Frugal Motoring – Bangernomics

A return to the Frugal Motoring series, and a window into one of my side hobbies, Bangernomics. I could write a whole separate blog on Bangernomics, many do, but mainly I confine myself to esoteric forums tucked away in little niches of the internet. The term Bangernomics was first coined in 1989 by James Ruppert, the chief and foreman of the subsequent Bangernomics cult/ movement/ belief (1, 2). A motoring journalist, James found himself returning to the UK for a few days and at a loss for transport (2). After adding up potential public transport costs, he worked out it would be cheaper to buy a banger and run it (2). The subsequent press feature, titled “Better than walking” caught the eye of the public, and the movement ran from there (2).

The general premise of Bangernomics is this:

  • Target a cheap banger car for <£1000 or <£500 (depending on the source of your opinion)
  • Do your research, read up on common problems with the car and which models/ engines to avoid or go for
  • Find a car to buy, originally and potentially through car auctions, but often these days through eBay/ Gumtree/ other online platforms
  • Inspect the car very carefully before buying
  • Look after the car with strict basic maintenance. Servicing and basic work is relatively cheap, cheaper if you DIY
  • When the car reaches a point of a potential uneconomic repair (clutch, gearbox etc) scrap it, sell on or break for parts

James Ruppert’s mantra here is “beware of the dog” (3). Avoiding hopeless sheds and going for the well-loved family cars at the bottom of their depreciation curve and with the curb appeal of steaming dog droppings. You have to be prepared to own and drive something which will make your friends’ and neighbours’ toes curl. Which is where I think the frugal, financial independence-minded community Venn diagram transects with Bangernomics. Many FIRE bloggers couldn’t give a flying monkey about keeping up with Jones’ in other respects, so why do they continue to with cars on PCP?

But I know nothing about cars, what can I do?

Happily, the Bangernomics community are really helpful in this regard. When I first started I adopted the opinion that I am of at least average intelligence, and therefore I should be able to learn how to fix and maintain a car. These are all useful skills.

James Ruppert publishes a book on how to subscribe to Bangernomics (1, 3). He also maintains a series of free buying guides, a buying checklist, and a blog for advice (1, 3). For make and model specific guidance, other Bangernomics blogs have published their own buying guides, and people share their knowledge on the Bangernomics forum, as well as the more popular Pistonheads and RetroRides (4, 5, 6, 7). YouTube is an invaluable source, as many thousands of amateurs publish how-to guides.

Not sure what to buy? There’s plenty of column inches and forum posts detailing peoples failures and successes. Some highlight their own experiences, listing successes and tips, others offer guidance on good target vehicles (2, 8, 9, 10, 11). My own experience has been tempered by a job requirement to appear respectable and not fail to turn up to work, so people don’t die. I’ve never spent more than £2k on a car, and average 12p/mile in cost over the life of my daily car for purchase price and maintenance. One memorable snotter was bought for £1k and survived 8 years and 80,000 miles of abuse. I also abuse Bangernomics a little by purchasing classics at the bottom of their depreciation curve, before they begin to appreciate as an investment.

Bangernomics, the financially independent motoring choice

A little whistle stop, but hopefully a jump-off point for many. DIY car maintenance should not be a scary thing, and by avoiding it people miss an opportunity to save. Bangernomics offers the opportunity to learn some skills, save some money and tell some good stories, as long as you can put up with some graft, the odd breakdown and minimal social respect for your new whip.

Have a great week,

The Shrink

 

Next time on Frugal Motoring – Should I buy a petrol car?

References:

  1. https://www.bangernomics.com/
  2. https://www.autocar.co.uk/car-news/used-car-buying-guides/25-years-bangernomics-how-buy-and-run-used-car-cheaply
  3. https://www.jamesruppert.com/bangernomics-bible.html
  4. http://bangernomics.tripod.com/intro.htm
  5. http://bangernomics.editboard.com/
  6. https://www.pistonheads.com/gassing/topic.asp?h=0&f=23&t=1671991
  7. http://forum.retro-rides.org/
  8. http://www.autoexpress.co.uk/car-news/98907/cheap-as-chips-how-to-buy-a-banger-and-run-it-for-peanuts
  9. http://cardealermagazine.co.uk/forum/topic/4772-bangernomics/
  10. https://forums.moneysavingexpert.com/showthread.php?t=3803929
  11. https://www.driving.co.uk/car-clinic/buying-guide-six-brilliant-used-cars-for-just-1000/
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The Full English Accompaniment – Are interest-only mortgages the next PPI?

