - it’s only a short book so didn’t take too many evenings to read it.

The book was written in 1926, though it still feels very relevant today, and what’s more, the lessons that it teaches are written in the context of the residents of Babylon circa 500 BC. This is what so fascinated me, the notion that the secrets to wealth and happines are the same today as they were thousands of years ago.

The main lessons that I got from reading the book are the same as the main lessons that you can read in many other self help books. Here are a few:

• Always save 10% of your earnings for future investment
• Control your spending, i.e. learn to live frugally and well within your means
• Don’t get sucked into scams, only invest in things you understand or invest with people that have the understanding themselves
• Make your money work for you, i.e. look for opportunities for passive income to be generated

Now I have read many self help books, most of which have focussed on either generating wealth or improving ones personal finances, and in all the books I’ve read, I can honestly say that The Richest Man In Babylon has had the most profound effect because it makes one realise that the rules of the game have not changed in millenia. This in turn made me come to a very profound realisation, there are no short-cuts, the only path to lifelong wealth and happines is to play a long game.