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Andy: Hello and welcome to episode number 61 of the MoneytotheMasses.com podcast with your resident expert as always, Damien Fahy, and me, Andy Leeks. Damien, welcome back. How are we doing?
Damien: Good, Andy, How's your week been anyway, Andy?
Andy: Really good thanks. We've just been getting on with it in our household. Children have lost some teeth. They've gone off to the tooth fairy, so that's cost us a couple of pounds.
Damien: How much do you pay? It's a money podcast, so how much do you pay? How much does the tooth fairy deliver in your household?
Andy: Well, we asked that very question of our friends, and the general rule of thumb was somewhere between 50 pence and £1, but generally people do something special for the first one. So we decided to go for £2 for the first tooth and £1 for every tooth thereafter. So it's cost us a fair few quid at the moment.
Damien: The thing is kids talk. My daughter is the same age as Andy's daughter, so she'll be losing her first tooth imminently. For a five year old it's the most exciting thing on the planet. She asks me almost daily, "Dad, is my tooth wobbling? Is one going to fall out?" She's so excited about it, and they talk about it. When she comes home from school I know which child in the playground has lost a tooth, I sometimes try to fob her off with stories about how it could be just tooth decay. It doesn't mean it's a good thing their teeth are falling out, but they talk about how much they get. One of her friends came up to me and said, "Look, I've lost my first tooth." Oh, brilliant. The tooth fairy had come, blah, blah, blah. It turns out she then said she got a £5 note for her first tooth. Of course Isabella, my daughter, is listening to this and I'm thinking, "Hold on, there's not going to be £5 a tooth in my house". Then the mom, because she could tell by my face that £5 was obviously way ahead of inflation going back to when I lost my first tooth, and she was quick to say, "No, that was the first one. It was a special one, so they pay more." And I'm thinking at £5 a go I'd be pulling my own teeth out if I was getting £5 a tooth. So that's obviously the going rate.
Andy: Charlotte's lost four now, so that would have been £20.
Damien: Yeah, it's interesting. I'd love to hear what other people pay their children for the tooth fairy, if there's a variation across the north of the country to the south, whether we have evidently wealthier or more generous tooth fairies down this neck of the woods compared to up north.
Andy: I've heard lots of stories of people doing quaint little things like making things or giving little gifts so that when they lose a certain amount it makes up a bigger thing, and just being a bit more creative with it. I quite like the idea of that. So I've already heard that your daughter hasn't lost any teeth yet, so teeth aside, what's been happening in your world this week?
Damien: Well, my cat is still moon-walking. In last week's podcast I told a story of why my cat now moonwalks. This week actually we had quite an interesting bit of PR, I don't mention all the bits where we're in the press because we're typically in the press a couple times a week, but this time we were in the Tesco magazine again. The Tesco magazine is the magazine with the biggest circulation in the U.K. because obviously it's free and they print millions of them and it goes to their clubcard holders and in stores. So actually to be in the magazine is quite a coup. So it's quite interesting. I had forgotten I'd done the piece actually. So go and look at the October 2015 magazine. We're in it again. We've been in the magazine a few times now. I think this time I'm talking about how to make your money go further at Christmas.
Andy: Good, okay. I'll look out for that. Well done.
Damien: That's it, Andy. So should we crack on with the podcast?
Andy: Yes, I'm interested to see what we're going to be talking about this week.
Damien: Yeah, because Andy never knows what's going to be on the podcast. He still doesn't know up until this point. I just surprise him every week. So this week there are three pieces we're going to talk about. Types of advice, we're going to talk about how much money you can expect to make on a buy-to-let investment, and we're going to talk about small print.
Andy: Brilliant. Do I get to choose the order
Damien: You get to choose, Andy.
Andy: Okay, just because I've not got a very good memory I'm going to go for the last one you said, which is small print.
Reading the small print
Damien: Right. Small print. I'm talking about T's and C's, terms and conditions that you have at the bottom of contracts or insurance policies. They're everywhere. How many times are you told to read the small print?
Andy: Yeah, all the time, but how often do we?
Damien: Do you? It's an interesting point. Do you tend to read the small print?
