Monthly Archives April 2010

How to Fix the Nations Deficit – You Decide!

As part of Channel 4’s ‘Alternative Election’ they have devised an online interactive application called ‘Chop or Not’ which allows members of the public to say what service areas of the budget they would ‘chop’ or ‘not’.

http://chopornot.channel4.com/

No sign up is required and it’s designed so that it’s fun, quick and in the style of the popular ‘hot or not’ site.

Everybody’s submissions are totalled and compared with your own results and you’re shown results ‘as you go’.

The wider story is that through people playing the app, Channel 4 is building a picture of what the British people would choose to keep or chop in the budget. This is especially timely today in light of the leaders debate last night on the economy.

I had a go and managed to slash the nations deficit by 65% but not without making some tough choices I can tell you!

I was merrily going through slashing this and chopping that but when I was faced with choosing to axe home visits for the elderly or state pensions it suddenly dawned on me that the reality is much more daunting.

The Channel 4 application is a bit of fun but by slashing many services and cutting entire departments I only cut 65% of the debt.

The big question that still needs to be answered is ‘how bad is it really going to get?’

All the fun aside, exactly how will the debt be paid off ?

Take a look at your friends, family and colleagues and you’ve probably identified a few of the people who will really foot the bill.

So this election….

I suppose it deserves a mention as there is no doubt it will have an impact on the finances of the country.

I do however believe that politics and religion are two subjects which need to be discussed with care and it does not pay to take sides if it’s a quiet life you’re after.

So, I’m not going to take sides but when diplomacy fails…

The main reason for writing about the forthcoming election is not to mock the process or the candidates (ow! I’ve bitten my tongue already..) but instead to mention the effect that televising the debates for the first time has had.

I don’t recall experiencing as much public debate and discussion amongst friends, peers and colleagues than I am this time around.

People seem to have really responded to seeing the party leaders ‘discuss’ important questions and issues amongst themselves because it provides an opportunity to gauge the person at face value.

The average person does not sit and watch live parliamentary debates and so only gets to see politicians when they are making pre-prepared speeches which are often in response to a single issue.

It’s true that party leaders can have coaching and training on public speaking, how to present themselves and the importance of body language in gaining trust and displaying honesty & integrity.

Put the same person who has had coaching and is only used to delivering speeches in a situation where only limited preparation is allowed and unexpected questions and responses occur, then the cracks begin to appear and the real person starts to show through.

And that’s what people like to see.

It’s reality TV with significance!

But will it all make a difference to the turnout of voters?

This handy graph shows an interesting picture and it’s plain to see that the UK has not been voting at capacity since 1992.

http://www.ukpolitical.info/Turnout45.htm

The state of the economy is sure to influence the number of voters making a point of having their say this time around and hopefully the televised debates will help the voting public decide what kind of person they want running the country.

Mortgage Lenders & Income Multiples

For many years a multiple of earnings has been considered a way to gauge how much a mortgage lender will lend.

For example, if a mortgage lender suggests they would lend 5x income, someone with a £10,000 salary would be able to borrow £50,000.

In some instances this is still partly the case but to safeguard against overstretching individuals with high outgoings, most lenders will also now look very closely at the whole affordability picture.

For example, Woolwich still use a 5x salary multiple as a guide but they also insist a borrower has a minimum amount of disposable income after paying for essentials like; the mortgage, council tax, school fees and maintenance.

Abbey use the borrowers ‘net’ monthly income to calculate how much they will lend but also have an upper ceiling of 5x income.

Most lenders now have an ‘affordability calculator’ on their website which can be used to determine if the mortgage required is likely to be accepted by the respective lender and although these calculators are only referred to as ‘guides’ they are a very close approximation of the actual figure (provided all important information is input).

By assessing borrowers in this way lenders can take less risks because they have a much better idea of the borrowers financial situation.

Lenders will also take off any financial commitments from a borrowers gross salary before calculating how much they will lend.

eg: A borrower has a gross annual income of £20,ooo and a loan which costs £50 per month and maintenance payments of £100 per month.

This represents a monthly fixed liability of £150.

The borrower will need (£150 x 12) £1800 per year to make sure these commitments are paid and so the mortgage lender doesn’t jeopardise the borrowers ability to make these payments, they will not take into account £1800 of the clients income.

If the borrower approached Woolwich without any loans or maintenance then they may be able to borrow £20,000 x 5 = £100,000 (subject to affordability).

With the liabilities (£20,000 – £1800 = £18,200) x 5 = £91,000 (subject to affordability).

The Small Business Owner’s Mortgage Trap

Typically, self employed people wishing to obtain a mortgage require at least 2 years worth of accounts or, very solid business projections with an accountant’s letter or certificate.

Small business owners who are the only director of their limited company are also considered self employed for mortgage purposes.

Historically, to calculate how much an applicant can afford, mortgage lenders will use an average of the last 2 years figures and depending on the lender the figures will consist of:

Salary + Dividends

or

Net Profit + Salary

However if the net profit of the business has declined in the last year, lenders will only consider the most recent year’s figures instead of an average of the previous 2.

Looking at this with examples:

2007 – 2008  – Net Profit – £40,000 + Salary £6000 = £46,000

2008 – 2009 – Net Profit – £45,000 + Salary £6000 = £51,000

Rising profits.

In the above instance the lender will use the average (£46,000 + £51,000)/2 = £48,500

If they then use 4x income to calculate the maximum borrowing this would be £218,250

But if the net profit has reduced:

2007 – 2008 – Net Profit – £40,000 + Salary £6000 = £46,000

2008 – 2009 – Net Profit – £38,000 + Salary £6000 = £44,000

Using the lower figure only, 4x £44,000 = £176,000

£42,250 less.

Bang goes the idea of moving to a new/bigger/nicer house…

In 2008 – 2009 a lot of small businesses suffered and are continuing to feel the effects of the recession.

The owners of very robust small businesses, who will survive despite the down-turn, are finding themselves unable to switch mortgage lender because they simply can’t borrow enough at the moment.

Their existing lender will probably allow them to switch to a new offer but any additional borrowing that is subject to an affordability review may well be declined and, if applied for, highlight and create a potential problem for the lender regarding the mortgage as a whole.

Another handy knock on effect of the financial crisis/recession that is contributing to the marginal recovery(?) of the housing market.

Good luck to all small businesses for the remainder of 2010 and beyond…