Mortgage help or mortgage madness? What six times salary loans will mean

0:02Welcome to This Is Money podcast sponsored by Charles Stanley Direct. I'm Georgie Frost and joining Simon Lambert and me today is Tanya Jefferies. And coming up, is Labour sowing the seeds for mortgage meltdown? Could risky new lending plans aimed at helping first time buyers get on the property ladder spell disaster, pushing house prices up even further? Meanwhile, the Chancellor is on a mission to get us to invest more. So Simon and Tanya pour over the Leeds reforms. Elsewhere, is there a better way for the government to get cash from our pensions that doesn't involve slapping inheritance tax on them?

0:37Tanya will help you work out what and how to pay death duties. You only have six months to do it. And the FTSE soars past the 9 ,000 mark in a much-needed boost to the UK stock market. That's before US inflation fears hit the market. Where will it head next? Don't forget you start up to date with all the latest breaking money news. Just go to thisismoney.co.uk or download the app. Take control of your finances with Charles Stanley Direct. Invest, save, coach or plan. Using technology where it's helpful and people where it matters. Our website and app make trading cost effective and flexible. But we're more than just an online investment service.

1:19We're here for you regardless of your financial needs or if your life takes an unexpected turn. Your finances, your way. Take control today with Charles Stanley Direct. Sign up now. Investment involves risk. But first, experts are warning that the Chancellor's latest plan to help young people get on the property ladder, well, could backfire spectacularly. Rachel Reeves, along with the Bank of England and financial watchdogs, want to sweep aside rules that were put in place to protect homeowners following the financial crisis, allowing us to borrow more to buy a home. It follows the government-backed move to increase 5 % deposit mortgages and banks easing stress tests.

2:00So are we making homes more affordable or just making debt more accessible? Simon, Tanya, welcome. Simon, what exactly is the Chancellor trying to do and why? the chancellor is trying to enable people to borrow more money on their mortgages in order to help them to get onto the property ladder we have a problem in that houses are expensive in this country by comparison to wages not as expensive as they've ever been but nearly as expensive as they've ever been and this means that it's very difficult for people to buy a home Now, there are various things exacerbating this. For example, we haven't really built enough homes to keep pace with the rise in the population in recent years.

2:50We also haven't built enough homes that go for social rent, affordable homes. We pretty much stopped building council homes quite some time ago. We built we'll build a few of them. But there's a real lack of those in the market. Now, we did actually build more homes than most people give us credit for over a period of time under the Tories. And there is some dispute as to whether the housing completion figures that are used are accurate or not. But the supply of homes is only one part of the equation. The other side of it is that historically, even though mortgage rates are higher than they were, they're still pretty cheap.

3:30People are able to borrow more money and that's pushed up house prices. So what do you do about it? Well, the Chancellor has decided that a rule that was put in place after the financial crisis, that means that only 15 % of a bank and building society's mortgage lending can be at more than four and a half times income, should be swept away and this can now be increased to up to six times salary. Now that's not to say that people nobody was allowed to borrow more than four and a half times income before just there was a limit that on how much of that lending that banks and building societies could do and this has kept a cap on those larger mortgages.

4:09That's going to be moved to one side this will enable people to borrow more money which will enable in theory more people to get onto the property ladder and you know to put it in context if you've got a couple uh on a combined 80 000 pounds so that's pretty much two average earners average earnings in this country is about 37 38 000 pounds then they would now be able to borrow up to 480 000 pounds rather than 360 000 pounds so that's 120 000 it's a lot more that's a lot more isn't it 120 000 pounds more that they could borrow now that doesn't mean that they necessarily can borrow it because whilst we talk about this rule there's this slightly weird situation where actually we talk about we still talk about lending in terms of multiple of salary but actually lending is done on something called an affordability basis now where they look at your incomings and your outgoings and then they decide whether you can afford the mortgage.

5:11But with the affordability stuff, you can shuffle that around a bit. You can extend the term of the mortgage, which means that you then lower the monthly payments. You can do some other things to play around with those incomings and outgoings to fit people into a box. So what we're seeing is already some other stuff being moved aside by banks and building society. So they've clearly got the appetite to lend more. And now the government is opening the door to them doing it. Tanya, have we learned nothing? Are we in the same situation that we were? I mean, bearing in mind, as Simon said, these rules were brought in post the financial crisis.

5:50We know what happened there. Are we just on a slippery slide back to that situation? Obviously, we could be if everyone goes a bit mad. I'm talking about the banks and the buyers, but I don't think that there's much sign of that. It seems that the first time buyer plans that the banks are a lot more cautious. They use affordability, as Simon says. And also the reports from the mortgage brokers about what has been going on recently is that the buyers are a bit wary of taking something that's six times salary. And there hasn't been a great big demand for that. And people tend to shy away with that.

6:31I think from the buyer's side, we have to hope that a combination of the stress tests and the crash in recent memory keeps them on the straight and narrow a bit. I was struck in the reporting this week, a mortgage broker from London Money said that the signs are that the banks wouldn't collapse under this kind of regime. There is still a possibility, though, it could cause a crisis on the consumer side. So I think that that might be where we need to watch out. But Simon, with rent so high, isn't the reality that the really hardest bit is not making the mortgage repayments, it's getting that deposit together?

7:11Look, there's two ways of looking at this, right? There's the top down, zoomed out approach, which I'll talk about in a second. And then there's the individual level. At an individual level, I can absolutely 100 % understand that if you are paying more money than you would be paying on a mortgage in rent, then you would be totally happy to take on a big mortgage because at least some of that is going towards you eventually owning the home. It will take you a long time. You probably, if you're in that position, you're going to end up taking out maybe a 35 or 40 year mortgage, but you'll be chip, chip, chipping away at that debt.

