To fix or not to fix that is the question.....

With the base rate on hold for another month and some major lenders reducing their fixed rates, is now the time to switch to a fixed rate mortgage? Probably not, say the experts who predict that fixed rates may fall further in the next few months and suggest that trackers are a better punt at the moment.

Amongst the lenders that have already cut their rates Nationwide has dropped rates on all its mainstream fixed-rate mortgages and some of its tracker deals for new customers by up to 0.46 percentage points and Newcastle building society has lowered its two-year fix for borrowers with a 25% deposit from 6.20% to 6.12%. Halifax also announced cuts of up to 0.15 percentage points to its fixed deals last week. Its five-year fix for customers with a 25% deposit has gone from 6.49% to 6.34%. BM Solutions, Bank of Scotland and Intelligent Finance, which are part of the same group as Halifax, have also made cuts as have both Cheltenham & Gloucester and Abbey.

Swap rates, the starting point that lenders use to determine the price of their fixed rates, have fallen dramatically over the last few weeks, coming down 0.7% from their peak a month ago.

Even the bad news on inflation has failed to dent their progress downwards, and now lenders are, theoretically at least, able to offer better priced products. Although sounds like good news there are still a couple of factors that might prevent fixed rates dropping straight away. Firstly, lenders have been looking to increase margin rather than market share, so have priced more profit into their products. Secondly lenders are concerned about being inundated with applications so they don't want to appear too competitive.

However with swap rates likely to decrease further with expectations that bank rate would be cut before the end of the year there may be more cuts in the next few months so borrowers that can hold out before locking into a new fixed rate might be wise to wait before they do so. Those lenders that haven't reduced their fixed rates yet also have some catching up to do. At the moment trackers and variable rates appear to be the best bet for borrowers looking for a new deal although these will be still be more expensive than most deals coming to an end.

Equity release for cash poor predicted to grow

Equity release is becoming increasingly popular. Safe Home Income Plans recently reported equity release business by its members rose by 14% to £275 million in the second quarter of 2008.

We are hearing more and more that pensioners and those approaching pensionable age are going to face poverty because they have not provided enough for their retirement. As a result I think equity release is going to be something we hear more and more about and the credit crunch had boosted the appeal of equity release products. At the moment a lot of equity release rates are better than mortgage rates.

A lot of people are very asset rich but cash poor and people have often got hundreds of thousands of pounds tied up in property but a very low pension equity release could be used not only to fund retirement but also to pay off other debts such as credit cards and mortgage repayments, and even to finance holidays.

It is however a specialist area of business requiring specialist and carefully thought out advice. We advise clients to take time and fully consider all options before rushing in to an equity release arrangement. That said when it does fit the bill and all aspects are fully considered it can prove worthwhile and offer clients options they perhaps had not considered previously.

Stamp duty in for a licking

So the government is considering temporarily lifting stamp duty on the first £250,000 of the price paid for a home. So that means no stamp duty for homes less than a quarter of a million. And stamp duty on the value of the home minus £250,000 for the rest. It is a desperate gamble. The move will be expensive, and if it doesn’t work, it is money down the drain.

Actually, the move from the government will be the equivalent to it handing people buying properties an amount of money worth 1 per cent of the home’s value. Or if it is worth more than £250,000, £2,500. So that means buyers find themselves getting closer to the deposit they need all the quicker.

The snag is this. It is only 1 per cent. House prices are falling by more than that each month – it is not difficult to see why this may not work. In the last house price crash, John Major tried something similar – his move failed. But a more pertinent question is this. Why does the government want to do this? When house prices were rising too fast, it stayed clear. If you believe the current housing market turmoil is all a little odd, and solely down to this credit crunch which had nothing to do with us, then the move makes sense. If you believe house prices are falling because they are too expensive, and the credit crunch is down to lending that was too high, based on property valuations that were not sustainable, then reducing stamp duty would be a fool’s errand. It seems more likely that this move will just result in a short pick up in opinion polls, followed by the loss of taxpayers’ money – never to be seen again.

Quite frankly, the government would be better off using the money it would spend on reducing stamp duty, giving us all some kind of tax credit. Vince Cable, the Liberal Democrats’ shadow chancellor, said: “The falls we are seeing in the housing market are painful, but necessary, if homes are to become affordable once more for those not on the property ladder. “Ministers allowed house prices to get hopelessly out of control. They must not now artificially prop up the market for political expediency.”

