MTTM Podcast Episode 341 – Best way to fix your mortgage, beating rising energy bills & fund manager skin in the game

12 min Read Published: 17 Oct 2021

Episode 341 - On this week's show I explain why your monthly mortgage repayments could rise before the end of the year and what you need to do now to prevent it. With the energy market now broken and energy firms collapsing by the day I explain what you should do to stop your bills rising this winter, now that switching is more difficult. Finally, I talk about why it's beneficial for investors if fund managers invest in their own funds and one way you can identify some of those that do.

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Abridged transcript - Episode 341

Damien Fahy 05:09

If you go back to podcasts 335, I did a piece about interest rates talking about them possibly going up in the near future. I linked to an image I said for people to bookmark the page. That chart at the very bottom of that page is a good indicator of where the market thinks the Bank of England base rate is going to be into the future. On that chart there is a line that shows what the view was when the Bank of England had their last monetary policy committee meeting (where they make a decision on interest rates) and the recent decision was to leave things alone at 0.1%.

When are interest rates likely to rise?

The chart is updated daily to show what the market is pricing in at the moment and what is interesting is that in the last two weeks, things have really shifted quite dynamically. So we are now seeing exactly what I said in podcast 335 about the fact that you could get a sudden shift in the market's view and sentiment towards when the Bank of England is going to raise interest rates.

Now, of course, if the Bank of England raises interest rates, that means people's mortgage rates are likely to rise (unless they're on a fixed rate deal). So if you fix your mortgage for a period of time, then you'd be okay, but if you haven't, which to be honest with you, the majority of people are on their lenders' standard variable rate, which means the lenders can move it up and down as they pretty much please.

So when the Bank of England raises interest rates, it means that most people's mortgages start to leap up and what I want to talk about today is how you fix your mortgage and give people some insight into what could happen to their own mortgages looking into the future. So in the last two weeks, things have changed considerably in the market's view in terms of interest rate rises. Inflation has proved much more stubborn than previously thought. Central Banks keep telling us it's going to be transitory, which means that inflation is going to probably peter out, it's elevated at the moment above that 2% official Bank of England rate that they try and target and very simply, if inflation runs high, they tend to raise interest rates to try and bring it back under control and towards that 2% target.

Now, with inflation proving quite sticky, if you've listened to the Damien's Midweek Markets show you will have heard about it, it's not just in the UK, it's a global phenomenon that we're having. They are now predicting that the inflation rate could get to about 4% before the end of this year, and even get as high as 6% by April 2022, which is obviously three times the official rate of inflation.

The market has suddenly shifted in its predictions of when the Bank of England will raise interest rates, they thought it might happen in 2022 at some point, maybe in the first half, but they are now predicting that the Bank of England will raise interest rates on the 16th of December this year, which is when they have their monetary policy committee meeting and decide the interest rate policy. It is likely that it will rise from 0.1% to 0.25%. That doesn't sound a lot, but it will prove significant to people as it will add £10's of pounds a month on the average mortgage in the UK, but more importantly, the market has shifted its pricing for next year and it is now guessing that the Bank of England may make two more interest rate hikes next year and so by the end of 2022, we could be looking at a base rate of around 1%.

Mortgage calculator - Check how an interest rate rise could impact you

So that's considerably higher than where we are now. Yes, it's way lower than the pre financial crisis level when we were up around 5%, but it is a shift and there's a lot of people out there who won't be used to that kind of environment. They've only ever known the base rate to be below 1% ever since they've had a mortgage. So what I want everyone to do is click on this link where you'll be taken to a very simple calculator where you put in the details of your original mortgage. The calculator will help you work out what's going to happen to your mortgage when the Bank of England finally start to raise interest rates you can play around with it, and you can get a sense of reality. If you are not already on a fixed rate deal it is wise to start looking at what fixed deals there are available, but of course, what tends to happen when there is an inkling that we're going to get the base rate rise by the Bank of England is that the best mortgage deals on Fixed Rate Mortgages get snapped up, and the lenders start to raise the interest rates on their best deals.

