More on breaking out of fixed rate mortgages

I blogged on 9th April here about the possibility of a once-off amnesty for fixed-rate mortgage holders being introduced, allowing them a once-off opportunity to revert to variable without penalty. Charlie Weston of the Irish Independent has published a piece on this topic today. You can read it here.

Government-backed investing in Ireland Inc.

For those of you with a low tolerance for taking risks with your money, the options for investing your cash are thin on the ground. You can leave your money on deposit, but with interest rates falling, so are your anticipated returns. There are a handful of Tracker Bonds out there but you need to make sure you understand the participation rate, what's being tracked and the final year averaging clauses before parting with your hard-earned.

A new option has surfaced recently - investing in Government Bond funds. Such funds effectively loan money to the Irish Government on pre-arranged terms, i.e. at a fixed rate. As long as the Irish Government can honour their commitment, your money is secure.

Eagle Star were first to market with two such funds - the Irish Government Bond 2012 fund, which should return 12.1% on 5/3/2012 and the Irish Government Bond 2016 fund which should return 38.1% on 18/4/2016.

New Ireland followed with the 2014 Government Bond Fund paying a 4% coupon and maturing on 15 Jan 2014 and the 2016 Government Bond fund paying a 4.6% coupon and maturing on 18 April 2016.

All quoted returns are before deduction of charges and tax (if applicable) so make sure you buy from a broker who offers competitive deals on charges. (Like us!)

Investments can be made with lump sums or by way of a lump sum pension contribution or Approved Retirement Fund.

Be careful with annual house insurance increases

Your home insurance may well include a clause that increases your level of cover by a fixed amount, or perhaps by the Consumer Price Index (CPI) each year. This was appropriate when the cost of building was rising steadily. However, a recent review by the Society of Chartered Surveyors suggests that the cost of rebuilding a home has actually dropped by up to 5% recently.

So when your house insurance is up for its next renewal, check that the rebuilding cost is still a reasonable estimate of how much it would take to rebuild your home.

Two points of caution, though - (1) many people under-insure their homes, grossly underestimating the rebuilding cost of the property. Manke sure you're not one of them. (2) Many policies link the value of the contents to the rebuilding cost, e.g. contents insured for 20% of rebuilding cost. If you choose to amend the rebuilding cost on your house insurance, make sure the contents cover is still appropriate.

Bank of Ireland are reviewing their policy of automatic annual increases. See here.

Make your pension contribution early

There has been some confusion over the Supplementary Budget's 1% levy on life assurance policy premiums, which takes effect on 1/6/2009. It's not 100% clear whether or not this applies to pension contributions as well as life assurance premiums. We are awaiting clarification on this.

Got a note from Hibernian Aviva today - "Hibernian Aviva Life & Pensions Ltd is working with the Irish Insurance Federation and other life assurance companies to clarify the impact of the proposed levy and we are seeking to mitigate its effect on customers.

We want to assure you that we will be doing everything we can to lobby the Department of Finance to re-think the imposition of this proposed levy and to convey to them the potential damage that it will have on the Life & Pensions industry."

I fully support their efforts, as adding a levy like this to a pension product is simply a reduction in the tax relief by another name.

However, if this is going to be the case, there's a strong argument in favour of making pension contributions prior to 1/6/2009 and thus avoiding the 1% levy. This would be especially relevant to the self-employed who would normally pay their annual pension contributions in October or November.

Should banks allow penalty-free breaks from fixed rates?

As anyone with a variable or tracker variable rate mortgage will gleefully tell you, the European Central Bank (ECB) have slashed interest rates repeatedly since October 2008, down to their current low of 1.25%.

But this will be of no use to someone who is on a fixed rate mortgage, where the repayments are fixed for an agreed period of time. If you attempt to break out of a fixed rate, you must pay a substantial penalty, which generally renders the exercise worthless.

I usually hold the opinion that if you enter into a contract with your eyes open, you must deal with the consequences if it doesn't go your way.

But on this issue, I feel there is some merit in a proposal for a once-off amnesty where owner-occupier mortgage-holders get a brief "window" of time to break out of a fixed rate entered into prior to October 2008 without penalty.

In Brian Lenihan's Budget speech, he said "The Government has decided that from the 1st of May, Mortgage Interest Relief for principal private residences should only be available for the first seven tax years of the mortgage. I believe this move is justified given the significant recent reduction in interest rates and in house prices."

He is using the rate decreases as a justification for a reduction in TRS, but those on a fixed rate don't benefit from such decreases.

The ECB rate cuts were designed to stimulate the economy, but this aim will be diluted by all those on fixed rates.

As has been said before, these are unprecedented times - perhaps there is scope for one more unprecedented action?

What will this Budget achieve?

I'm struggling to find too many positives about yesterday's Budget.

I do accept the need for tax increases and spending cuts in the current climate.

But the overall strategy of this budget baffles me. He reduces incentive to save money, by increasing DIRT tax, CGT and Exit Tax on investments. This at a time when interest rates are very low anyway and most other investments are going through a very volatile period.

So if he doesn't want us to save, maybe he wants us to go out and spend instead, thus putting much-needed money back into the economy, right?

Wrong - he increases levies and reduces reliefs so that people will have less money to spend.

So what does he really hope to achieve?

Fear of Budget good for business

Although the r-word hasn't exactly been good for business, there have been two noticeable trends of recent days and weeks: -

(1) Self-employed people deciding to invest money in Personal Pension arrangements this week, in case the April 7th Budget changes rules on tax relief.

(2) Older people deciding to draw their pension benefits this week, in case the April 7th Budget imposes tax on lump sums with immediate effect.

It seems reasonable to assume that there will be some changes to pension legislation in next week's Budget, though only Brian Lenihan and a select few know what form they will take. But if the fear factor causes a bit of a rush, who am I to complain?