UK Mortgage Interest Rates – January 2013 Update

Analysis shows that today the purchase of a UK house through a mortgage is affordable however at the same time UK house prices are not good value.  This appears to be a surreal situation which is brought about by the abnormally low mortgage interest rates that are currently on offer today.  It is now my belief that we won’t see fairly valued housing in the UK until mortgages rates return to some semblance of normality.  With that in mind I’m starting a new dataset focused entirely on UK mortgage rates which will enable us to watch the mortgage market.  This might give us a heads up on what might be about to happen to house prices.

The Bank of England publishes a number of datasets on this topic and I have picked 5 which cover the more common mortgage types available today.  They are the sterling monthly mortgage interest rate of UK monetary financial institutions (excluding Central Bank) covering:

• Standard Variable Rate (SVR) mortgages
• Lifetime Tracker mortgages
• 2, 3 and 5 Year Fixed Rate Mortgages with a 75% loan to value ratio (LTV)

A history of these mortgage rates can be seen in the chart below.

 

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A zoomed version of this mortgage chart is shown below.  I’ve also placed the announcement dates of some of the well known market manipulations that have been undertaken by the UK Government and Bank of England which have helped keep rates mortgage rates low.  These include a Bank of England Bank Rate of 0.5%, 4 tranches of Quantitative Easing and the Funding for Lending Scheme (FLS).  So what is happening to mortgage rates?  Standard Variable and Lifetime Trackers are getting more expensive and are up 0.01% and 0.04% month on month respectively.  Year on year they are up 0.22% and 0.38%.

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RIT Reader EBook Plug – Slow and Steady Steps from Debt to Wealth

A Retirement Investment Reader, John Edwards, yesterday kindly sent me a copy of his EBook Slow & Steady Steps from Debt to Wealth. It’s a very easy read and at a little over 7,000 words can be devoured for the first time with a cup of tea. That said, doing something with the common sense approach will certainly take a little more time... I’ve been on a similar journey to the one described and I’m now 5 years in and still learning.

I’m plugging it because there is lot of commonality with the message I try and promote on Retirement Investing Today. The difference is that I fear that I sometimes over complicate the problem where John lays out a series of steps that go from debt (this site doesn’t really cover debt and instead starts with someone possessing £0) to a healthy investment portfolio.

Let’s look briefly at each of the Chapters in turn:
1. Avoid Debt. One sentence rams it home – “The first step to financial freedom is to avoid debt in the first place”. I couldn’t agree more.

2. Over Consumption. We are encouraged to answer two questions – “Do I really need this?” and “Do I really want this?” I probably push this concept more than most people could tolerate but it’s one of the ways I can regularly save 60% of my earnings.

3. Start Saving. This was the starting point in my KISS Investing for Retirement post.

4. Pension. “I had a variety of pension pots ... none were performing all that well and one reason for this was the high charges being levied every year.” I also believe that it is critical to minimise those charges and have it as one of the fundamentals of my Low Charge Strategy. I don’t understand how people can be so blasé and just accept say a 1% charge without question. Given that a reasonably balanced portfolio might only on average return 4% after inflation you could be giving 25% of your return away. John also makes another good point with the statement people “often don’t fully appreciate how much they need to save”. My belief is that you are not going to reach true financial independence early by saving 10% a year.

Allocation to UK Equities

My Low Charge Investment Strategy requires a strategic nominal asset allocation to UK Equities of 20% of total portfolio value.  I then add my tactical asset allocation spin which given the current valuation of the FTSE100 requires that allocation be lowered slightly to 19.6%.  My current allocation is spot on 19.6% with allocations to all asset classes shown in the chart below.

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Over the past couple of years I have been able to move my UK Equities investments into a position where I feel they are now relatively low expense and tax efficient.  Let’s look in a little more detail.

My UK Equities are now divided into two simple pots.  The first pot is 16.4% of the allocation.  This is all located within the Vanguard FTSE UK Equity Index Fund which is located within a Sippdeal SIPP wrapper.  I chose the Vanguard fund as it has good tracking of the performance of the FTSE All Share Index, which contains household names like HSBC, BP, Vodafone, Shell, GlaxoSmithKline, British American Tobacco, Diageo, BHP and Rio Tinto, while having a Total Expense Ratio (TER) of only 0.15%.  Note that on initial purchase you are subjected to a Preset Dilution Levy (SDRT) of 0.5% however this was not a major factor for me as I intend to hold the majority of this fund forever meaning this charge will become insignificant. 