To give an example, the best fixed two year deal on a £200,000 mortgage over 25 years on a house that let's say is worth £250,000 pounds has an interest rate of 1.24%. Now of course, when you choose a mortgage, you don't just look at the interest rate, you look at the total cost. They are now predicting that by December, the best rate you're going to get is going to be up near 1.7% or 1.8%, so that's a 0.5% to 0.6% increase based on the best deal that is available right now. That is likely to push repayments up from £775 per month to £832 which is over £50 per month.

So the message is that rates are going to start going up and so you might want to go in and fix your mortgage. So go and speak to your mortgage broker, if you've got one because a mortgage broker can search the whole market and are fully independent, meaning they can check the whole market to find the best deal for you based upon your circumstances and earnings. If you don't have a mortgage advisor that you know and can trust, then you could go and look at a service like VouchedFor, for example, where you can find reviews of mortgage advisors near you. Or you could use an online service like Habito.

Energy crisis - Why you should stay on your energy provider's standard tariff

Andy Leeks 13:07
Ok, so moving on, there is a lot of news about energy prices at the moment and so we are going to briefly chat about that and provide a useful tip.

Damien Fahy 13:50
So around 2 million people have been impacted by the energy crisis and in case you've been on the moon, natural gas prices have more than quadrupled in 2021 and a lot of energy companies didn't hedge against the fact that prices might rise so they're delivering prices at a level that is unsustainable due to the energy price cap that was brought in by OFGEM to protect consumers. The energy price cap currently stands at £1,277 pounds a year and just to reiterate, that's not the maximum bill you would pay, it is based upon the cost of the energy per unit using the usage of an average UK household. The cap is only reviewed twice a year and it's just been reviewed and subsequently gone up and it is likely to go up again in April 2022.

So, what is happening is that the energy companies that haven't hedged against the prices rising are at the point where they are providing energy to consumers at a lower price than which they are purchasing it, and of course that is unsustainable,and people are pulling out the market left, right and centre. In fact, since the start of September, there's been 12 energy providers that have gone bust. So, when you look across the board, my sense is that most people's energy bills are going to double this year. So you may recall, I talked about the fact that I have recently moved house and so I went to give my old energy firm the final meter readings. Just as I went to do it, the news broke that they went bust and they closed everything down. So I'm in the middle of moving house and changing providers but the old provider is now defunct and as you can appreciate, it's a bit of a mess. Just to reiterate that in case anyone didn't realise, if you your energy firm goes bust and you have a positive balance, that is protected when you are taken on by a new energy company. So if you're worried about your provider potentially going bust, go online, try and get your recent balance, screenshot it, do whatever you can, so that you've got proof of that, Unfortunately, with my energy provider, it simply turned its website off and so I couldn't get access to that information.

If your energy firm goes bust, you will get taken on by a new company and then they will contact you in due course and your credit balance will be protected. You can then decide if you're going to switch because of course, you're not guaranteed to be on the best deal with this new energy provider. The market is pretty much broken because 12 energy companies and counting have gone bust and I think we're going to end up at the point where we had previously created competition in the market, lots of energy firms fighting for customers, lots of switching going on, and people getting better deals. Now, partly because of COVID, partly because of the reopening of economies and demand, the price for natural gas has surged and combined with the price cap it has made the market unsustainable for the smaller companies, so we are probably going to end up with the big six again.

What I want to talk about now is that the energy cap is now working in our favour. So there was some research that was carried out back in September before most of this carnage had happened by Uswitch. It looked at the fixed tariffs that are out there available from the main energy companies and compared them to the price cap. Now the price cap only applies to the standard tariff. The price cap was brought in to protect people who are going to be effectively paying too much for their energy because they're not switching. When people switch around, they will go and fix their energy price at a much lower rate than the energy cap, but because of this broken market, the standard tariff is almost universally the lowest tariff you can be on.