7:48The one thing I would say though, is that first time buyers and those moving up the property ladder have a habit of discovering that the cost of running their new home comes in at more than they budgeted for it is human nature to be optimistic in this scenario you want that house you want that flat you want to move in there you will justify to yourself that you can definitely afford it that you can stretch that you can borrow that bit extra on the mortgage to get there and that you will do whatever you possibly can and you know what we can just cut back when we're there it'll be absolutely fine it will then turn out to be more expensive than you thought it was going to be trust me i've been there i've done exactly the same things for those of us who bought in the pandemic of which there will be many people listening to this podcast who moved home during the pandemic we know this because we then got walloped with the cost of living crisis where our bills absolutely rocketed and i still open my energy bill every month and look at it and go, how is that so expensive?

8:50And as somebody who is about to come off my beautiful, much loved 1.4 % five-year mortgage fix and start paying about three or 400 pounds a month more on his mortgage, that's the other thing that could happen to you. Now, mortgage rates are forecast to come down a bit from here, but not by much. And it wouldn't take a lot for that to suddenly turn around. I would not bank on mortgage rates in two years or five years necessarily being where they are now or lower. There is probably at least a 50 % chance that that is the case, but there is also a sizable chance that they are considerably higher.

9:29Now, one of the things that did protect people when mortgage rates spiked at the round the Liz Trust era, which is not entirely her fault that mortgage rates spiked, but she did, she was responsible for them spiking more than they would have done. One of the things that did protect people en masse was the fact that these rules had been put in place and it had limited how much they could borrow so these these protections i think genuinely have worked there's some question as to whether they work during the lockdown that's the other time when you know we saw these problems but at that point actually mortgage rates came down and you had the whole furlough thing where people who were made unemployed and otherwise would have had problems were supported by furlough.

10:11So it's difficult to say. That's such a crazy time, it's hard to put a picture on it. But I think these rules definitely helped when mortgage rates spiked around that kind of list trust era and are continuing to help people in the position of needing to remortgage. But as I said, I can totally understand from the personal perspective why you would go, do you know what, I can do this. But the other element, as you said, is the deposit. You need to raise the deposit. And deposits actually have been the major hurdle for most people getting onto the property ladder. Because if you're buying a£400 ,000 property, which is a fairly modest property in quite a large chunk of the country nowadays, even just to raise a 10 % deposit, you need to save£40 ,000.

10:53If you don't have the bank of mum and dad behind you, saving£40 ,000 is an extremely tall order, especially at a time when, you know, bills have been rising and so on. But if you can do it, then why wouldn't you do it? But to go back to my top down point, I cannot help but think that this mortgage bonanza is a bad idea. I do think that we are potentially sowing the seeds for a future problem here. If you look at economic theory of boom and bust, you will find that there's this cycle that we move in. And the end of one cycle and the start of another cycle comes when people forget. they it's so long ago it's just like it was a different time it was different problems and i think that's what we're seeing now it's 2025 the credit crunch started in 2007 it's nearly you know it's nearly 20 years ago it's 18 years ago that's around about the time that it takes to forget that there was a problem and start to just shuffle aside some of those annoying things the annoying rules and protections that you put in place they were for different times we don't need those anymore we need to move on the one thing i'll say is i wrote my column about this this week up up up go the house prices that was the tv news reporter's opening line the first time i was ever invited to go on television it was november 2006 and i'd had a call from itv because there was a story in the news about a bank called abby you may remember them who had decided that first-time buyers and home movers should be allowed to borrow up to five times their joint salary.

12:34I googled this earlier this week to write the column and in it there was a quote from an Abbey spokesman. Lending five times salary may sound high but really is something we have to do given what is happening with house prices. And we'd written in the article some lenders go even higher. Northern Rock says its maximum loan was 5.9 times salary but added that it rarely allows borrowers to stretch that far. The eagle-eyed may notice that Abbey and Northern rock are no more they were victims of the credit crunch now the big difference back then is that banks and building societies were handing out mortgages like sweeties you know there was a big push to get people to borrow more there was the house prices always go up they had been going up you'd had the whole you know economic growth being fueled by people remortgaging there was the buy to let boom going on it genuinely was a very different time okay and also you had interest only mortgages i remember i've talked about this on podcast before i bought my we bought our first flat in 2006 and the the bank said to us you know if you take an interest only mortgage you could borrow more might be able to afford a bigger property if you want i was like no actually i'm all right i don't want to just take out an interest only mortgage now at the moment interest only mortgages are very niche right they've been on the rise a bit more people are flipping over to them actually from repayment mortgages to try to deal with the payment shock they're getting but what's to say that banks and building societies don't the next move isn't that they shuffle back to a bit more interest-only lending because that's the thing you could do because once you've tweaked everything you can tweak on affordability to get people through and get them those six times salary mortgages but what what else what other knob do you turn well you could start turning that interest-only mortgage dial you know and at the moment you know it is harder to get an interest-only mortgage but one of the qualifying criteria for it for when you say that that how you're going to pay your loan back is that you're going to sell your home at the end of it and if you say that it ticks the box and the bank is totally fine with it now obviously you could do that and downsize most people won't though they will need their home because they're going to live in it and they're not planning on downsizing so this is a bit of a problem so and i think my other issue with this is that ultimately you don't need to be an economic genius to work out if you lend people more money to buy homes the prices of the homes will rise also extending borrowing on the demand side somewhat undermines the benefit of increasing the number of homes you're building on the supply side so we've got a bit of a push me pull you thing going on here with these policies.

