Are retail bonds a good investment?

 What are retail bonds?

A bond is  basically an IOU where an investor lends money to a corporation or government in return for a predetermined interest rate together with the return of the original investment amount at the end of an agreed term. Bonds are issued to allow the corporation to grow by investing the money raised into the business.

The rate of interest depends on the strength of the corporation that issued the bond. The riskier the investment the higher the interest rate.

Historically, bonds were available only to investment companies and pension schemes and known as corporate bonds  but over recent years they have been available to the private investor and referred to as retail bonds.

Are retail bonds a good investment?

As with most investments there is an element of risk and the same applies to retail bonds. Although the interest rate is fixed at outset and may compare well with your local bank there is always the risk of the corporation defaulting (see the next section). Also, you need to be aware that there will usually be no capital growth on your investment as only the agreed interest rate is paid this means that your initial investment will be eroded by inflation.

Are retail bonds covered under the Financial Services Compensation Scheme (FSCS)?

Well this is where the is a bit of confusion as not all retail bonds are covered under the FSCS. Recently there have been an increasing number of mini-bonds launched that are unlisted and therefore not covered under the FSCS. Due to the greater element of risk these mini-bonds often carry a higher interest rate than ordinary retail bonds. The other negative issue is that mini-bonds cannot be traded and, therefore, the investor has to retain the investment for the full term offered.

Why are unlisted retail bonds issued?

It comes down to cost as unlisted retail bonds are cheaper to issue than listed retail bonds. This saving can then be used to increase the interest rate on offer and therefore more appealing to the investor. When retail bonds are issued it is important that they fully subscribed as failing to do this can reflect badly on the issuing corporation.

Can I include a retail bond in an ISA?

Under ISA rules the retail bond issuer must be listed on a stock exchange and many mini-bond issuers are not, and must have at least 5 years to run from the point you purchase it.

Why not just buy a corporate bond fund instead?

Corporate bond fund managers typically hold over 100 different bonds within their portfolio in order to diversify risk. By investing in a single retail bond you would expose yourself to the risk of default from just one company. You have to ask yourself why you would you do that? Do you fully understand the risks? Plus retail bonds are often poor value when compared to the institutional versions invested in by bond funds managers.

Conclusion

With interest rates remaining low for the foreseeable future investors are always looking out for better returns. Retail bonds may on the surface appear to be the answer but, as explained above, you need to look carefully at each offer to ascertain the risk, liquidity and tax advantages involved.

A sick pet can be expensive

Anybody who has a pet will know that a visit to the vets can be expensive. Covering this cost by buying pet insurance is an obvious option, but you need to be aware that there are different types of pet insurance with a variety of exclusions. So to help you, here is my guide of what to look for when buying pet insurance.

What types of pet insurance are there?

There are basically two types of pet insurance

• Annual cover - policy lasts 12 months and is renewable every year until your pet reaches a certain age. Some insurance companies  offer you a ‘senior’ policy with reduced cover and more conditions after this age.

• Lifetime cover – the policy covers your pet for the whole of its life and needs to be taken out when the pet is young. The policy is renewable every year and cover will be provided as long as required up to the limits set out in the policy. Due to the length and range of cover provided this type of cover is usually more expensive.

What cover is provided by pet insurance?

Pet insurance provides a range of options  and you can choose the cover that best suits your needs and budget. Basically, the more conditions and restrictions you have on a policy the cheaper it will be.

Vet’s fees

• Reinstatement cover – the most flexible and expensive  type of cover with a cap on the amount of  cover for vet fees each year.

• Condition limit cover – no annual limit on total vet fees but instead a limit on the amount that can be claimed one each condition that your pet suffers.

• Monetary/time  limit – puts a monetary and time limit, usually 12 months, on how much you can claim from the onset of a condition. Cover will cease when one of the limits is reached.

Boarding fees

• covers fees payable if your pet has to go into hospital as a result of illness or accident. There will be limits placed on the length of time per hospital stay as well as the frequency of claims.

Death benefit

• usually pays out the original purchase price of your pet if it dies through illness or accident.

Lost pet fees

• covers the cost of advertising for the return of  a pet and includes the provision of a modest reward. Normally it is a requirement that the pet has a microchip fitted to help in recovering the lost pet.