So the research showed when they looked at the price cap rate, they looked at average usage, they found that only 24 fixed tariffs across different energy providers were cheaper than the price cap, whereas 53 were more expensive. So you'd probably pay more a month on your energy by choosing to go on a fixed deal. To give you an inkling about how much more expensive when you look across some of the major providers, you're talking about £600 a year or around £50 per month. So it's one of those weird scenarios where the rules are almost working backwards and are in favour of the consumers. So doing nothing, instead of doing what we've been telling people for years and switching at every opportunity is actually better for people.

Why you should consider getting a smart meter

Finally on this, if you go back to podcast 174, I was talking about smart meters and the problem with smart meters are that the first generation of smart meters weren't very smart, because when you switch energy providers, then they wouldn't work anymore. There are now second generation smart meters that work with any energy firm even after switching and I am pleased to say that my new house has a second generation smart meter. Of course, what's happening is I'm walking past it every time I'm flicking the kettle on for a cup of coffee and I'm having a hernia about the amount of energy being used. I'm now going around the house and turning off the lights and I've inadvertently turned into my Dad because I can see in pounds and pence the usage of my energy in a given day. So the message is get a smart meter if you can, because we can't switch around at the moment anyway and the best thing to do is pretty much nothing because half of our energy firms have gone bust and we will need to wait for it to sort itself out before we consider switching again. The other advantage to a smart meter is that you don't have to give meter readings anymore and that means the end of estimated bills and you actually end up paying for what you use.

Andy Leeks 25:58
Okay, so moving on to the next piece and the final piece of the podcast and we're going to be talking about skin in the game. What do you mean by that?

Damien Fahy 26:06
So in the investment world, about 90% of investors would like to know if the fund manager of the fund they invest in actually invests in their own fund. So in the investment management world in the UK, in particular, there is no official disclosure about whether managers invest in their own funds or not and the reason it could be important is because if a manager invests in their own fund, then it means that interests are more aligned with their own customers, so the people invest in their funds.

Do fund managers invest in their own funds?

Now, given that some of the high profile issues we've had in the investment fund world lately with people taking excessive risks, etc, then there is a school of thought that if a fund manager was invested in that fund, then they wouldn't necessarily or perhaps they'd be less likely to gamble in it in the same way and is more likely to stick to the mandate of what they're meant to be doing. Unfortunately, that information isn't out there.

Now what was quite interesting, I saw some research this week that was sent to me by investing platform Interactive Investor. They in particular have been trying to push the FCA into making it mandatory for fund managers to disclose how much money they have invested in their own funds and at the moment, that's not really going anywhere, but hopefully it will start to gather momentum. They went out and asked the fund houses how much money the fund managers had invested in their own funds and what was interesting is that 94% of them said they had skin in the game. So they invested in their own funds. However, out of those 77 funds that said they did, 49 of them wouldn't say how much So to me, that is quite important. They're not telling you how much, why wouldn't they tell you how much? It is also interesting that 20 of the funds, that's about 24%, had more than £1 million pounds of their own money invested in the fund. So that's significant. Additionally, there was a piece of research that was carried out a few years ago in the US going back as far as 2016, where they looked at a similar idea, but looking at American funds and what they found is that managers running funds with lower fees were more likely to invest in their own funds, which suggested that if more fund managers invest in their own funds, it could lead to lower cost because, but put it this way, fund managers aren't silly. They know that to be a successful investor, don't invest in complex products that are overcharged.

How to be a successful investor

We have provided a link to the research below where you can see the funds where the manager does invest in their own funds, you also get to see the ones that didn't disclose and you can make of it what you will. It's not necessarily something you will use to decide whether you're going to invest in a fund but it does show a level of transparency and I think there is a bit of a correlation between some of the funds that do have quite low costs and the fund managers that actually disclosed how much they invest. Now obviously I'm quite interested in the idea of transparency which is why I run my own  £50,000 portfolio on 80 20 investor. I've been disclosing what I invest in for the last five, six years to try and show people how you would do it, not just to talk about things theoretically. I am proud that I actually demonstrate how you can be a successful investor and I believe fund managers should do it too.