15:16And I would argue, and I've argued many times, that high house prices are a root cause of most of Britain's economic ills over the last 20 years, at least, or longer. People put so much effort into the lottery of the housing market. They have to put so much of their wages into mortgages, into saving for a deposit, into rent, and so on, that they don't have money to do other stuff. and it limits people they don't they don't do entrepreneurial things they don't move jobs they don't do things because of that whole thing about how much has to be channeled into it and i can only see this driving up house prices and therefore making things worse and it comes at a time where you know high prices are still very high compared to wages because they never fell back to the kind of long-term average uh after the financial crisis after that bust and that was because interest rates were cut to the floor and there was a huge amount of forbearance but also because wages didn't go up for years now we have finally got ourselves into the position where wages are going up faster than house prices and faster than inflation even and yet now we've come up with a plan to just say hey guys borrow some more money i i think that we're undermining solving the housing issue, not solving the housing issue here.

16:39Well, regular listeners to the show will be aware that we've been bemoaning the tinkering that's been going on for many, many years. But Tanya, you do have to feel, I think, for the next generation, I'd probably even say our generation and down, basically not boomers. Because if I think of my relatives, certainly I've got relatives who are teachers. They could afford to buy a lovely home in Warwickshire and a second home in France. You know, those sorts of things, big houses. I can't imagine ever being in that situation. And the kids underneath me, as it were, I can't imagine they can either. We sort of need a national reset almost of the way that we think about buying houses.

17:24I don't know. But be that as it may, the tinkering continues, Tanya. The banks are also introducing measures already. We've got, we've had this since I think 2001 though Nationwide's helping hand but now Lloyd's and Halifax they've extended their first time buyer boost scheme can you tell me about that one? Yes they've come in this week on the back of the announcement to say they're putting an extra four billion behind this particular scheme aimed at first time buyers and it's only going up as far as 5.5 times salary but they do say that you You have to have a£50 ,000 a year income. Maybe that's joint, maybe that's not, to qualify.

18:08And you also need a 10 % deposit. So it doesn't sound like they're going really mad with it. It's difficult to say when they went so mad in the past, those embarrassing quotes that Simon was reading out earlier. You have to wonder, don't you, what on earth they're going to get up to this time. I will say, though, that 18 years, I think that's quite a long time in the mind of consumers. But I think there's still enough institutional knowledge in the banks that they don't really want to go back there again. They don't want to be the boss of Northern Rock. They really don't. It is really difficult.

18:42What you were saying about teachers is interesting because on an individual level, which Simon was talking about earlier, when people can afford a rent, so they can't see why they shouldn't pay less in a mortgage and they think that's completely affordable. I do really think that you have to take into account what job you've got. Interest rates going up is obviously a real problem. But I honestly think one of the biggest dangers in terms of not being able to put your mortgage is suddenly losing your job and not immediately being able to find another one and being really, really stuck and then potentially having to sell up.

19:15If you've got a job like as in teaching where you're very, very unlikely to face a round of redundancy, you can be much more confident about taking on that kind of mortgage. mortgage. I'm not saying that everybody should rush into jobs that seem safe just so they can buy a house, but it is something to take into account because I think if you do think that you might face redundancy, you probably need to be more conservative about how much you're going to borrow and how much you want to be on the hook for paying higher interest. Which therein lies a whole other discussion, which I won't get into now, but to encourage people to buy, to take on mortgages that are very expensive, you say as a country, okay, we'll sacrifice the freelancers, the entrepreneurial spirit, because that's not exactly safe.

20:03And that is a real shame, isn't it? But that is a debate for another time. Just quickly on this one before we move on, Simon, can you, with your big, big, big brain, think of a better way? If only you could see Simon's face right now. He's there going, yeah, yeah, I do have a massive brain and I've got a load of plans. He's not, he's going, what? A better way of helping people get onto the property ladder, but also it's gummy, isn't it? It's just not working very well. So the whole sort of property market. So Simon, give me your manifesto for change. Yeah, I was definitely rolling my eyes there.

20:40Look, arguably one of the things that got us into this pickle in the first place was the point where we started lending people more money you can trace back the line of house prices and you can pick out credit event moments in it the deregulation of the you know of mortgages in with the banks and building societies in the 80s is one of them we'd probably be better off actually if we did have hard and fast limits on how much you can borrow related to people's incomes because it would keep a lid on house prices and it would mean that that relationship between house prices and wages was much harder to break.

21:13And fundamentally, that is the key element there that you need. We could encourage, the problem is you end up with a scenario of the haves and have-nots, right? Okay, you've got the bank of mum and dad and so on. So we have this haves and have-nots scenario. We could encourage more of that kind of early inheritance, passing on money kind of thing that would actually help more people. But, you know, what about the people who can't benefit from that? What do we do there? Well, we came up with a plan called Help to Buy that involved lending them deposits interest-free. Arguably, a better plan would have been Help to Build, where we lent builders money interest-free in order to drive down the cost of building.