And as for the markets…….. well they had another day of celebrating yesterday – although when you drill down and examine the reason why, it does seem a tad daft. The Dow Jones soared 331 points, one of its best days of the year. The FTSE 100 rose a healthy 134 points, the German DAX index was up 168 points. But the news in the US, UK and Germany was hardly the stuff booms are made of. In fact, you could say all three economies saw a catalogue of woes yesterday.

So why did markets celebrate? Well, for one thing, the Fed stopped talking about “continued increases” in energy prices, and merely said they were “elevated.” As for growth. Last time, the Fed said the downside risks to growth “appear to have diminished somewhat.” This time it merely said “the downside risks to growth remain.” All we can conclude is that the markets are only a slight guide to what is going on, but for those interested in what is actually going on whilst equities were performing well certain popular commodities had a tougher day with Oil down 2.16% and Gold also down 14.1%.

A year on - credit crunch

What is a credit crunch?
A credit crunch is a situation in an economy where there is a sudden decrease in the availability of credit from banks and other lenders in order to reduce their risk. They may also increase the cost of obtaining credit by raising interest rates. It is a time of mild recession as the growth of debt if forced to slow, money is tied up in debt and not immediately available and there fewer liquid assets.

How did it start?
The global credit we’re now experiencing was caused when people with poor credit ratings (or “subprime credit risks”) were unable to meet higher debt higher repayments to US mortgage brokers due to rising interest rates. As more mortgages were foreclosed in America (so properties could be repossessed and then sold on for a profit), their previously buoyant housing market nosedived. These subprime losses started in early 2006 and continued to worsen throughout 2006 and into 2007.

Debts often get sold to other financial companies around the world to help create one of their sources of money which can then be invested or lent to people or companies. With little debt being paid off, financial institutions like mortgage providers and banks have been unwilling to take on more debt themselves and have little money to lend, and so these effects have spread around the world. Some firms, like Northern Rock, have been too dependent on this source of finance and have suffered as a result. There is quite some debate about whether the blame lies with consumers for putting too much on credit and overspending or whether banks are the culprits for irresponsible, high-risk lending.

How does it affect me and what can I do?
To make sure they are no longer at risk, these companies have made it harder to get loans, mortgages, and plastic by tightening their lending policies, charging higher fees, and increasing interest rates. This affects you as it means you may have fewer methods to get out of debt, spending may be cut, and your repayments may increase. The credit crunch even affects job seekers as companies are less willing to take on permanent employees in case they have to make job cuts.

Now is the time to check your credit rating because if you want to borrow money, get a mortgage or remortgage then banks are more likely to lend to someone who is not deemed as a risky investment.

Be careful with credit cards and balance transfers. Try to pay them off or reduce the debt on them as interest rates are high. It’s also more difficult to get cards for new 0 per cent rates now and any cards you get may have lower credit ratings as banks are unwilling to be as generous as before.

The main market where the credit crunch is felt is in housing. Now is a good time to either improve your home so it’s ready for when the market improves too, buy a home at auction which has been repossessed, or get a mortgage with the lowest rate possible if you’re coming to end of a fixed-rate mortgage. If you’re looking to sell your home to move or use the money to pay off debt then shifting to a smaller property or even until the economy recovers may also be a good idea.

A year on !

A year in to credit crunch and where are we at. If you want to read on I will refer you to the BBC webpage which I believe presents the clearest opinion on where we are at focussing on specific areas of concern:

http://news.bbc.co.uk/1/hi/business/7521250.stm

Property or Pension ?

Falling property prices mean people may not get as much cash for retirement as they think and should consider making other provisions.

Research by Friends Provident found a third of consumers were depending on property or equity release for their retirement income. However, if property prices fall to the same extent seen in the last house price crash in the early 1990s, the average homeowner could see themselves out of pocket by £89,850 based on the Council of Mortgage Lenders’ average mortgage figures.

If house prices continue to fall, people could find themselves in serious financial difficulty with negative equity on their property and no personal pension. This is a dangerous situation to be in if people don’t have any savings or a pension to purchase an annuity for their ‘winter’ years.