The Sippdeal SIPP wrapper also subjects me to some extra expenses which are online dealing fees of £9.95 per purchase and a quarterly custody charge of £12.50, which covers all the funds within my Sippdeal pension.  For me Sippdeal was the cheapest pension wrapper for the asset types held with these fixed charges, as opposed to a percentage of asset value, helping as my SIPP pot is now relatively large.  Vanguard plus the Sippdeal wrapper have helped me reduce my costs significantly as the funds came from two old work Group Personal Pensions (GPP) which were both held with Aviva and were incurring high expenses of 0.85% and 1%.

The RIT High Yield Portfolio (HYP) – Adding VOD plus the New Contenders

The full detail on what a High Yield Portfolio (HYP) is, why I decided to build one and full detail on my initial selection can be found in my original post on the topic.  This post builds on that original HYP post and so is important reading for any newcomers to Retirement Investing Today.

Wealth Warning: As I said in the original post I don’t know if long term this HYP strategy will work.  There is every chance that a simple diversified portfolio of lowest expense index trackers that are invested tax effectively will in the long term outperform this strategy.  Only time will tell.

In November 2011 I added my first 3 HYP companies.  These were AstraZeneca (LSE ticker: AZN), Sainsbury’s (LSE ticker: SBRY) and SSE (LSE ticker: SSE).  I’m writing this post as late last week I added my 4th company, Vodafone (LSE ticker: VOD), for which I had to pay £1.552 per share.  This purchase was funded by moving 0.8% of my Low Charge Investment Portfolio assets from cash.  It takes the HYP portion of my Portfolio to 3.2% of total assets.

It’s been over a year between purchases.  The HYP is counted as part of the UK Equities allocation within my non-emotional mechanical investment strategy.  With the majority of that currently being FTSE All Share Trackers, which have risen nicely over that period, I have been given no opportunity to buy with either new money or rebalancing.

Reviewing the High Yield Portfolio

In my original post I stated that “The first priority is to amass 15-20 shares (minimise company risk), from different industries (minimise sector risk), from the FTSE 100 (minimise stability risk) that you believe will spin off dividends that rise at or above the rate of inflation.”  The purchase of Vodafone means I am still a long way from a mature HYP with a need to purchase shares in a further 11 to 16 companies.  All 4 companies to date are from different industries and are from the FTSE100.  Year on year all have increased their dividends at or above the rate of inflation – SBRY by 6.6%, AZN by 9.1% (once converted from $’s to £’s), SSE by 6.8% and VOD by 7.0%.

With the first priority met my second priority was “to maximise the capital growth ... of the portfolio” which will “ideally be an outperformance when compared to the UK market.”  To account for purchases at different times, which I need to do if I am to benchmark myself against the FTSE100, I unitise my HYP.  Since purchase my HYP units have risen by 12.3% and calendar year to date they are up 8.1%.  This compares favourably against the FTSE100 which with a Price of 5,951 at the time of writing is up 12.0% and 6.8% respectively. 

All have provided a dividend yield above that of the FTSE100’s current 3.69%.

UK House Value vs UK House Affordability – December 2012

This is the monthly UK House Affordability update which is the metric that I believe is the key driver of UK House Prices.  It is also the update for UK House Value which is the metric I am using to assess when it is time to buy a UK home. 

Let’s first update the key data being used to calculate both UK House Value and UK House Affordability:

• UK Nominal House Prices.  In recent posts we have been comparing the different UK House Price Indices however for this analysis we will stay with the Nationwide Historical House Price dataset.  November 2012 house prices were reported as £163,853.  Month on month that is a fall of £300 (-0.2%).  Year on year sees a decrease of £1,945 (-1.2%).
• UK Real House Prices.  If we account for the devaluation of the £ through inflation (the Retail Prices Index) we see a very different story.  Month on month that £300 decrease stays at £300 as we say no inflation in the last month however year on year that £1,945 decrease grows to £6,879 (-4.2%).  In real terms prices are now back to those around March 2003. 
• UK Nominal Earnings.  I choose to use the Office for National Statistics (ONS) Average Weekly Earnings KAB9 dataset which is the seasonally adjusted average weekly earnings of both the public and private sector including bonuses.  October 2012 sees earnings at £471.  Month on month that is an increase of precisely £0.  Year on year the increase is £7 (1.5%).  With inflation (the Retail Prices Index) running at 3.2% over the same yearly period purchasing power of those that work continues to be eroded.
• UK Mortgage Rates.  The proxy I use to monitor mortgage interest rates is the Bank of England dataset IUMTLMV which is the monthly interest rate of UK resident banks and building societies sterling Standard Variable Rate (SVR) mortgage to households (not seasonally adjusted).  November 2012 sees this reach 4.33% which month on month is a tiny uptick of 0.01% and year on year is an increase of 0.22%.  So while the Bank of England holds the Bank Rate at 0.5% out in the real world we are seeing mortgages creeping up at glacial speeds.