21:55And this is the issue with the house building stuff and the new homes, is that new homes are sold as a premium product. If you go and buy a new home, it's sold as more expensive than the houses in the existing market. and builders build out at a rate, that means that they keep the prices high. The reason why we've been building less homes over the last few years is because of the market tanking for buying new homes. And so they're building less of them to protect their profits. One of the reasons why they have to charge such high prices is the price of land. I think there is some merit in the scenario where if you are going to build on the green belt and you're building on you know farmer's land that you remove those lottery style winnings from people who sell their land for house building because agricultural land is worth x agricultural land with planning permission is worth a huge multiple of x and you've got people who will sell a field and they walk off with you know literally lottery style winnings two three million pounds the developer then builds on it and has to sell at a price that reflects the underlying cost of buying that land now if you had that uh land zoned for building and therefore there was then a compulsory purchase scenario where the landowner still got an uplift above the agricultural value but perhaps they were only paid two or three times what it's worth as agricultural land they still win they still get more money um but that lowers the cost for the developers but that's hugely controversial i think some of labor's plans to do with more building more houses are okay but i don't see anything in there about building quality houses what we need to do is build houses that people want in places that people want them supported by the people who already live there not just chuck a load of houses on the outskirts of towns you know that have been chosen for this and it looks to me a lot like that's going on you need more small developers there they have tried to do some stuff to support small developers it's a complicated issue that requires a really well thought out plan that you get buy-in from from the nation and just whacking up the amount that people could borrow on a mortgage doesn't solve it and i don't hold the banks or building societies necessarily responsible for any of this stuff they are in a much better financial position than they were and they want to make money and as a building society your job is to support people who want to buy homes that's you know that's why they were set up and as a bank your job is to make money for shareholders so i don't you know they only operate within the rules that you give them and they will be prudent you know as tanya said they do have the memories that mean that they'll be prudent and it's a really thorny issue because it's really as i said it's really easy for me to say this as someone who was a first-time buyer in 2006 and is you know sitting in his own home whereas you know if i was in the position where i was renting and paying more on rent than i would want to on a mortgage and i'd say yeah great brilliant lend me some more money all right then from encouraging people to buy homes to encouraging us to buy more shares the government has launched a drive to get more ordinary folk to start investing in a package of reforms aimed at boosting economic growth now in an echo of the 1980s tell sid campaign around the privatization of british gas a new consumer campaign will lay out the long-term benefits of investing for better returns rather than keeping savings in cash so we sort of had a prelude to all of this with the will they won't they cash isa we will not go into that don't worry um but we did get the leads reforms tanya not as we thought lots of announcements in the mansion house speech the leads reforms what are they yes rachel reeves went up with a lot of important finance industry people uh to leads she didn't just uh talk about the drive to get people to buy shares.

25:46There was more to it than that. In another throwback to the financial crisis, they're going to have a review of ring fencing investment banking from retail banking, which basically means that they might loosen the rules. They probably will loosen the rules on banks mixing up their investment and their retail operations. They say that they'll do it in a way that protects customer deposits. I mean, we do have this£85 ,000 backstop which protects our deposits, but it sounds like they would take that kind of thing seriously. So it sounds like they want to relax the rules, but try and do it in a sensible way, which doesn't bring a lot of risk again.

26:29There's also quite a lot of stuff about cutting red tape. And again, it seems to be, they've looked at the red tape, which is supposed to make consumers safer, but maybe as just a bit too onerous. They want to relax the senior managers regime, which is basically checking at a fairly constant basis that people who run companies are fit and proper. They should be able to do that without having to have people go through a battery of tests on a regular basis. Presumably they're going to try and come up with something where we still end up with sensible people in charge of things, but not having to fill in loads of forms and jump through loads of hoops on a constant basis.

27:13And then we come to this consumer campaign. There's a couple of strands to this, one of which I think is more likely to work than the other. One is a nudge campaign where they're going to get banks to have a look at all the people with a lot of cash in their current account who don't seem to be doing much with it. And they're going to get the banks to write to them and gently suggest that they might be interested in doing a bit. How intrusive. Yes. I mean, I don't know exactly how it will work. I mean, there must be data protections, but I suppose that they're nudging banks to do this with their own customers who have given the data over.

27:51And so they've got a certain amount of leeway. I mean, you always have to worry about scams in this scenario. I don't trust any email that arrives from any bank whatsoever. and I'm even quite dubious about letters sometimes so that would have to be handled with care that's the one which I am not sure will really work I don't think people getting a letter from the bank saying you know have you have you thought about investing seems like a good idea will really work I think people will shy away for that and think it is a bit intrusive why are you contacting me and it's my money, I'll do what I want.

28:31And if I want to have a high balance in my current account, I will. The advertising campaign, though, may have promise. And I think the reason people are saying, oh, it's an echo of the Tell Sid campaign, is that was such a memorable campaign. It was in the 80s. Remind us, Tanya. They were promoting the privatisation of British gas. And so you were supposed to tell Sid that he could go off and make a killing on buying shares in British gas. But it really did take off and it came to be shorthand for the whole privatisation programme of the public utilities that happened in the 1980s. And I think that is going to depend on who they get to do the advertising campaign, whether they're any good.

29:17Advertising is very hit and miss. You can get some kind of absolutely miracle campaign, which everybody loves and always remembers no matter what. And then there are many, many, the vast majority, I suppose, that sink without trace. That has got promised. I think with a really good advertising campaign, you could persuade people, I think, to start doing something a bit more interesting with their money than just putting it in savings. I'll also add to that on the industry side, all the apps you get now with the savings and investing, They make it so easy for you to just sign up and start investing straight away with just a small amount.

29:57You just put in£100 or even less and or you commit to putting in£5 a month or whatever. It's on a really low level. But I do think young people are more open to investing. I mean, they look around and they haven't got many other opportunities to make money. so I think some of them are more open to investing perhaps than younger people would have in the past I wouldn't really have considered it back well I wasn't really earning enough money to even consider it when I was young but had it been made really easy for me and all my friends were doing then I might have thought oh okay well I'll put 10 pounds a month in what the hell and then it ratchets up as you become better off as you get older so I think there is I think there is some promise but we have to see how it works an absolutely brilliant eye-catching advertising campaign where it's got a slogan that people who are doing what we're doing in 20 or 30 years time 40 years time that could make a real difference i understand that jemma collins uh is free she recently did a pensions campaign you're both looking rather blank jemma collins anyone Yes, Tanya.