Third party liability/accidental damage

• this cover will pay any successful claim against you for the damage caused by the actions of a pet such as causing an accident by running in the road or damaging property.

Holiday cover

• will provide cover if you have to cancel a holiday due to your pet’s illness or injury.

What exclusions are there regarding cover under pet insurance?

If ever there was one policy where you definitely need to read the small print then pet insurance  is that policy. The exclusions and conditions are many and varied but the main exclusions are:

• pre-existing conditions
• hereditary conditions and conditions that may be specific to the breed of animal
• normal vaccinations and injections
• spaying and castration
• treatment for fleas and ticks
• conditions arising through pregnancy and birth
• dental cover (may be provided under separate policy)
• insurers will not cover pets at either end of the age range due to the increased likelihood of illness
• all policies will have an excess applied to deter small claims, there will also be an option to add a voluntary excess to keep the premiums within your budget

Are there any others things I need to be aware of when buying pet insurance?

• always read the small print carefully so that you are fully aware of all the exclusions and limits on each policy then you can compare like with like
• check the payment options, as paying for the policy annually rather than monthly will likely save you money
• if you have more than one pet check out the insurers who offer a multiple pet discount
• ask the insurer about how they will increase premiums over time, will it be age related, claim related, or both
• closely read the details regarding any excess applied, will this be per claim or per condition
• check what happens when a condition needs treatment over the renewal date of the policy as this treatment may be excluded in year two or a new excess applied
• make sure you shop around to get the best deal

Summary

Pet insurance is a useful policy for pet owners, but it isn’t cheap. However, you really need to do your homework to ensure you get the best deal, there are numerous options and exclusions that differ from insurer to insurer, and make sure you only pay for cover that you need.

You can get comparisons on pet insurance at www.gocompare.com or www.moneysupermarket.com

(Image: freedigitalphotos.net)

Tough property market causes rent price hike

Spotlight on East Grinstead

The winners and losers in overseas property game

Sunday Telegraph

Charming houseboats for sale for London

The allure of the French Riviera

The London Underground: a fast track to property profit

Sunday Times (subscription)

Is our love affair with open-plan living finally over?

Britain’s best new up-and-coming neighbourhoods

Moving On: Naomi Campbell’s next move

Mail on Sunday

House prices could be about to take off again

Bank of Ireland’s mortgage tracker increase ‘may be illegal’

More pain for tenants as rents rise nearly five times faster than wages

Sunday Observer

Let’s move to Wallingford in Oxfordshire

Green Deal debt may have to be repaid before property sold

Snooping around – in pictures

Post Office: Transparent accounts, but are they right for you?

We are seeing the dying  days of the golden pension

Consumers hit back  at financial institutions in record numbers

Sunday Telegraph

Should you buy a 17% Co-op bond?

New tool promises to measure your total wealth

How to back the US stock market boom

Sunday Times (subscription)

How long can the stock market rally last?

Entertain the children for less this  half term

Has the sun set on solar power?

Mail on Sunday

Debt time-bomb for taxpayers as 85% of students will never pay off their loans

How to get a cheaper smartphone

Best route for motorists to avoid rising costs of vehicle breakdown

Sunday Observer

Npower feels the heat after accusations of UK tax avoidance

Public sector pension ‘will be reduced by a third’ under reforms

Nuffield retail bond launches at 6% – but does it have a clean bill of health?

1. Keep cash to a minimum

Many people prefer to pay with cash when on holiday as they feel this helps control their spending. Whilst this may be true, walking around with a lot of cash is leaving yourself vulnerable to theft. Try to use credit cards for larger payments such as hotel bills, car hire and restaurant bills, leaving a small amount of cash available for the daily incidentals.

Always carry two different credit cards in separate places, in case one gets lost, stolen or declined, and check that these are accepted in your holiday destination. If your credit card gets stolen the provider will refund fraudulent purchases, but if someone steals your cash then it is gone forever. Please check the charges that may be levied by your card provider when used abroad and always pay your bills in the local currency, this will be cheaper than converting to your home currency.

2. Record your account and customer service numbers

If your credit or debit cards are stolen then you will need to cancel the cards as  soon as possible. It will be difficult to cancel these cards if the only place you can find the customer service number is on the back of the card itself.  Record the key numbers and keep them in a safe place separate from your cards.

