This is something we’re looking at right now: our mortgage rate is now rising again after rising each quarter for nearly 2 years. Would it make sense?
Would it make sense? Apart from keeping some cash for emergencies… what would you do?
Expenses
Budgeting Baby Steps #1: Recording Your Expenses/Income
In 2006, when I just started blogging on InvestorBlogger, I created a very simple download PDF and Excel file – a cashflow and expense calculator that was based on something I had been using for a while in my own life. I had been doing my own finances on a spreadsheet since 1996, and had refined the sheet down to the basic elements. I decided to share the fruits of the experience. Today, I finished re-designing and updating the Excel files and have created a new download for readers of InvestorBlogger. It’s available in my download section or here.
The Totals sections will update automatically as you enter data. The right hand totals in the main page are the total cash in your accounts + income from the 1st of the Month and total cash + expenses from the last day of the month. These totals should be the same. A check has been done for you in the ‘Unaccounted’ box which will keep a check of the amount of difference. As you can update data as you go through the month, you will be able to monitor the total cash on hand to make sure that your cash reserves aren’t running low at any point.
If you have a lot of receipts each month, you’d be wise to set up some categories (you can use the ones I provide here, and adapt as you go along). The second page provides space for once a month billing, and the third for receipts and bills that come several times a month. You can always add more rows as you need. It’s wise to set up a small number of categories at the beginning, stick your multiple receipts for the same categories in large manila envelopes (each marked) and calculate the total when you need to update the figures.
Once you’ve done this for a few months, you can on to getting control of your budget, but if you’re just starting out, it’s wise to try to monitor your expenditure as best you can at the beginning before you implement any budgetary controls.
Oh, and if you’re a pen’n’paper freak, just download the PDF with blanked out spaces. That’ll work nicely, too.
Notes:
Also, when you open this sheet, you will get a Macros error. Just ignore, and click ‘ok’. You should be fine. I wrote the spreadsheet in Excel, but switched to OpenOffice a few years ago. Hence when you are using the spreadsheet in Excel, you may notice a few differences in the layout. Also, for US users, the pages are designed to be printed in A4 format (NOT letter format) landscape style. You may need to alter margins, cell-size, and spacing for your own printer. It should print on 3 pages only.
Selling a house: Would you take a 100% profit?
This recent story on the Guardian Newspaper website caught my eye about negative equity. Virginia Wallis responds to a Q&A from ‘KJ’ who writes about her worries about negative equity, and unfortunately underlines the problems that house purchasers face in a bullish market that turns negative. Unfortunately the writer’s response isn’t that helpful or accurate…
Go and read the story, since I can’t repost it here. In summary… KJ bought a house very near the peak of the market in 2007 for £154,000. Obviously she’s worried now that prices are falling, and is thinking of selling up. The respondent unfortunately seems to have poor math in the article, missing out on £2000 in the calculations. … She put £8000 down in the first place, and the other 95% was a mortgage.
Where did she get the 10%?
In sum, here’s a lady who bought near the top of the market. With the terms she employs in the article, like ‘invested’, and ‘valued at £185,000’. Now she’s panicking over a 10% variable rate (I have no idea why or how she came up with 10% pa). Top rates these days in the U.K. are about 6.5% to a little over 7.2%. It would be quite a jump to 10% (unless she’s saying something I don’t know). Australian rates are another story though.
She ‘believes’ her flat was worth £185,000 in February, but has no independent way to verify this assumption. All such ‘values’ are only theoretical until someone ACTUALLY puts down the cash. However, the current offer she’s got is £167,000. In such a difficult market as this, she’s actually lucky. She’d actually be sitting on a gross profit of nearly £21,000. Of course, early redemption fees would eat some of that, as would transaction fees. Still she’d make a reasonable profit on her ‘investment’.
Is this a place to live?
It seems though that we have what we might term a ‘weak’ card. I don’t see how if she were actually living on this property she would be thinking like this. It seems that she may really have ‘invested’ in the property as a buy-to-let, and may be unable to rent it out at the moment. With the threat of higher interest rates, lacklustre rentals, and a likely profit, she may be willing to cash out. If she were the owner, would she be thinking like this?
Why does she have to remortgage?
She writes “I have to remortgage in January 2010 and am panicking over the possibility of negative equity”. I would guess that she’s is currently struggling to make the mortgage payments at the moment, if she is living there. She is naturally concerned that rates are rising (they are), and they could go much higher (remember that rates have been at historical lows in MANY countries), and her mortgage is an ARM with favorable upfront terms (likely and common scenario) due to reset in 2010 at much higher rates than a year and a half ago. It seems unlikely she may be able to meet THOSE payments, never mind the payments that might result from additional rate rises between now and then.
From the tone of the letter, it seems that this ‘house-owner’ was seeking to make some kind of profit in the short-term while taking a longer term gamble that would allow her an exit strategy before the three years were up. It seems she has been wrong-footed by the market, and is now seeking an early exit. But will she succeed in taking a profit?… Let’s see.
100% profit, that ain’t bad?
Why? There are early redemption fees (approx. 3% of the mortgage amount), a likely stamp tax of 1% on the amount of the property, ie. approx. £1,670. It’s difficult to assess other fees on transaction costs, but they could easily range from £2500~£6500 plus fees of £500 for lawyer fees. Then you have removal fees, too, and other sundry costs of setting up a new home. Suddenly that fat profit of £21000 is looking a lot smaller! You could be paying out £13,000 or more in expenses, fees, and taxes. You’d still have a net £8,000 on your initial investment of £8,000. Which would be a return of 100% on a year and a half. Not too shabby. But certainly a lot less than KJ was hoping for when she gambled on the market.
That calculation only includes exit costs. To assess the true profit, you’d have to include the transaction fees, duties, and other costs that she incurred to get into the transaction in the first place. I wouldn’t be surprised if she spent a similar amount on the set up costs of the property transaction as she does getting out of it. Goodbye 100% profit!
What would you do? How would you get out of this mess?