31:06She from TOWIE. She's the, yes, just Google her. Yeah, it will be interesting to see where they target this because I think Tanya has a really good point. The young people, and the stats are bearing it out, are getting much more involved investing. Now, where they're getting their information from, TikTok and the like, I'm not sure how legit that is, but there is certainly an appetite. The people that they're focusing on, though, or they want the government is probably not young people because young people don't have an enormous amount of money. It's the older generations that do have more in cash savings.

31:41But I imagine the advertising and all that will be definitely targeted a younger way. I'm not sure. We'll see. We'll see what happens. But do you think it's going to work, Simon? Or do you think we're already there and actually just let almost nature take its course, let the next 10, 20 years bear out because people are moving in that direction anyway? Can you speed this up? I think it's definitely a better idea than cutting cash ices. And this is what people have been saying. We need to educate people. We need to encourage them. We need to build an investment culture in the same way that the United States has an investment culture.

32:11People are much more likely to invest in the US than they are over here. And they're also probably much more likely to lose money on investing. But you know what? When you lose money on investing, you don't tend to, most of the time, you don't tend to lose all of your money. You lose some of it. And at the same time, some of your other investments have gone up in value. That's why you have a diversified portfolio that holds a number of different things. And actually, over the long term, if you do have a diversified portfolio, then statistics show that over every kind of 10 year period going back 120 years or something.

32:47I don't have them in front of me. You are extremely unlikely to lose money. In fact, if you go back far enough, you just won't lose money over every 10 year period. And that's any 10 years in that time. Right. So, yeah, we should be encouraging people to do it. The nudge letters, I think, will be going to people sitting on huge sums of cash who are definitely older. But maybe we do need to be targeting younger people and getting them to invest from the start. They might not feel like they have the money to do it, but, you know, maybe they could afford to invest£25 a month or something like that.

33:17Just a little bit going into a pot. And one day people will thank themselves that they did. but it is that messaging around what you invest in because you've got people at the moment you know there's at the moment there's a new wave of interest in crypto for example bitcoin's hit another record high this week it's surging again um there's all kinds of talk about that we're not at the same level i think of the you know everybody talking about crypto everybody piling into crypto that we have been in previous booms but you know that we will be um but the problem is there's nothing wrong with holding some bitcoin maybe if it's like 10 of your investments that's a really large amount of your investments to hold on bitcoin okay but if it's even if it's only 10 of your investments next time it tanks by 60 or 80 which is very likely to happen with bitcoin at least you've only lost 80 of 10 if on the other hand it's 90 of your investments as some people overexpose themselves to these things when it falls by 80 you've got a really big problem so that's the message that we need to get through to people and people should be investing we're talking about a nation of people who are quite happy to buy a brand new car on a finance deal and lose 30 to 40 percent of its value over the first three years yet they won't invest in the stock market in case it goes down it's things like that that we need to look at and go hey look if you're happy if you're happy to actually be guaranteed to lose 40 on your new car then maybe you should consider investing in the stock market that's it part one

34:57i'm joined now by rob morgan of charles stanley direct for our weekly investing explained feature rob a lot of focus on getting people investing this week so here is a listener question i want to buy a cheap global stock market tracker fund or ETF. How do I work out which one is best? It's a good question, Simon, because there's numerous tracker funds and ETFs or exchange traded funds or offering what is essentially a similar thing. So straightforward access to global markets. And as a reminder, a passive fund or tracker aims to replicate the performance of a market rather than try and beat it as an active fund would.

35:39And they tend to do this by owning all or most of the companies that make up that index typically. So when it comes to selecting a particular one, it really tends to come down to the charges owing to the similarity of the products. And it is a very competitive space where you can expect to pay as little as 0.1 or 0.2 % in annual charges. So that's about£1 or£2 a year for each£1 ,000 invested. And to gauge the charges, you can look at the OCF or ongoing charges figure on the fund, on your investment platform or in the fund literature to see how it stacks up against the competition. That's not quite the full story though, because there's always the cost of buying and selling the product itself as well to add to the equation.

36:27And that is particularly the case if you're looking at making adjustments to rebalance your portfolio with that product over time. So when we look at ETFs, for instance, we look at what's known as the spread between the buy and the sell prices. And often that's a function of the size of the product. So the bigger the fund, the more frequently it's traded and the narrower the spread and the lower the costs are typically. So essentially, you need to look for a large popular product with a low OCF. And finally, one thing to say is that your investment platform may also charge you for the buying and selling of the product itself and that can differ according to whether what you're buying is an ETF so a traded share or whether it's a fund which is dealt once a day so be sure you understand those costs as well in order to decide between the two product types and help minimise your overall investment costs.

37:19Rob thank you very much. Thanks Simon. Welcome back talking about the stock market as Simon was before the break there. The FTSE 100 soared past the 9 ,000 mark for the first time this week, providing a much-needed dose of optimism for the UK stock market. London's leading index has been on impressive run of late, climbing by more than 10 % so far this year and outperforming its Wall Street rivals. However, Trump, well, he spoiled the party again over increased fears of inflation in the US, over tariffs, the situation, of course, not being helped by the president's provocative, continued provocative shall I say remarks about the future of the Fed chair.

