Defending Debt by John Landon
by NicolaCairncross on November 16, 2009
in Money Gym | Success
Nicola says: I’ve been in conversation with John Landon from Pier Properties recently, who sent me a great article on Debt, for me to share with you. John is an experienced property investor who, like all of us, is trying to help other people get their head around concepts that seem alien at first, but which have the power to change your life. First though, you have to be willing to open your mind a little bit.
Defending Debt by John Landon
By chance last week, I found myself defending debt on three separate occasions. Twice, the conversations referred to mortgages when friends were discussing their borrowings and how they were trying to pay them off as fast as possible. I firstly had to decide whether we had time for the inevitable debate. So often, anyone with a fixed view that all debt is bad and should be paid off as fast as possible, takes a lot of convincing of the alternative approach.
So what is that debate?
I suggest they think of it as someone else providing them with the funds to invest in the property market – which in the UK is a very good place for your own money, let alone someone else’s being invested so you can get the profit. Sometimes that statement does the trick and the penny drops, but it often needs further explanation.
That debt declines in real term value every year. As your house increases in value – traditionally doubling within ten years – the mortgage that may have accounted for 90% of the house’s value at purchase, halves in proportion over the same period. (90% at purchase becomes 45% of the house’s value within ten years; 22.5% within twenty years and so on). Your equity grows in direct proportion. This is why residential investors only use interest-only mortgages. They don’t want to pay more than necessary for their borrowing so don’t worry about paying off the debt – they just let it decrease naturally as a proportion of the increasing value of their investment. They know that what appears to be a very high borrowing on day one, will quickly reduce as a proportion of the property’s value over time.
A personal example: I raised £300K mortgage to buy my office premises. The cost of the mortgage payments at the time were marginally higher than the rental would have been. I recall a friend pulling my leg at the time about paying more to own the premises than just renting it – ‘some businessman you are..!’ Within four years, the property had doubled in value to £600K. Since I bought it, the rental cost in this building has increased by about 25%. I’ve thought about telling my friend but decided against it.
All this should illustrate the point that when you buy a property you instantly become an investor in the UK property market. Whether you are buying BTL or your home, the market plays by the same rules of economics regardless of your reason to own your property. As a result, you should always be thinking like an investor, which leads to the conclusion that perhaps you should not be paying off your mortgage – ever. Or even selling your home.
Debt | Part 10 | Debt Consolidation
by NicolaCairncross on September 23, 2009
in Money Gym | Did You Know?
Many people ask me if they should consider debt consolidation which is where they consolidate their debt by re–mortgaging or taking out another loan to pay off old loans/credit cards or those with higher interest rates.
There are many, many advertisements on television encouraging you to do this and the arguments are powerful. When you are under pressure to make payments and desperate for a fresh start, the logic seems overwhelming.
The question I always ask my clients first is ‘have your circumstances changed from those in which you incurred the debt’?
Debt | Part 8 | Repairing Your Credit Record
by NicolaCairncross on September 22, 2009
in Money Gym | Did You Know?
So you may have a negative entry on your report. A default or a CCJ perhaps. There are two things to know about the effect that this will have on your financial future.
- You may be able to have it removed. You can have it removed if it is incorrect and the law defines incorrect as that which you ‘reasonably believe’ is inaccurate or incomplete, information that can’t be verified or information that is obsolete. Consider your entry, does it come under any of those headings? If so, get it removed. If you can’t get it removed, you may be able to put a short explanation on your record, explaining the circumstances. Be careful with this one as it can be a double edged sword.
- If you have one negative entry, you will still get credit if you have several positive entries and they are more up to date. Lenders are so desperate to lend (because, if they don’t, they don’t make money) that they will assume one old negative entry is out of date, a dispute, or otherwise not to be trusted; if, and only if, the rest of your credit report is exemplary. So if you can’t get the old entry removed within the six years that it has to remain, even if cleared, then work on your exemplary current credit record.
How can you build up an exemplary record? Borrow and pay back. Borrow and pay back.
My old nan was actually refused a Damart catalogue because she had always paid cash for things, never owing anything to anyone. So she had never built up a credit record!
Debt | Part 9 | 10 Reasons To Pay Debt Off
by NicolaCairncross on September 22, 2009
in Money Gym | Did You Know?
Now remember we are talking about bad (consumer/unsecured) debt here, not “good” debt.
- Simple survival. If you are carrying a load of debt, even the slightest shift in your circumstances can leave you vulnerable. Think of the man travelling up the escalator the wrong way, with a briefcase, a suitcase, a knapsack, several carrier bags, a bunch of flowers, a hat, bag, coat and newspaper. All it takes is for his shoelaces to become undone, or for him to trip or get tired and it’s all over.
- Debt is very stressful. It can cause immense worry, sleep problems, feeling like a rabbit caught in the headlights, lack of control, the need to overwork, inability to enjoy time off, alcoholism, overeating, depression, inability to communicate with others, feelings of shame, powerlessness. Need I go on?
