The Fixed Rate Mortgage: Availability of Finance - Essay Example

Jane discovers that lender will offer her a mortgage with an interest rate of 7.25% APR, fixed for five years. Jane has heard on the news that 89% offirst-time buyers are now taking out fixed rate deals so she wishes to give this offer serious consideration. outline three factors Jane may wish to consider when thinking about whether to take out the fixed rate mortgage.(130 words) Terms of finance Jane has to determine the length of the mortgage. If she plans to borrow money longer than 2 years, which means long-term financing, then it is strategic to choose the fixed rate mortgage; since fixed rates reduce the risk of fluctuations. For example, if demand for properties has gone up lately, hence mortgage rates will increase then. With the fixed rate deal, she could avoid such a risk. However, if she plans to repay the borrowed money faster than 2 years, which means short term financing; hence other financing opportunities may involve lower costs. Such as taking bank overdrafts (i.e. 5.90% at Alliance & Leicester Premier Direct1) or trade credits; trade credits is an available option if she borrows between 30 to 90 days and it's profitable for Jane since it does not include any interest charges. However, she must have a good credit record. Additionally, since the globalisation, deregulation of financial markets as well as technological advancements, customers around the world have now easier access to obtain finance around the world; which offers Jane an opportunity to choose the lowest rate possible. Availability of finance A good credit history enables Jane to reach a larger amount of financing opportunities. As illustrated above, trade credit does not involve any interest rates; however the customer should keep a good credit record. To ensure a good credit history, Jane should control her payments; such as ensuring that debts are paid by their due date, etc. Level of control Jane should gain information of the level of control of the lender. What happens if Jane isn't able to pay her mortgage as their due Will the lender take ownership of her property Is there any penalty charges involved Do I have enough funds for my other essential needs These questions are important, as they reduce risks and also prevent Jane for having bad credit records. Both Annie and Gareth acquire a 10,000 lump sum. If they each put the 10,000 into a savings account paying 6% AER gross for one year, how much net interest would each of them receive after one year (50 words)) 6% of Pound Sterling 10,000= Pound Sterling 600 Tax is 20% on interest payable So, Pound Sterling 600-20%(Pound Sterling 120) = Pound Sterling 480 Hence, the net interest rate is 4.8%. If the inflation rate had been 3.5% over the year, what would be the real value of both Annie's and Gareth's total savings after one year (60 words) Real value equals to nominal interest rates minus inflation rate: 4.8% - 3.5= 1.3% 10,000+1.3%= 10,130 10,130 x 2= 20,260 (both Annie and Gareth) Annie is considering using her 10,000 to purchase shares in a large blue-chip company instead, with the idea that she would sell the shares after one year in order to purchase a car. Briefly outline the key factors that Annie should think about before making such an equity based investment. She should research about the company first. The risk involved of investing there, such as examining the company's financial performance, such as its balance sheet, cash flow, revenue statement, etc. How long the company has been established, is there any negative publicity, etc. These points assist Jane to avoid the risk of loosing her funds. She should also identify other opportunities, such as other companies which would be more profitable to invest in, such as established companies; i.e. Apple, Sony, etc. Additionally, she could also use her 10,000 to establish her own little business or join a partnership, etc; depending which one is more profitable and involves less risk. Moreover, she should also consider the flexibility of the company. Some companies require investors to invest longer than 1 year. Gareth is considering using his 10,000 to buy some government bonds (which mature in 2016) that he plans to sell after five years. Briefly outline the key factors that Gareth should think about before making such a decision. (120words) Interest rate is an important factor, as it fluctuates on a regular basis. Hence, since it matures in 2016, a lot of interest movements are involved; increasing the risk of loosing funds. Market conditions also affect the investment; if demand for the bond increases, hence increasing the value of the bond as well. Thus, Gareth should do a careful research of the outlook of the demand of the bond; especially in 2016 in which the bond matures. Although it involves a high amount of risk, the return may be higher; since risky investments may offer investors a better return. Another opportunity is to split his investment money, such as investing some funds for government bonds, while some funds are invested in other companies. This action will help Gareth to reduce risk, as one company may make losses but on the other hand the other company may bring large profits. In November 2006 the UK government proposed a Pension Bill to make significant change to future pension policy. The proposed changes include: - the raising of the state pension age for all , in stages, to age 68 by 2048.- a national low-cost pension scheme to be set up with automatic enrolment (although people could choose to opt out)- making the state pension more generous in future by linking state pension rises to increases in earnings rather than to price (RPI) inflation.