37:58Tanya the FTSE what's been happening? The UK stock market has I think benefited from the turmoil we've seen in the states with the tariffs and although the US stock market has recovered after the initial tariff announcement on Liberation Day I think it is fair to say that Europe and particularly Britain, have benefited from the rotation away from the US, which I think is still a bit tenuous, frankly. America's got all these huge tech companies who are potentially going to lead us into the future. So I really don't think we should write that off. And also because people caught on to the fact that Trump wasn't necessarily following through on the tariffs, they've started not believing him.

38:47There's been this taco trade where he doesn't actually go ahead with the tariffs. So the US stock market has recovered. I also think that on the tariff front, one of the reasons the FTSE has been doing relatively well compared with other markets is that Keir Starmer has been seen as pulling off a fairly decent deal early on with Trump. Now, it's not a great deal. We've still got 10 % tariffs and it's still not looking good. But Relative to other countries, it is. He's also got another four years and he's got a big majority. So we're seen as fairly stable. And also, as we all know, because we've talked about it many times on this podcast, the UK stock market is really cheap.

39:29So people are finally thinking, well, maybe they will be a good bet. So that's what's been going on behind the scenes. The tariff issue hasn't played out by any means yet, partly because Trump has been pulling back and announcing more tariffs and then unannouncing them and changing deadlines every five minutes. Everyone's completely confused about what is going on. But also all the American companies, not surprisingly, did a lot of stockpiling so that they wouldn't have to put up prices a lot straight away. The inflation figures from the US, though, were interesting this week. They were the first signs of it feeding through.

40:09And that's probably only going to go in one direction. in terms of inflation going up. You can't really see how, with what's going on and the stockpiles running out, that US inflation's suddenly going to ease, which I suppose brings us on to Trump and his threats to fire the Federal Reserve chair, which he really ratcheted up this week. It may well be as a distraction from a huge political scandal that's going on in the States at the moment. We don't need to detain ourselves from that. But there's no doubt that he's wanted to fire Jay Powell for a long time. And what he seems to want him to do is really radical.

40:51He wants, I think, the rates in the States are around about four and a half percent. And he wants to cut by three percentage points. If he got Powell out, there's still a whole committee at the Fed who might not go along with a new Fed chair, even if they were a Trump appointee. So he might not immediately get what he wants. but I think the firing of the Fed chair would be, I personally think that would be more serious in immediate terms than a terrorist because it would be a definite event. Once you'd fired the chair of the Federal Reserve, there'd be no going back, it would be done, whereas the tariffs, he's been announcing them and unannouncing them as we've seen, whereas firing the Fed chair would be a massive deal.

41:33Obviously, he would then try and get somebody in who was a yes person. Everybody else after that would be a yes person. So it's the first firing that is really the crucial one and would really shake confidence. The markets have not liked it at all. And that's an understatement. The dollar falls every time he saber rattles about this kind of thing. Bond yields go up, especially on long dated debt, the 30 year debt in the US. And that would have the kind of effect on US mortgages that we saw under Liz Truss here. And we know how unpopular that was. Also, the reason Powell has been digging in his heels on interest rates is because of worries about inflation from Trump's tariffs.

42:16So he is potentially saving Trump from potentially big political disasters, which is mortgage rates going up in the States and inflation going up. So it is a bit of a sticky situation. We'll have to see how it unfolds. But he does seem really serious about firing Jay Powell this week anyway. he would find it really difficult to do it legally you have to do it for cause which means you have to have a good reason and Jay Powell is a sober banker who is not easy to fire they do seem to have found one potential reason though which is they've been renovating the Federal Reserve building and the costs have overrun and there is talk about allegations of fraud involved in this and also potentially perjury when he talked about it to a committee in Congress.

43:08This is all really tenuous and I think it wouldn't really hold up because everybody knows that Trump wants to fire the Federal Reserve boss to get interest rates down, not because he suddenly discovered the cost of renovating a building came in a bit higher than everyone thought it would. He would be on sticky grounds if he wants to go in for that sort of attack on the Fed chair. But I mean, he seems the president seems to be doing really whatever he wants to at the moment, Simon. But before we dig into those sorts of things, and I'm really keen not to get too much speculation because honestly, we could do.

43:45And there are plenty of podcasts. We do this every week. Will he? Won't he? What will happen? Blah, blah, blah. I want to know a bit more about the FTSE. So just explain to me why is it that it's it's so desirable or so upsetting when you hear companies that want to delist here, go list somewhere else. or what does it mean for a country? You know, what does it mean if the FTSE is doing well for brand UK, especially the FTSE, which has got quite a lot of foreign companies in it. So how does that filter down to the wider economy and what does it mean? The FTSE 100, which is what we talk about as the UK stock market, is actually only the top 100 companies in the UK stock market.