Andy: Pages and pages and pages. Yeah. To be honest, Damien, I never read the small print unless it's, let's say, a loan or an insurance document that's going to cost me quite a lot of money I tend to never read the small print. The iTunes small print is ridiculous. They upgrade their terms and conditions every few months, and it's pages and pages. I've never read it.
Damien: Yeah, but then you're the typical person. I'm the same. I will tend to look at small print sometimes just out of interest.
Andy: The long winter evenings must just fly by in your house.
Damien : Yeah, my wife and I get out the T's and C's and compare our favourite ones. It beats playing Scrabble. To give you an example, a typical stocks and shares ISA, if you wanted to take out a stocks and shares ISA these days, then there is about 80 pages of small print or terms and conditions that come with an ISA. Now, that is excessive. I know why it has to be there for compliance reasons, but good news on the terms and conditions, because from now effectively you can ignore them, which seems quite a bold statement for a money podcast to turn around to people and say, "You can ignore those terms and conditions.". Last week we were talking about the consumer rights act, and that was podcast episode 60, so go back and listen to it. It's a new act that's coming and gives us greater powers as consumers when we buy goods and services. What they've done is to clarify the position on things like terms and conditions going forward for new products. Because of the changes in the rules there is actually a change in the way lawyers are interpreting the existing contracts that are out there.
So that means that millions of people who have all these existing products, whatever they are, then the terms and conditions may not be worth the paper they're actually typed on. The reason why this is the case is because a lot of terms and conditions, like you said about the iTunes one earlier, tend to grow over time. So a product may exist and companies keep adding to the terms and conditions, so they just get longer and longer. What ends up happening is they become a mishmash of old terms and conditions with new ones and tagged on. So rather than starting fresh with a blank page you end up getting this mishmash of terms and conditions that often no longer are valid or they aren't even relevant. A law firm called Slaughter & Maze, one of the big law firms out there, has done some research. They estimate that nine out of 10 terms and conditions have errors or glitches in them because of the way they're cobbled together over time, and that means therefore that companies wouldn't actually be able to use them to enforce anything that's in them.
That's not just the lawyers' viewpoint, because if you end up making a complaint based on the terms and conditions you will ultimately complain to the company, and then if you're not happy with what they say you might go to the Financial Ombudsman Service, the FOS. Well, what's actually happened is that the Financial Ombudsman Service have clear rules on what terms and conditions should be and how they should appear. For example, one of their statements is that the seller or the person who's writing the terms and conditions must ensure that they are written in plain and legible language. So in short terms what the lawyers are now saying is if you don't understand the terms and conditions, then they aren't even worth the paper they're printed on, and that companies won't be able to use them to enforce whatever is in the terms and conditions. Does that make sense? You might as well just screw them up and throw them in the bin. This is coming from a top lawyer, so terms and conditions, the rule is now, yes, read them, but the chances are if most companies try to enforce them they legally wouldn't be able to. So you don't need to perhaps spend your life reading 90 pages of terms and conditions.
Andy: Good, okay. Well, that's good to know. That's probably days I've saved.
Damien: Well, the thing is all that's happened is that I'm just making people feel good, because no one's was reading them anyway, and I'm just telling people that.
Andy: Okay, I'll fess up. It's not going to save me days. It's not going to save me any time at all, but at least I won't feel guilty for not reading them.
Financial advice - restricted versus independent
Andy: Okay, so restricted advice. I'm interested to hear about this.
Damien: Now, this relates to when you go and get financial advice. When you go and want to have advice on, let's say a mortgage, investments, pensions, or insurance, often people would go to a financial adviser. What I would always say to people is to go to an independent financial adviser. Now, an independent financial adviser is somebody who will look at all the products in a market and then give you a recommendation based on all of those products. So they won't limit it in any way. They will look at all the products provided by all the different providers, and then come down to a recommendation which they can implement for you. Now, what's happened is life has become slightly more complicated for financial advisers because a couple of years ago there was something called the Retail Distribution Review, RDR. What happened was that the Financial Conduct Authority, the regulator, put in a bunch of rules and legislation in place saying that financial advisers and the financial services industry had to be more transparent in what they were charging. They put down more rules about what you had to disclose and about compliance levels, and the T's and C's that had to be issued whenever someone received advice.