Further research suggest 65% of UK consumers have yet to start saving for their retirement.
Research shows a potential crisis for some people in the future. People have depended on the property market in the past to fund their retirement, but with the uncertainty over the past few months and the current credit crisis they should not put all their eggs in one basket.

CARE: Assessable assets.

There has been discussion for some considerable time as to whether the definition of life assurance for the purpose of the local authority means test includes an investment bond.

Indeed, in the past, some local authorities have sought to take investment bonds into account as assessable assets despite the fact that, strictly speaking, most investment bonds (other than capital redemption policies) are policies of life assurance.

The latest version of the Charging for Residential Accomodation Guide or CRAG as it is more commonly known (issued on 04/07/2008) confirms the clarification of the treatment of investment bonds which was first issued over four years ago. The guidelines are quite clear that where an investment bond is written as a policy (or policies) of life assurance, the value should not be brought into account as an assessable asset.

The key points are as follows:

• Investment bonds issued as life assurance policies should normally be disregarded as a capital asset, although capital redemption policies will be taken into account.
• “Income” from investment bonds will be taken into account when making assessments.
• Care should be taken to ensure that the deliberate deprivation rules are not invoked.

Investment Bonds are clearly a worthy consideration when conducting CARE financial planning exercises.

Inheritance Tax has fallen under the radar for many following the Chancellor’s announcement in the 2007 Pre Budget report when he made a useful change to the IHT legislation for married couples and civil partners to ensure that they benefited from two Nil Rate Bands without the need for IHT planning on the first death.

This is a welcome change to the legislation but should not be relied on as the solution to a couple's IHT liability. Having easily introduced the legislation, it could just as easily be withdrawn or altered. Inheritance Tax (IHT) concerns more of us than ever before. Mainly this is because the sharp rise in the value of houses over the last 10 years (by far the biggest asset for most people) has been much greater than what is known as the 'Nil Rate Band'. Below this key level (currently £315,000) you pay nothing on estates you pass on when you die. Above it, you pay 40% tax.

There are a number of exemptions to IHT such as transfers between spouses or civil partners, gifts of up to £3,000 a year and gifts to charities and political parties. An individual’s IHT liability will also depend on other factors such as if he or she has made a will, and whether assets are wholly owned or jointly owned.

So get the basics right.

Make sure that assets are owned in equal parts by a couple, and that a valid will is in place which includes suitable trust arrangements to ensure full use of the Nil Rate Band on first death. Nonetheless many people will still have significant IHT liabilities, mainly because of the price of their home. Some will say ‘Do nothing, the children can pay’, while others will take measures ranging from simple life cover/savings plans to more aggressive tax planning strategies. There as many solutions as there are individuals with an IHT liability.

Generally speaking, the more straightforward the solution, the more flexible and robust it is. We have in the past seen very complex and convoluted IHT mitigation strategies that then fall foul of future changes in the law.

IHT planning is made more complex as it has a very long tail. The earlier you start to plan, the easier it is to implement, but the longer it needs to be monitored and reviewed. Flexibility in any plan is essential. IHT and trust legislation has changed significantly over the past few years and this rate of change is likely to continue.

Diesel fuel theft

The number of incidents of theft of fuel from vehicles has doubled since the beginning of the year, it was revealed today.

"We are urging drivers to be more vigilant to both protect their own fuel stock and also report anyone who is trying to make money by selling on stolen petrol." The RAC offered motorists the following tips to help reduce fuel thefts:

1. Park in well lit and preferably off-road areas whenever possible - fuel thieves don't want to be seen
2. Ensure your fuel cap is locked and secure
3. Don't encourage fuel theft - if you are offered fuel you think could have been siphoned from another vehicle, call the police. Apart from it being illegal, the fuel could be contaminated, causing damage to your vehicle's fuel system - some companies place dyes and covert marking into fuels, so you could be tracked
4. Check fuel levels when you switch off your engine and check again before you use your car again - if the level is suspiciously lower than expected, look around the vehicle for signs of theft prior to turning the key
5. If you smell fuel when returning to your vehicle, or see a puddle of liquid, keep away from the car, and don't turn on the ignition. Call your breakdown organisation, and whatever you do, don't light a cigarette whilst you're waiting!