44:27Really, you need to look at the FTSE All Share, which is a much broader measure and includes the FTSE 250 companies, which are the smaller companies and then also includes some of the top companies lower down the level as well, small caps. The FTSE 100 is full of big multinational companies, companies that make a lot of their money elsewhere and don't make their money in the UK. So, as you say, I mean, why does it matter? What difference does it make? well it's a it's a sort of barometer isn't it um it doesn't necessarily relate to the uk stock market sorry it doesn't necessarily relate to the uk's economic performance and often our economic performance and the footsie go in completely opposite directions but what it is is it's a as i said it's a barometer but also it means that those companies when they're listed in the uk they have a presence here they might not have most of their business here but they have a presence here and it's important for the city you need big companies to be listed in the city and you need small companies because there's a whole support network that goes around that professional services and the city is one of our one of the things that we do really well in the uk is financial services legal services professional services and all that stuff around that it's hugely important to the uk economy it's very high margin it makes us a lot of money ideally we want to do more of that that is one of the things rachel reese was talking about earlier this week and we want to spread that around as well we want more of it in leeds which is a bit of a financial center we want more of it in birmingham we want more of it in manchester we want more of it in other you know cities around the country um and every time a company gets bought out and then it doesn't get replaced it gets bought out by a foreign company and then it doesn't get replaced and we lose another company from the index it just gets undermined a little bit and every time a company decides to go list in new york rather than here that gets undermined a bit so it does matter um it doesn't directly matter it's not going to make a huge difference if starling for example lists in new york or lists in the uk but it just undermines it that little bit sucks a bit of money out pushes a bit more money towards new york and means that we don't manage to you know redirect the balance and we need economic growth in this country and one of the drivers of economic growth is going to be financial services and this is the kind of financial and professional services growth that we want arguably this is a better kind of growth than just lending people more money on their mortgage um this is the stuff that puts more money in people's pockets and makes those houses more affordable for them because their wages are going up and wow i tell you what there was a really interesting article in the economist this week about something that we've talked about on this podcast before and it was comparing what has happened to average weekly earnings in the united states and britain um and it's absolutely astonishing when you look at the chart how wages have gone up and up and up in the united states and the differential between what people earn in the states and people earn in britain yeah has spread and at one point during the 2000s actually average weekly earnings were higher here than they were in the states and then they've just gone up and up and up now obviously working patterns are different they get less holiday there's more expected of them and everything else but this is why we feel poorer um you know when we go to the states this is why we feel this is why we can't afford to go there i'd love to take my children to the states on holiday i'm like i cannot afford to go on holiday to the states that was not the case when i was a teenager but even if you go to france and germany places in europe it feels really expensive one of the reasons why it feels really expensive is because their wages have gone up by more that is the benefit of growth to us if we can get that growth going if we can get that productivity growing then we will stop feeling poorer compared to the rest of the world and one of the important bits of that is financial services professional services, building up the city rather than seeing it being slowly chipped, chipped, chipped away at.

48:39And that's why it matters. All I'll say to that is I read that article too. As someone who goes to America a lot, looking around, seeing the poverty, seeing anything that's state funded, the roads, everything. And I'm sorry to all my American friends, I'd rather be here with a lower wage than seeing the types of unbelievable sort of levels of poverty that I've witnessed in the states oh don't get me wrong I'd rather live here I'm not saying I'd rather live there I'd rather live here any day of the week that's actually a great example because what I think they do fail to do in America is they fail to capitalize on this effect by improving the lot of everyone of improving the lot of the people at the bottom it's a very very divided country in terms of wealth and income and opportunity and things like that.

49:31And so actually, it's the wrong place to be comparing ourselves to maybe we want to be comparing ourselves more to our European cousins instead and saying, well, actually, we want some more of how their wages have gone up. But as we talked about, American exceptionalism has been replaced by American erraticism. That doesn't mean everybody's going to stop investing in the US. And in fact, there's a load of money flooding into the US stock market at the moment. But it is showing signs of irrational exuberance combined with extreme erraticism in terms of policy and what's going on over there. And people are questioning it.

50:02And they are thinking, where else should I put my money? And they are looking at other places in the world where shares look a bit cheaper, opportunities look good. One of those places they're looking is the UK. And we are in a scenario where Apple as a company is worth more than the whole of the UK stock market. So it doesn't take much in terms of people just shifting a little bit of their allocation from those gigantic US companies into the UK to drive the index up. And that's what's been going on. And then you get a bit of momentum and a few more people pile in. And maybe, just maybe, by the time you listen to this podcast, because it often happens on Friday, the FTSE will have closed above 9000.

50:47We shall see. I swear, Tanya, from April 2027, we're going to talk about pensions now. They're going to be liable for inheritance tax unless, unless. The Investing and Saving Alliance is urging the government to slap income tax on inherited pensions worth£90 ,000 plus instead. Another option is to impose a tax charge at death on unspent pensions worth£150 ,000,£200 ,000 or£250 ,000. Now, the idea is to reduce the burden on grieving families yet still rake in, so the finance groups say, around the same amount of money. So, Tanya, what are the current plans? Who are TISA and what are they proposing?

51:30Well, let's start with TISA. They're a not-for-profit lobby group for the pensions and savings industry who have obviously taken a look at the plans for including pensions and inheritance tax and thought we've got a better idea. In fact, we've got two better ideas. The plan for inheritance tax is to count it towards inheritance tax like everything else, your ISAs, your property or your assets. And that will start from spring 2027. The two ideas that they've come up with, one is looking at getting people to pay income tax on unspent pensions when someone dies over£90 ,000. they would though force you to take it as a lump sum unless you were a dependent of somebody so rather than take it as taxable income and manage the tax bill it sounds like it would be compulsory i think to actually just take the lump sum um which some people might not want to do obviously um the other idea is the thresholds would be higher at 150 000 200 000 or 250 000 that would see a tax charge being slapped on an unspent pension of respectively 25, 30 or 35%.

52:46The plans are not completely fleshed out. And although they had quite a lot of supportive comments from industry people in reaction to it, I mean, presumably a lot of their members were involved in coming up with these plans. But some of them said, well, it would be a good starting point, a good springboard to discuss how we could tax pensions in this way when people die, as opposed to thinking, this is, you know, we're done, this is great, let's stick with that. I think where they've got a point, in my opinion, is that including pensions in inheritance tax is going to be really onerous for families when they have to do the calculation.