So for example, what will happen if you want to invest in a stocks and shares ISA? It now gets to the point where you're probably going to get a 70 or 80 page document with all those terms and conditions we were talking about earlier. So that's an independent financial adviser. There is a different sort of advice on offer out there which is more restricted, and they call that, obviously, restricted advice. The difference between independent financial advice and restricted advice is that the latter will only offer advice on a limited range of product providers or products. Or restricted financial advisers might simply limit their advice to certain areas within the financial services. They could just focus on, for example, investments or something like that. So they end up restricting the universe of possible solutions they will look at. So what it means is if you were to go to an independent financial adviser you could in theory be recommended anything that's out there and they'll look across the whole market, give you the best thing. A restricted person will give you basically something out of their toolkit, and often it can be something that may be paid more on, but there could be something else better out there, but they're not going to recommended it
So the reason this has become important now and everybody needs to take note if they're going to get financial advice is that there's a move now within the financial services industry to go from whole of market independent financial advice to restricted advice. The reason for this is because the cost of providing that advice, this whole of market kind, has gone up massively. Because if you think about it, with this increased terms and conditions, increased amount of compliance to issue just a simple ISA is no longer cost effective. Listeners might not realise, but if you went to a financial adviser and said, "I've got £15,000 to put in a stocks and shares ISA," they might earn just over £200-300 on that ISA. That might sound like a lot, but in order to produce all the paperwork, the compliance, the recommendation letters and carry out the necessary administration it will cost them more than that. So offering whole of market independent financial advice on a single stocks and shares ISA is not cost effective. I know for a fact that a lot of advisers out there wouldn't even entertain you if you were to pick up a phone and ring them up and say, "I'd like to take out an ISA." They would probably say, "Go see someone else," in a polite way, but they won't want to say that.
So most financial advisers are either moving up the client food chain, so they're going for the wealthy clients, the ones that have got hundreds of thousands of pounds, or what they're going to have to do is streamline what they do to make it more cost effective. The way they do that is by giving restricted advice. So therefore their compliance becomes a lot more streamlined, a lot simpler, and they can cut the costs of their service. Hargreaves Lansdown has just announced that they are going down that route. Of course, Hargreaves Lansdown is the biggest financial advice firm out there. They're a FTSE 100 firm and have huge influence. So therefore most other advisory firms are going to probably follow their lead.
The reason why I also wanted to talk about restricted advice is that I've been asked a lot by the national press what I think about this move to restricted advice. I'm not massively against the idea because I don't think everybody needs whole of market advice all of the time, because most people's needs are fairly limited and can be met by the majority of products that are out there. But the problem is that if you get to the point where the world becomes more used to this term of restricted advice, so they no longer look for independent financial advice, what consumers will end up doing is not really understanding the difference between different firms' restricted propositions, so they will eventually start migrating back to the things they know, which will mean they'll probably go back to their bank for financial advice. If there's one tip you ever take from any of our podcasts, it's never go to your bank for any form of financial advice because they will only end up pushing one of their own products that has a high profit margin and won't necessarily be the best product for you, because they just have to give you the best product from their range. In recent years as a result of the RDR , lots of banks decided to leave the financial advice world and they decided not to give advice to the public anymore, and they were also getting fined tens of millions of pounds for the bad advice they had been giving previously. So they just thought, "Do you know what? We're not going to do this anymore."
Andy: Yeah, we've been burnt. We're going to step away.
Damien: Exactly that. So now what's happened is they're starting to come back into the market because of financial advisers have started to go restricted. So it's easier for them to get back into that market. Previously I would just say to people, "Go find independent financial advice" as it was a very simple way to ensure they didn't end up at their bank, whereas now if nearly every firm they're going to come across is going to start becoming restricted, then it means consumers will be thinking, "No one's giving me everything. So I might as well just go to the bank. At least it's just down the road and I kind of know them." And that's the problem. So keep in mind when you go for advice there are still independent advisers out there. If you want one, then use a site like unbiased.co.uk or vouchedfor.co.uk which are good finding independent financial advisers near you. Failing that, if you end up with a restricted adviser, which isn't necessarily a bad thing, make sure you understand what their level of restriction is and how it will impact your possible recommendations.
How much money can you make from buy-to-let property?