- To protect your future. We have already said that every debt repayment is eating into your future wealth. It’s not just the lack of money now, it’s what you could be investing that money in, that would generate an income, that you are sacrificing. There’s an opportunity cost here as well as the stress.
Debt | Part 7 | Your Credit Record & Report
by NicolaCairncross on September 21, 2009
in Money Gym | Did You Know?
Many of my clients say to me, ‘But I couldn’t do that, my credit record is terrible’. I ask them ‘how do you know?’ and they always answer that they have been turned down for something in the recent past. Or they have a county court judgement against them that they either settled years ago or are still paying off.
The same day that I was turned down for a credit card with a £1000 limit was the day I got the offer letter from my bank regarding the £300,000 loan to buy my hotel.
You just don’t know what the criteria are, for each lender. No two are the same. They have certain things in common that they look for and I’ll go into those in more detail tomorrow.
Did you know that most people are turned down for credit because they are not ….
Debt | Part 6 | Paying Off Your Debt
by NicolaCairncross on September 20, 2009
in Money Gym | Did You Know?
So we had some fun yesterday with other people’s money.
But today we are back to our own accounts and looking at the consumer debt we have run up over the years. A couple of credit cards here, a personal loan there, oh! and a nasty little storecard there lurking about hanging it’s 27.5% APR head in shame.
Just how do you go about paying it off?
Debt | Part 5 | Good Debt – Other People’s Money
by NicolaCairncross on September 19, 2009
in Money Gym | Did You Know?
So, enough about bad debt for a moment and let’s talk about good debt, how you can use other people’s money to pay for your assets. Let’s assume that the mortgage market gets back to normal one day for a start!
Imagine you have £60,000. You want to buy a one bedroom flat to let out and can’t decide whether to get a mortgage or buy it outright. Why would you even consider getting a mortgage if you could buy outright?
If you have one flat worth £60,000, and if it appreciates at 8% per year (conservative estimate) how much would it be worth in 1 year? 10 years? What about any positive cashflow?
Let’s assume that your plan is to build up a ‘stable’ of buy–to–let properties and your goal is to generate income now, rather than create a nest egg for the future.
If you have six flats worth £60,000, and they appreciate at 8% per year, would you be six times better off? How much would they all be worth in 1 year? 10 years? What about any positive cashflow?
Would it be six times as much?
Debt | Part 4 | Compounding – 8th Wonder Of World
by NicolaCairncross on September 18, 2009
in Money Gym | Did You Know?
Albert Einstein described compounding as the eighth wonder of the world and if you need any more reasons to get rid of your debt, this segment should convince you. We are going to go into compounding in much more detail in Module 5, but you need to know what it is (don’t laugh, I didn’t really know for years) and how it impacts debt.
Compounding is paying interest on an outstanding amount, and then paying interest on that interest, and then paying even more interest on the whole lot of interest, and so on.
Imagine you buy a computer on a credit card or using store finance. It cost £2000 (or $2000) and the terms are 17.8% for argument’s sake with minimum repayments of 3% of the outstanding balance.
At that rate it will take you (wait for it) 13 years and 9 months to pay the total price tag of £3759 (or $3759).
Debt | Part 3 | You & Your Debt
by NicolaCairncross on September 18, 2009
in Money Gym | Did You Know?
In the same way that Michael E Gerber maintains in his book ‘E–Myth Revisited’ that there are three kinds of people when it comes to starting your own business, Mary Hunt, in her book ‘Debt Proof Living’ maintains there are three kinds of people when it comes to attitude to debt and she describes them as follows.
The Revolvers: A typical example is Debt Ridden Dexter and he rides the escalator of life. The only problem is that he goes the wrong way, trying to climb UP the down escalator. This sounds like fun at first (watch kids at the mall or shopping centre!) but swiftly gets tiring and stressful. Initially he can keep up but every other debt added is like an extra shopping bag, rucksack, suitcase, briefcase and box to carry. It gets harder and harder and he eventually becomes unable to keep up the momentum of the escalator. Eventually he ends up at the bottom, battered and torn; he possibly gets himself sorted out, but always he starts to climb again.
Debt | Part 2 | Debt-Proof Living
by NicolaCairncross on September 17, 2009
in Money Gym | Did You Know?
Debt Proof Living
The chapter in my book dedicated to debt, at least at the beginning, is heavily influenced by Mary Hunt, because her excellent book ‘Debt Proof Living’ has such a wealth of good advice.
She talks about the ‘Principles for Debt Proof Living’ and I have tried to distil the essence here and put my own spin on it, but I would recommend you visit her website and you must buy and read her book too.
- You must never keep it all (we have talked about tithing already)
- You must never spend it all (this is the “pay yourself first” concept)
- There are only five things you can do with money. Give it, save it, invest it, lend it and spend it. Notice where ‘spend it’ comes in that list. Last.