53:30It potentially will take a very long time, you'll have to go around to all the pension firms that there's unspent pensions with, it will make it potentially very much drawn out. And people then could be looking at penalties if they don't pay the inheritance tax bill on time. Both of the plans they come up with, I think, would be more straightforward in there would be a pension, you would either pay income tax on it, or you'd pay a charge, that would be that. And then you would do inheritance tax separately as you as you do now presumably where i think i would have questions would be the thing about inheritance taxes it adds up all your assets and then pensions would be among all of your assets and then inheritance tax is applied at it i'm obviously people think that inheritance tax at 40 over the thresholds is too high um that's a discussion uh for another day but it would be looking at all your assets.

54:29Whereas what if you have got an unspent pension of over£90 ,000, but not many other assets, then potentially you could be taxing a family that is not inheriting much else. I mean, I suppose if you've got a large unspent pension, you're more likely to have lots of other assets. That's fair enough. But I'd want to know more about that. I don't know the answer. I don't know if that really is a stumbling block. They've obviously crunched the numbers if they say that the outcome in tax terms would be equivalent to the plan for inheritance tax. But I don't think it would just be simplifying it. I think it might be changing who ends up paying it in a way.

55:09And I reported on the announcement this week, but I definitely think there's follow-ups digging into it if there are signs that the government might be taking this kind of thing on board. They sent quite a dismissive comment. Well, I think it was dismissive, basically saying we like our plan. Thanks very much. That was the gist of it. But they have been quite quiet since announcing it in the budget last year. I don't think we've got really any firm idea about how the inheritance tax on pension is going to work in practice. And I think that where the pensions and savings and investment industry have got a point is they will need to try and make it as easy as possible and not make inheritance tax even more burdensome than it already is but we don't know until they come out with something and maybe this is the usual amount of time it takes but I'm waiting for a bit more detail about the practicalities of it and the ins and outs and I think the industry is as well and so they seem to have put down a marker here and they are making some interesting and fair points.

56:14So we will have to see what transpires, I suppose. Meanwhile, you get just six months to stump up death duties or you have to pay interest on the amount owed. So you've written an excellent guide, Tanya, on how to work out and pay inheritance tax and now seems an appropriate time with which to just cover some of the basics here because a lot of people won't realise that there's that time limit. And why would you think about it until, unfortunately, you've gone through a loved one's death and you have to deal with it? Yes, that is to pay the bill if a bill is owed. Technically speaking, it's six months.

56:50The starting point is the end of the month when your relative dies. So it could be almost seven months if they died at the beginning of the calendar month. so there is a bit of leeway that that but basically it is six months you do get longer to sort things out and put the forms in if you need to inform hrc but you don't actually owe the tax and there is an option as well of paying in installments you might want to do that you might want to opt for that if you are getting into a bit of a sticky situation in terms of paying the bill up front. So there are various ways around it. We write a lot about inheritance tax, as you know, but I decided we needed to do a really practical guide, really going down as deep as what are the forms you need to fill in, in terms of their reference numbers and links to them.

57:47And how do you fill them in? What is the process step by step? If you've only got six months, then you can't hang about and it's a really difficult time obviously when people are grieving one of the things I took away from writing it and I learned a lot of things I didn't know during the course of writing it because I got our tax expert Heather Rogers to weigh in I got a really good lawyer from the Association of Lifetime Lawyers to help and various financial advisors pitched in as well I really think if you've got a complicated estate get a lawyer to help you out it's executors that are responsible for working out and paying the inheritance tax within six months you pay the lawyer out out of the estate and if you're a beneficiary obviously that means it comes out of whatever you inherit ultimately but I think it is a good idea this is is complicated even if you just need to fill in the main form just to prove that you don't need to pay inheritance tax that can still be a tall order for people.

58:47And if you do have to pay an inheritance tax, in addition to the main form, there's all these what are called schedules, all these extra forms to fill in if the deceased owned X asset or X asset. There's forms for all of them. There's a huge, great long list of them. So I think that executors really should seriously consider getting a lawyer involved at an early stage in this just to make sure that it's done properly. It is a serious matter to leave things off. It may be the HMRC will just come back and ask some questions but it can open an inquiry and it often does into inheritance tax bills because they think for instance that a house that is not going to be sold but is going to be passed on to a member family has been undervalued for inheritance tax purposes.

59:38You could see why people might do that. And so they might get the district value around to do their own valuation on it. And the penalties are quite steep. If they decide you've been deliberately underplaying what you owe in inheritance tax, then it gets very sticky very quickly, definitely to be avoided. All right, then, Tanya, thank you very much. I do urge you to read that article. It is very comprehensive great article tanya simon stat of the week stat of the week i can't just say a number this one needs a little bit of explanation first right then simon right an electric car and concerns about how the battery degrades and how much range it loses right testers ran a volkswagen id3 for four years and did 107 000 miles in it right so they clocked up some serious mileage they gave it some heavy use um charged it loads exceeded the battery's 100 000 mile warranty after all that time how much of the battery's health how much do you think the battery's health had declined by what percentage had it lost no idea do you the answer is nine percent i was gonna say 10 hey you would have been quite right now this is an exceptionally heavy use over a short period of time of the battery.

1:00:58So this is like probably as much as you can run it down by, I reckon. 9%. That's not bad because it translates to a loss of just 8 miles on its measured full charge range, which isn't bad. Now, obviously, people who are proponents of using petrol and diesel cars would say, well, if you had a petrol or diesel car and you'd used it like that for four years, you probably wouldn't have lost that much on the MPG. but anyway it's an interesting stat i like it simon thank you very much tanya thank you very much and thank you for listening you keep up to date with all the latest breaking money news just go to thisismoney.co.uk or download the app and if you have any comments or questions for the team or anything you'd like them to look into simon you can email us at podcast at thisismoney.co.uk and come to thisismoney.co.uk forward slash podcast to find all podcasts past and join in debate in reader comments.

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