3. Use multiple locations to store your cash and cards

Don’t keep all your eggs in one basket. Keep credit cards in separate locations, maybe you carry one card and your partner carries another. Also, if you are carrying cash split this into small amounts and keep these amounts in separate pockets or bags. Then if you do get robbed you can give the thief a small amount of money without losing everything. Also it’s good practice to keep some small denomination notes in a specific pocket. That way if you need to tip someone you can a pull out a dollar bill, for example, quickly rather than pull out a wad of high denomination notes and be fanning through them in public.  You just don’t know who is watching you.

4. Avoid cash machines in secluded or rundown areas

If you need to use a cash machine try to use a machine in a busy area during daylight hours. If possible get your partner or travelling companion to accompany you to the cash machine. Although they may charge a fee a cash machine located on your hotel would be the safest option.

5. Don’t ‘flash your cash”

Always be discreet when taking cash out of your pocket or wallet as this the time when you are most vulnerable. It would be advisable to plan your likely spending for the day prior to setting out and take only what you need for the day.

6. Keep cash or cards in a money belt or zipped pocket 

It’s amazing how many men keep there wallets poking out of their back pocket, or how many women keep everything in their handbag loosely hung over their shoulder. Carry your cash and cards either in a money belt, which can be hidden under clothing, or in a zipped pocket. Keeping your valuables secure and out of sight will save you from a potential theft or loss.

7. Use passwords on all your devices

When we go on holiday we take with us devices such as laptops, tablets & smartphones. These  devices contain all types of personal information which is a goldmine to any thief. Make sure you have passwords on all these devices and programme them to auto-lock  after a couple of minutes inactivity. Also a number of devices such as iPhones and iPads have a function whereby all personal data is erased should someone eneter the password incorrectly 10 times in a row. So this can protect your personal data in the event of you losing your device or having it stolen. But if you do activate this feature then make sure you children don’t inadvertently play with your phone.

(image by Graeme Weatherston / FreeDigitalPhotos.net)

So, here are my top 5 Buy-To-Let mistakes and how to avoid them.

1.  Not having a business strategy

Entering the Buy-To-Let industry should be viewed exactly the same as starting up a business. Many new landlords will start out without having a clear idea of their goals and the strategy they are going to adopt. Every landlord should create a business plan covering the following areas.

- What is the purpose of the investment?

Are you looking to create a surplus monthly income or build a capital amount, or both?

- How many properties do you want to have in your portfolio?

Are you just looking for one investment property or are you going to scale it up to a full-time business?

- What type of property are you going to buy?

Will you concentrate on small residential properties, student accommodation or even commercial properties?

- What is your exit strategy?

Will you eventually sell and if so when?

2. Poor property choice.

Not every property, or area, will be suitable for a Buy-To-Let investment. Here are some tips for buying the right property.

- Do your research

Find out the areas where rental demand is high, searching the property portals and talking to estate agents will give you some idea.

Find out the expected rents on the type of property you are interested in.

- You are buying a property to rent, not to live in

Many new landlords will buy a property based on their tastes rather than viewing it as an investment. If you do this you may end up paying more for the property and find it difficult to maintain.

3.  Not doing the sums and watching the cash-flow

It’s not enough to just assume that if the rent covers any mortgage then everything will work out fine. You must sit down and calculate the real cost of your investment before you buy. Here are a few pointers.

- Calculate the true cost of buying

Make sure you include stamp duty, solicitor’s fees, mortgage fees and maintenance required before you make a purchase. This will give you a clearer idea of your return on capital.

- Don’t under estimate the ongoing costs

Make sure you include all your ongoing costs such as maintenance, letting agents fees and an allowance for void periods when calculating rental yields.

- Keep a close eye on the cash-flow

Landlords should keep detailed records of all income and expenditure and record these in a spreadsheet, this will enable you to see the profit & loss on a monthly basis together with future projections.

You should also review each property in your portfolio annually, so that you can ascertain the profitability or otherwise of each investment.

4. Not vetting tenants

- References

It is vital that you take up references regarding employment and previous rental history as well as carrying out a credit check. A letting agent can help in this area.

- Quality

You should make a judgement regarding each tenant on whether they will look after your property whilst renting it. Ask questions about their lifestyle and write into the contract your view on pets and any other restrictions.