- reducing the number of year it takes to build a full basic state pension from 39 years for women and 44 years for men to 30 years for everyone (from 2010) and making it easier for parents and carers to build a state pension. Describe the implications of these proposed changes for individuals in relation to financial planning for retirement. In your answer, also outline what future social and economic changes might impact upon both state and private pension provision, and what action could be taken should an individual's pension income be inadequate. Having the number of year taken reduced to build a full basic state, requires individuals to save more for their retirement. Additionally, the automatic enrollment ensures that no individual is left out of having the opportunity to acquire sufficient income in their retirement age. Although this system requires individuals to save more, it will benefit them. It is stated that millions of people in UK are not saving enough for their retirement2. Thus this system rather offers an advantage for individual, although they are required to save more; since this scheme ensures people to have income even in their retirement. Moreover this is especially beneficial for carers and parents, since they obtain low income and thus may not have enough funds in their old age. However, this rather disadvantages employers, since people are out of work sooner; which means higher turnover rate, higher recruitment, training and dismissal costs. Thus, the government provides support to employers who voluntarily provide a good workplace pension scheme for their employees2. It is estimated that this action will have a positive social welfare impact equivalent to 40 billion pound sterling between 2012 and 2050 and could as well result in a 0.2% increase in Gross National Product in the long run2. This system provides many social benefits. One of the main is, that it will reduce income inequality (income gap between the lower income earners and the higher income earners). It will also increase the standard of living, as more older people will receive income and thus are able to buy their essential needs. Additionally, since many diseases occur at older ages, now with this scheme they are able to heal them; increasing life expectancy (UK's rank for life expectancy is currently 15th of the world3) and also quality of life (UK's rank for quality of life in 2006 is 18th of the world4). This scheme has its economical advantages as well. Since, it provides income at older ages and also for low income earners, hence Gross National Income will experience a rise. On the other hand, inflation could rise as well, as people are able to spend more when receiving the pension. But this should balance itself in the medium until the long term, since interest rates will rise and thus more people are encouraged to save; lowering the inflation. As illustrated above, since its social characteristics will improve, investors might be more motivated to invest into UK. Higher investments lead to lower unemployment, higher economic activity and growth and thus increase income of the individuals. Higher income supports the improvement in Gross National Income, income inequality, standard of living as well as quality of life. However, as mentioned above, the government supports employers who provide workplace pension for their employees, which means higher outflow for them as thus a higher current account deficit. A higher current account deficit might discourage investments. Lower investments levels produce many economical disadvantages, such as lower economic growth, higher employment, lower income levels, etc. Furthermore to finance its deficit, the government might increase taxation levels. Higher tax reduces income, especially for lower income earners and thus worsening income inequality. It might also increase interest rates, in order to attract foreign investors. Higher interest rates will lead to lower spending; this will result in lower economic activity, growth and thus higher unemployment and lower income. A current account deficit might also lead to a 'debt-trap-cycle', since a high current account deficit requires savings and investments from foreign countries (as millions of people in UK don't save enough), these investments require returns and savings also require interest payments; hence increasing the current account deficit. Additionally, if more and more foreign investments occur, hence UK will be increasingly dominated by foreigners. A high current account deficit may also increase volatility for exchange rates, since it would decrease confidence of foreign investors and put downward pressure on the demand and value of the currency. A depreciation of the currency will lead to higher price of imports as well as higher cost of servicing foreign debt. Thus, this could lead to using the pension funds for repaying those debts; delaying the payment of pensions to the individuals. Economical changes might affect state and private pensions. If economic growth is increasing, which means lower unemployment and thus higher income; hence individuals are able to save more. However, inflation might encourage pensions to require individuals to save more; since people then need more funds to buy their essential needs. Inflation might be caused by a depreciation of the currency. A depreciation leads to higher import and thus product prices. Nevertheless, since individuals are automatically enrolled, the demand for private pensions might decrease. Thus, it will be encouraged to be more competitive by for example providing extra services, bonuses, etc. Social changes might influence the pension policy as well. As an example, if the types and amount of disease is increasing, hence the pensions might require individuals to save more funds to ensure that they have enough money for the medication. As well, the pension age might be lowered, as risk of disease increases, supporting the action of saving more. Moreover, birth rates could also play a role. If the birth rate is increasing, hence more mothers would stay at home and thus the family receives lower income. A lower income might require people to save more to ensure sufficient funds are available at their pension age. To prevent individuals having inadequate income, the state pension should forecast how much funds individuals need for their retirement; including inflation. It could also force all employers to offer an adequate pension scheme for their employees. Should inflation rise, hence the state pension should require individuals to save more. It could also expect employers, who did not offer a pension scheme or who do not sufficiently provide it, to provide their previous employees with a suitable income. Moreover, the state pension could also offer community work and pay those individuals who don't have enough income. Read More