(Note: do also listen to podcast episode 66 which discusses a new tax 3% additional stamp duty charge that will be applied to buy-to-let properties from April 2016. This extra 3% charge will be applied on top of the stamp duty figures quoted below, as episode 61 was recorded before the new charge was announced)
Damien: Right, our third and final piece this week, Andy, is on buy-to-let investments. There is an article on the MoneytotheMasses.com website that has answered the question of how much money you can make from a buy-to-let property. I've got to do this fairly quickly, but I'll chuck some numbers out there because people often think "Oh, I'll get into buy-to-let," and people who listen to this podcast might realise that I'm not the biggest fan. Although I've never personally done it I've looked at the numbers and I think there are easier ways to make money or be able to run your investments because to put all of your eggs in one basket, basically, is never a good thing. So what we did was to go through an example with some numbers in it. Anyone listening to the podcast who is thinking of possibly getting into buy-to-let will get an idea of what sort of money they might actually make. Starting off with the purchase price. If you were to, say, buy a buy-to-let property for £150,000, we'll use nice round numbers. So for people across the country that is going to be a nice average.
Andy Leeks: The exact price of my very first flat. There we go.
Damien Fahy: There you go. See? It almost proves the point. If you were to buy that property and have a £30,000 deposit, and then obviously you would need a mortgage. If you look at the numbers that would mean you'd need a mortgage of about £120,000. So typically if you're looking at the mortgage market at the moment and say you wanted to have a two year fixed mortgage, because you're thinking that interest rates might go up and you just want to have a bit of security, then you're going to get a rate of around 3.95%. Ultimately what it means is you're looking at around £400 a month to pay on that mortgage, just using round numbers. Now, the next stage is people always want to know, "What's the rental yield? How much money am I going to make?" LSL Property services has done a nationwide survey looking at the potential yields you can get across the country. The regional yields vary quite a bit. In the south you'll get 3.7% rental yield, and it goes up to about 7% in the northwest, because rental yield is a function of what you actually get monthly coming in on your property versus what you pay. So therefore obviously in the south there are very high prices, which is why your yield is lower.
Now, let's take an example and go slightly high yield and go for something, say, 6%, so we're not going for the top rate, but we're going for something that's a little bit punchy because I want to prove a point with these numbers. If you went with 6% based on that £150,000 house or flat, that means you're going to make £9,000 a year in rent. That might actually sound quite good when you think of it. You think, "Now, £150,000. I make £9,000 a year in rent." What we need to then look at is the additional costs that everybody seems to overlook. Now, I'll just give you a list of some of these costs. You've got to take into account landlord and rental insurance. So the possibility you're going to have to pay out to cover any damage or void periods where you don't have a tenant. And of course you are also going to have to estimate the repairs you're going to have to make every year. You're going to end up having to pay letting agent's fees, and obviously your mortgage payments. So if you add all that together, then you're going to be looking at, just roughly, about £693 a month.
So that might sound okay, doable, but, if you do the numbers from your £9,000 income that you are getting it actually works out that you will only be left with about £684 a year profit, because all those other costs soon add up, and they add up to over £8,000 a year. So when you look at this example, a £150,000 property you're going to end up having a pretty good gross rental yield but you're still going to look at only getting back about £684 a year. Now that means, if you want to start looking at rental yield, the real rental yield net of costs after you've taken out those bits and pieces, that's 0.4% gross. That doesn't, to me, sound the sort of investment I'm going to get too excited about. That's also got to be taxed. We're only talking about gross here. Now, I'm not just laying on bad news after bad news on buy-to-let property, because I'll come onto in a second how you can make it work.
One of the other things you've got to think about is the upfront cost of actually being able to buy the property. So for example you've got to think about mortgage fees, which would probably be about £1,800 on a mortgage this size. You've got to think about survey fees, stamp duty, and legal fees as well to actually get the ball rolling. Now, on a property of this size if you add all that up you're probably looking at almost bang on £3,500. So if you take that £3,500 as a proportion of the initial purchase price you're looking at almost 2%. So to do this investment you need to have about 2% of whatever the value is up front, and then your rental yield a year is only 0.4% gross, that's before tax. Now of course I know there are going to be people shouting at the podcast, "Yeah, but what about the value of the property? It's going to go up." Well we have done some analysis on this and looked back at the last 10 years and worked out what the average price rise was over that period of time. So after analysing it and breaking it down, the capital growth of your buy-to-let property is probably going to be on average about 2.4% a year.