Diesel theft:

Meanwhile, West Yorkshire Police has reported a 265% increase in diesel theft. They advised hauliers to tighten up security of their storage tanks, vehicles and commercial compounds and urged the public to be vigilant and report anyone who offered them cheap diesel.

Officers said a wagon depot in Skelmanthorpe, Huddersfield, had lost thousands of pounds of fuel over the last 12 months, most recently being targeted by someone entering the compound and siphoning diesel. Kirklees Crime Reduction Officer Dave Whitteron said: "Although the police do everything they can to catch the culprits, we need the help of hauliers and motorists to prevent it from occurring." He recommended that owners of commercial compounds installed CCTV, security lighting and alarm systems, examined and secured fencing, and locked access gates out-of-hours.

Vehicles left in compounds should be fitted with lockable fuel caps and drivers should park hard up against a fence or wall to prevent easy access to the fuel cap for thieves, the officer said.

(GRAPH: FTSE-100 Index At Midday Today - 21/07/08)

As we continue to reach out for any good news I was quite intrigued by the following article from JP Morgan Asset Management which along with several others of late are starting to come from other angles. Still early days but maybe the start of some light.......

"The start of the great summer bounce? Weaker oil prices were the spark for a resurgence in equities this week. It provided a catalyst for a summer rally from deeply oversold levels. Indeed, our short-term timing indicators suggest there is scope for some follow through on this rally. Stocks are oversoldvs. bonds, while positioning data show that investors have savagely cut their equity weightings. Indeed, according to the Merrill Lynch Fund Managers’ survey, they are now running the highest cash weightings in the history of the series(see COTW). Moreover, sentiment is very depressed, judging by low levels of risk appetite, while global sector breadth has fallen to levels that suggest a bounceis due. Add to that an encouraging start to the Q2 US earnings season and further signs that the US economy is set to grow by an annualised 2%-2½% in Q2, with signs that restocking could partially offset the post tax rebate slump in consumption in Q3 and the markets have taken the view that the world is not about to end…yet.

However, for us the key investment question now is whether thereis a case for buying equities for more than a summer trade. We will address this question in the coming edition of the World Market Outlook, which will be released on Tuesday. We have updated analysis we undertook in March, when the market last bottomed, using a checklist of conditions required to be met to justify a higher strategicweighting to equities. Then we judged that the strategic case for risk assets was building but was not compelling.

We have updated and expanded our checklist, looking for evidencethat: (1) the credit crisis is improving; (2) that banks have done the bulk ofthe heavy lifting in recapitalising themselves; (3) that central banks are willing and able to ease further to support activity; (4) that the economic outlook for growth and inflation has become clearer, with clarity on the extent of the economic slowdown and some visibility about the peak of the inflation cycle and realism regarding 2009 earnings; and (5) that investors are paid to take equity risk. As in March, we find that the strategic case is still not compelling, although there are glimmers of encouragement on the valuation and bank recap fronts. The great summer bounce could welbe underway and indices could run further into the coming weeks, but we would not chase it from a strategic perspective."

Still on the subject of Oil

Citywire AAA-rated Nicolas Komilikis of Amiral Gestion believes it is incredibly unlikely that the oil price will go down and says $250 a barrel by next year is not beyond the realms of reason.

Contrary to the views of Dr Hendrik Leber of German boutique Acatis, who thinks there is a correction looming and that the oil price could fall to $50 in the next two years, and BlackRock CIO Bob Doll, Komilikis believes the oil price will remain high due to supply-side pressures and the strong depletion of oil reserves. 'We need to fill the decrease that is coming from depletion. This is why production hasn't increased since May 2005,' he says. 'Country by country it is difficult to see where the growth in production is going to come from,' he says.

He highlights decreases in Norway and Mexico and is also wary that Russia, which he says has been one of the only growth areas among non-OPEC countries, may have reached its peak in terms of production.

The Paris-based manager also believes it is unlikely that Saudi Arabia will spend a huge amount of money to increase production which could cause the price to go down. 'Saudi Arabia is happy to earn money and is aware that they have to keep oil in the ground for the next generation,' he says.

The AAA-rated manager cannot envisage significant falls on the demand side, particularly as oil-exporting countries such as Russia and the OPEC countries, are experiencing growing domestic consumption. 'Unless China goes into a major recession, it is difficult to see how consumption could decrease at a worldwide level,' he says.