5.  Not understanding the legal issues

- Landlord responsibilities

There are some legal requirements that landlords must adhere to that could have serious consequences if ignored. Some requirements are around safety standards, others concern the treatment of tenants in situ and on eviction, if needed.

- Don’t forget the taxman

In general terms if you are making more than £2,500 income from property (after deducting allowable expenses) each year you will need to file a self-assessment tax return. It may be worthwhile using the services of an accountant to help in this area.

Conclusion

As with all investments you need to do your homework to get a good return and Buy-To-Let is no exception. Don’t expect short-term miracles but if you avoid the mistakes mentioned above your investment may return good dividends.

Further reading: The Buy-to-Let Guide, Can I nominate my buy-to-let property as my principle residence to avoid tax?,

Image: jscreationzs / FreeDigitalPhotos.net

Here are details of what is covered under the Financial Services Compensation Scheme (FSCS):

Banks and building society deposits

If you have an account with a bank or building society that becomes insolvent you will be contacted by the FSCS, or the liquidator. Cash up to £85,000 per person, £170,000 for joint accounts, will be protected under the FSCS. If a customer has savings in different banks that are part of the same group, then the compensation limit is £85,000 in total, across all bank accounts under the same authorisation.

Credit Unions

The FSCS can pay compensation up to £85,000 per person if a credit union is unable to pay back deposits it owes to its members. Members of a credit union will not need to apply for compensation as the FSCS will send compensation to them automatically  and in the majority of cases within seven days.

Investments

Compensation is only payable when an authorised firm is declared in default after investigation by the FSCS. The maximum level of compensation is £50,000 per person per firm. Investments covered are stocks and shares, unit trusts, future and options and other long-term investments. The compensation cover is only triggered when a product provider goes bust, or for a loss arising from poor advice rather the collapse of the underlying investment.

Investment trusts and exchange traded funds are considered shares in a company and are therefore not covered by the FSCS unless there is a case for bad advice.

Investments in a SIPP are typically ring-fenced away from the provider, so funds shouldn’t be affected if the SIPP provider goes bust.

Overseas banks

From December 2010, all EU countries increased their compensation limit to €100,000. So if a bank is not regulated in the UK then it is more than likely covered by the EU scheme. However, deposits held outside the European Economic Area are not covered, this would apply, therefore, to the Channel Islands and the Isle of Man.

There are ways, however, that you can purchase high end fashion at high street prices and here are my favourite designer fashion ‘top spots’ for looking good.

SearchTheSales.com

Started by student Bertie Wilson, with a £3,500 start up loan, this new website brings you the biggest online designer discounts in one place. Find the brands you want at up to 90% off. Brands such as Paul Smith, Ralph Lauren and Vivienne Westwood are included together with a regular newsletter so you never miss a bargain. Also, there is an interesting and informative blog to keep you up to date with the latest trends.

Designer Sales UK

Established over 20 years DSUK holds sample sales throughout the year showcasing designer outfits and accessories. Each sale will last for only a few days and are held in hotels, or other large venues, in major cities in UK and a small entry fee is charged to each sale. Brands include Jimmy Choo, Chloe and Salvatore Ferragamo and you can keep up to date with forthcoming sales by subscribing to their newsletter.

The Secret Sample Sale

Since 2003 the Secret Sample Sale has been bringing together London’s fashion designers, agencies and boutiques to clear their samples and excess stock. Sales are held  at the Old Truman Brewery in Shoreditch together with other venues in London approximately sixteen times a year. Subscribers to the newsletter will be allowed access to each sale before they are open to the general public as well as receive invites to private sales. Gucci, Prada and Fendi are some of the brands available together with designs from London’s up and coming independent designers.

The Designer Warehouse Sales

The Designer Warehouse Sales have established themselves as one of the foremost destinations for London’s fashion lovers. It boasts having more designer labels housed under one roof than at any other outlet in the country at their location close to Arsenal Underground station. Held over three days, twelve times a year, these sales offer customers catwalk one-offs, show room samples and cancelled orders from the pick of the current seasons collections. Register for the newsletter to be kept up to date with details of upcoming sales.