So it's not as much as people think. Interestingly, I did some separate analysis before on house price rises going back to the 1960's. Don't ask me why I did this. It was for a completely different exercise. It took me ages and it almost was bang on, that figure. That 2.4% increase has almost historically been the same for about 50 years, and that's because it's largely in line with inflation. So the upshot is if you're going to get a capital growth every year of 2.4% in your property and maybe rental yield of 0.4%, then what you're looking at is a 2.8% gross return. Does that make sense? And don't forget you're not going to get that capital in your pocket unless you sell the house, and you can't sell part of a house. You're going to have to decide to exit the whole thing, and then that will be what the equivalent growth rate is. So that sounds to me quite an expensive way to make money, because the big thing is that people think you can make money on buy-to-let, but the thing is people underestimate all the costs and don't factor them in, and they'll tell you, "Oh, I've got a buy-to-let portfolio," but they might talk about how much money they make, but they don't really look at the net cost. Because if you invest in simple things like investments in funds and shares and things, the costs, while they can occasionally be slightly opaque, the performance figures are usually always net of cost.
So the thing I want to quickly finish on is How can you make buy-to-let work? Obviously buy-to-let must work, otherwise people wouldn't do it. Well, the numbers just emphasise the fact that if you want to get into buy-to-let, then the key is to actually buy the properties with little or no mortgage at all. Because if you do that, then the figures radically change and your actual net yield suddenly will rocket up from that point forward. So if you are going to get into buy-to-let and you're thinking of cashing in small pension pots to do it then you are unlikely to make much money. When I say small pension pots, anything realistically under £50,000 is unlikely to make a lot of money at buy-to-let.
Andy: That's good. That really does make sense. Buy-to-let is, to me, something to aspire towards, and is really quite appealing, but there are risks involved. And actually hearing those numbers broken down, maybe it isn't something now that I would really leap upon if I had that money.
Damien: Do you know what it is, Andy? We're obsessed in this country with property.
Andy : Bricks and mortar.
Damien: Bricks and mortar. How many times have you heard people say that? The reason people do it is, I know we all obsess about owning houses, but the idea of a buy-to-let is quite simple to understand. You buy a house, you rent it to someone, you get the income. So people understand that. It seems relatively simple, but of course as in our example, which we've got on the website, you can see the figures broken down bit by bit, but it just emphasises that fact that it is a good investment if you've got the money and you don't have to take out a mortgage. But I don't think it's for everyone. I think people need to be a little bit realistic.
Andy: So that's it. Podcast done and dusted. Damien, and I thank you for that. I tell you what we're going to do, Damien. There are always lots of things that we have to cut out for various reasons. but every so often I cut out some comedy gold purely because it doesn't quite fit in the section that it needs to. I tell you what, maybe Christmas or something we're going to treat the listeners to what we get up to when the mic is still recording, but we can't put it out.
Damien: I'm laughing because I can remember odd bits that have been cut out, and I dread to think what would be in there, because some of the things are...we're not intentionally trying to be funny when we do them. They are things that just sometimes happen when you record a live podcast. We should do that, Andy, because there are some funny things in there. So we'll do that because Christmas is coming up and we'll probably do that one because we've had people ask for the outtakes, and some of them actually are quite funny by purely unintentional. Like the time when it seemed like a riot was kicking off in Bromley outside my house.
Andy: Yes indeed. So if you want to get in touch with Damien, you can of course always-
Damien: Via email on podcast@moneytothemasses. And you can get me on Twitter at @money2themasses, and you can even contact me via the website or on our Facebook page. So whatever it is, if it's just to say hello, 'hi', then do email me because I do respond to everybody. Also, do leave a review on the podcast. We've had more of them, Andy. I do mean to point them out to you, because I get notified when we get them. We're getting more and more, so it's great to see. If you're listening to this podcast and you haven't left a review, shame on you. We need to be asking at the beginning so you haven't turned off by this point and don't give us one. So please leave a review for the podcast. That is it for me, Andy. Until next time.
Andy : Until next time. Catch you later. Bye.
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