Making Cents: Your financial questions answered

Question
Liam, I’ve been approached by a financial services firm that I know who are telling me about an account they are promoting. They are recommending that I invest in it but I’m not sure if it’s any good or not. I’m sending you the factsheet and brochure of the account that you might review for me. They are telling me the returns year to date are 4.2% and since its launch they’ve been +8.6%. They sound good but before I do anything I wanted to get your advice and opinion.

Answer
I’ve reviewed what you’ve sent on and four things stuck out for me.
The first are the annual management charges that are being applied to this account. They are very high at 1.53%.
The second thing is that exit tax, which is 41%, will be applied and deducted from any growth on the fund.
The third is that the account offers zero capital guarantees and I’m not sure if that is important to you or not and in a moment, I’ll explain why I’m referring to it.
So, when you look at the year-to-date return of 4.20%, that’s before charges and before exit tax and when you apply both the net return is actually 1.57%. And that’s the number you need to be really aware of.
This real return is less than the rate of inflation so any monies invested in the fund would not even be holding their value but that’s not to say the return won’t increase over time and be greater than inflation.
The problem when people see returns of 4.2%, they think it’s double the rate of inflation and a good return, but when you dig a little deeper and apply charges and exit tax the return is actually much lower.
The fourth area that is worth bringing to your attention is that the fund was first launched in September 2023, so it’s a very new fund and only in existence for eight months which is hardly enough time I think to review how it’s performed in the past.
I personally would like to see at least 10 years of a track record so you can see how funds have performed in good times and equally in bad times.
I can show you a fund that is very similar to the one you are looking at that has (a) charges that are 50% less than what you are being quoted (b) where the returns over the exact same time period as to when your fund was launched are 15.79% which is obviously far greater than 8.76% and (c) the fund I’m comparing yours against has a track record going back to 2010 and its returns over the past 10 years have been +154.88%.
And there are other accounts available where you can have your capital 100% guaranteed, no charges whatsoever, tax is charged at 33% etc. and the returns are 2.04%, which is nearly 0.50% greater than the fund that has been put in front of you.
So, now that you have this information to hand, I’d say have another conversation with this company and ask them for some feedback on what you now know and see what they say. And perhaps ask them if they have any other options they could put in front of you rather than just this one. I like having three or even four options that you can compare each against.

Question
Liam, I’ve recently been made redundant, and I’ve begun claiming job seekers benefit but I’m planning to go away on a holiday for two weeks and I’m worried that if I leave the country and don’t sign on, I’ll lose my payment. Is there any way I can go and still get my job seekers payment?

Answer
Yes, there is.
You can take up to two weeks holidays each year and still have your job seekers benefit paid. If your holiday is longer than two weeks or you’re abroad for any other reason, then the payment may not be made but once the holiday is for two weeks you’ll be fine.
And to be sure to be sure, as a matter of course I’d say you should let your local Social Welfare Office know what you are planning on doing so at least there is a record of you letting them know that you’ll be away.
So go and enjoy your holiday and know your job seekers’ payment won’t be affected.

Question
Liam, my partner, and I are planning on building an extension on our home and we think we’ll need about €50,000. I’m unsure as to whether I should get a personal loan to finance the build or whether I should get a mortgage top-up. I know personal loan interest rates are significantly higher than mortgage rates, but the plan is to pay off this debt in five years. One other option we’re considering is borrowing from ourselves. We have savings and we were thinking of using them and then paying ourselves back the amount we would otherwise be paying on a personal loan or on a mortgage. We have an emergency fund in place which is separate from our savings which covers six months expenses so I would still have this to fall back on if we were to use our savings. I would be grateful to hear your expert advice on this.

Answer
Okay first things first let’s look if you borrow the money by way of a personal loan.
If you did, the rate would be c. 6.80% and over a period of five years your monthly repayments would amount to c. €979.80. So, the cost of this loan in interest payments would be €8,788.
If you borrowed the funds by way of an equity release from your mortgage at a cost of say 3%, the monthly repayment would be €898.43, so the cost of this type of loan over five years would be €3,906. But there would be additional costs as well i.e. legal fees for a second mortgage, new valuation on the property etc. and I’d say you could add on another €1,000 at least to the overall cost.
The mortgage route is still the cheapest but two things to bear in mind (a) it’s cumbersome and time consuming and it’s like applying for a mortgage all over again and (b) I’m not sure your bank would be very enthusiastic with a loan term of just five years i.e. there’s not much in it for them so they could and I stress could, insist on a longer term.
Your third suggestion i.e. taking out a loan from yourself is great.
I really like this particularly when you have emergency funds in place that can be called upon and you’re not exhausting everything. And the one big advantage to using your own funds is that you’re in control of the release of funds i.e. you’re not waiting on loan offers to issue and legals to complete, you can release funds from your savings whenever they are needed.
And that would be my preferred route. I’d charge myself the mortgage rate of interest rather than the personal one and pay yourself back €898 per month and in five years you’ll end up with €53,906 back in your savings account.
Sometimes people might be worried that they’re losing out on the interest they’d earn on their savings versus the cost of borrowing the money but in this instance, the difference between what you'd pay yourself back in interest and the investment growth on your savings wouldn't be huge.
If you charge yourself say a rate of 3%, to get the same return from an investment and after you account exit tax and management charges, you'd need to be grossing c. 6.08% to net down to 3%. Charging yourself a rate of 3% you'd need to get an equivalent return on an investment of 6.08% so it's still an excellent return that you're getting and a great low return you’re charging yourself as well.

Liam Croke is MD of Harmonics Financial Ltd, based in Plassey. He can be contacted at liam@harmonics.ie or www.harmonics.ie