Money to the Masses tips

If you do decide to attend a sale then:

• make sure you read the returns policy before purchasing any item 
• there may be a charge levied for purchasing items with a credit card
• as well as being charged an entrance fee you may also be required to leave bags and coats in a managed cloakroom for security reasons
• as the sales are quite frenetic and it may take time to search through all the items it is not advisable to take children

Is buy-to-let a good investment?

Well, it certainly can be, but there are some issues you need to be aware of  in this type of investment.

- Instability

If there is one thing we have learnt in the last couple of years it’s that property prices can go down as well as up. Whilst over the long term property prices have risen, you need to realise that buy-to-let is no ‘get rich quick’ scheme.

At the present time rental yields are high due, partly, to the inability of many first-time buyers to obtain a loan to purchase a property. A sizeable deposit is now required by lenders to secure a mortgage which is beyond the reach of many would be purchasers. This will not always be the case and a time will come where tenants will be thin on the ground resulting in falling rents.

- Cyclical nature of markets

Both property prices and rental yields are cyclical, so you need to view this investment as long term. If you are the type who wants to jump in and out of investment in the pursuit of profit then buy-to-let is probably not for you.

Property is not a liquid asset and trying to offload your investment in times of trouble may result in you making an overall loss.

- Void periods

It is unrealistic to assume that your property will be let out at all times. The rental market is fluid with tenants changing  properties quite regularly due to family or work issues, so you will need to finance the property during these periods.

What returns can I expect?

- Yield

The return on your investment is called the rental yield and is dependent on a number of factors – type of property, location, market conditions and condition of the property.

- Gross yield

The gross yield of a property is the annual rent divided by the purchase price, expressed as a percentage.

- Net yield

The net yield is the annual rent, less costs such as mortgage payments, repair costs, fees and void periods, divided by the purchase, price expressed as percentage.

Gross rentals yields in the UK are running at around 7.5% (2011)  but the net yield can be a lot less if your costs are high or you experience long void periods.

Cheaper properties will provide a better annual yield and I recommend that you look for a rental yield in the region of 130-150% of your mortgage payments.

What are the costs involved?

- Initial costs

Substantial resources are required to purchase an investment property. Firstly a lender will require you to fund a deposit of 25% or more before they will consider your loan application. In addition there are the usual costs involved in a property purchase  - survey fee, stamp duty, legal costs, mortgage admin fee & insurance.

- Letting costs

Once you have purchased your  property there are further costs involved before you earn any return on your investment.

You will need to clean the property and carry out any repairs, purchase furniture, appliances and equipment your tenant will expect. In addition you will to pay for a Gas and Safety report to comply with legislation.

If you are letting privately then there will be advertising costs, or instead you can pay the fees for a letting agent to find a tenant. There are also fees involved in carrying out an inventory, drawing up a tenancy agreement and obtaining references.

- Running costs

Some properties cost more than others to maintain depending on the age, condition and other responsibilities such as lifts in blocks of flats.

The single biggest cost is likely to be your mortgage repayments. At present mortgage rates are low, but this won’t last forever so you need to make allowances for a significant rises over the coming years.

You will also need to insure the property and its content, plus it is wise to consider public liability insurance and rental insurance.

If the property is leasehold you will also have to pay an annual ground rent and service charge.

Conclusion

As you can see , being a landlord is not an easy or cheap venture. There are considerable costs involved and a sizeable degree of risk involved. But if you do your homework, and are in it for the long haul, then it could form a profitable part of your investment portfolio. Good luck!

Image: jscreationzs / FreeDigitalPhotos.net

Spotlight on Oxford

Cashing in on London is Britain’s new property trend

It’s so hard to buy my first house thanks to the cost of renting

Sunday Telegraph

Gorgeous properties on Italian lakes

Family affair: large homes for extended families

Homes for animal lovers

Sunday Times (subscription)

Can you pick a property bargain in Ireland?

The landlord tribes of the new boom in buy-to-let

How to be a buy-to-let landlord

Mail on Sunday

Sorry your home’s a dope farm  so you’re not insured

Mortgage advert blunders making comparing home loans an even tougher task 

North West homeowners most likely to have taken action over interest-only shortfalls

Sunday Observer

Let’s move to the Isle of Sheppey, Kent

Buying your own island tends to be a rich person’s hobby

Tanera Mor: yours for £2.5m