Fancy a “free holiday home” or perhaps a few “foolproof investments” to pep up your portfolio in 2006?” Well look no further. Have property sales firm Assetz got a deal for you.
You can, they say, in a press release headlined “French holiday homes for free” now use an interest-only mortgage to buy a holiday flat in France. You can then lease it back to a French based property company for 9-10 years in exchange for a “cast-iron rental income” which will cover your mortgage costs – your mortgage we are told would cost you 3%-ish and even if you used the property yourself for a few weeks a year, you could get a rent guarantee of 4% for the rest of the year. The result? “Effectively a free holiday home.”
This is, of course, all not quite the whole story. There’s no mention of how you pay the mortgage on your “free holiday home” off at the end of the term (remember it’s only interest-only – you still have to pay back the capital). There’s no mention of the fact that mortgage rates fluctuate. What are the odds of mortgage rates in France staying at 3% for the next 20 years?
And how “free” is your property going to look if they move to 15% in ten years and you are still getting a yield of 4% (or less – your guarantee will have long run out by then)? There’s no mention of the fact that you have to pay tax on your rental income (which will bring your income from the guarantee below your costs if you are a 40% tax payer).
Finally there’s no mention of the fact that sometimes property prices fall. Note that while prices in France rose over 10% in 2005, there is ample anecdotal evidence that sales are slowing (particularly in areas where the Brits like to buy) and even the leaseback sales people says that “the rate of growth is in a downward trend.” Free holiday home? It isn’t very likely is it?
The interesting thing here however is that Assetz and their public relations company clearly think that putting out this kind of over-the-top marketing stuff is worth doing and the really irritating thing is that they may well be right. Why? Because so many of us are so absolutely hopeless at understanding how money works that enough of us will fall for it to more than cover the costs of sending out a few press releases.
As regular readers will know the British have more than £1.1trn in personal debt and rising, much of it made up of horribly overpriced credit card and store card debt. And that’s before you start factoring the huge mortgage debt (much of it interest-only even without French leasebacks) so many of us have these days. We’re overstretched in every direction and my bet is that a significant number of us have no idea how we will ever get in the clear. This will come as no surprise to the Institute of Financial Planning (IFP) which has recently announced that as far as they can see financial literacy in the UK is “at crisis point.”
The good news is that the IFP is actually doing something about it. They have come up with two qualifications (a Certificate in Personal Finance and an Intermediate Certificate in Personal Finance) for schools to offer 14-16 year olds from September this year. The course will offer lessons on everything from the best ways of borrowing money, how to decipher pay slips and how mortgages work to car insurance and budgeting, all with a view to helping the young make better-informed decisions about their finances in the future.
This isn’t a perfect qualification (it teaches too much on how to get the best kind of debt and not quite enough on why not to get into debt at all for my liking) but it’s an excellent start. I know Ruth Kelly has a lot on her mind at the moment, but if I were her I would step in and take the whole thing a bit further, making this not just a Certificate but a compulsory GCSE.
It just couldn’t be more important. What difference does it make if you can’t read a menu in French, if you don’t really know what an ox bow lake is or if you can’t tell your Shakespeare from your Chaucer? None of these things are really much of a problem for most of us, a faint embarrassment maybe, but not a problem.
However to not know what an APR is, to not understand how compound interest escalates your debt, to not grasp that using a savings account that pays interest of 1.5% year means that you are actively making yourself poorer in real terms, to not be able to chose a mortgage that suits your circumstance, to regularly over pay on your insurances and loans, all these things are huge problems.
Indeed, a quick read through the papers most days shows you that they are often more than just problems, they are life destroyers. To my mind more misery could be prevented with a little compulsory financial education in secondary school than has been prevented by every single government initiative introduced over the last decade put together. Imagine if everyone understood that there is no such thing as a free holiday home – just like there is no such thing as free credit. Wouldn’t the world be a better place?
First published in The Sunday Times, 15/01/06