What’s piqued my interest this week?

This week the BoE raised the base rate to it’s highest level in nine years, 0.75% (1). All the newspaper business sections went into meltdown and a slew of commentators popped up to foretell doom. My opinion of the whole thing largely follows Monevator’s, this is still historically very very low (2). Rather than repeat Monevator, this week I’ll focus on something else that caught my eye.

A couple of weeks back I posted a link to a BBC article about a couple who didn’t understand their interest-only mortgage, had some bad life circumstances, and subsequently were trying to complain to the regulator about their bank so they didn’t have to leave the home they hadn’t made repayments on (3). This prompted YFG into a rant on people who want something for nothing, definitely worth a read (4). Some scraping script must have clocked me viewing these stories, as I was directed to a company which claimed ‘you could be owed thousands if your interest-only mortgage was mis-sold’ (5). From their website (5):

• 1.9 Million people have been led into an interest only mortgage

• Lenders and brokers may have mis-sold mortgages to thousands of customers

• Many of the people affected by this have no idea they could be due compensation

• Nearly 2 Million have been left repaying a mortgage that was inappropriate and unaffordable

• Interest only mortgages holders are being refunded thousands of pounds

Well dear readers, bricks were shat. I had to go and wash my head in a bucket with a bit of casual screaming thrown in to calm down. If you are making the biggest purchase of your life, how do you sign onto something that you know is ‘unaffordable’? Are people seriously not reading the small print? I completely get the something for nothing types who signed up to IO-mortgages expecting their house value to go up, and the added equity to provide them with something for the next re-mortgage. I understand it but don’t agree with it. But how do you sign up to an IO-mortgage when you can’t afford to also put something by in another investment vehicle, or where you don’t expect to move at the end.

Hey look, here’s another couple who are losing “their home” because they can’t remortgage what was an IO-mortgage (6). Concerns from the FCA that people have not put money away or planned for the end of their IO-mortgage have been a recurring theme in the press (6, 7). Depending on your source somewhere between 1.6 and 1.9 million people currently have IO-mortgages, and the FCA expects 600,000 to expire in 2020 (7, 8). As some people clock onto the fact they may suddenly lose their home, the claim sharks have started to circle.

Just a few months ago, the concerns around IO-mortgages seemed to have led to a decrease in their number. Or perhaps their utility was lost as house prices slowed. Either way, the number of IO-mortgages was falling, with one source reporting they had halved (6, 8). This appears to have now reversed. Thirty-three lenders now offer IO-mortgage products, a modest increase of eight in the last couple of years, but nowhere near the 73 of 2008 (9). It is likely these products are only available in specialist circumstances (10)

The argument from the claims people is that in some cases the mortgage products were mis-sold; bad advice was given by brokers/ lenders suggesting that IO-mortgages would be the most affordable (11, 12). Which? even offers a template letter for complaints rather than going through a claims company (12). The Financial Ombudsmen, much more helpfully, actually gives case studies of when and where mis-selling occured, and when it’s your own damn fault (13). The Financial Ombudsmen Service has broadly upheld one-in-five complaints, around 300-400/year (11). The fear is that as more IO-mortgages mature, customers who are not prepared will turn to claims of mis-selling for compensation (11). Two reasons why this infuriates me:

  1. If you’re the sort of person who doesn’t read the T&Cs on the biggest purchase of your life, doesn’t understand the product, and doesn’t make any effort to save or prepare for an end point, why is it someone else’s fault?
  2. The average shortfall on IO-mortgages is estimated to be >£70k (6). A few thousand compensation is not going to bail you out of the sordid hole of your own making.

And with that, I’m off for a lie-down.

Have a great weekend,

The Shrink

Side Orders

Other News:

Opinion/ blogs:

What I’m reading:

An exam textbook (le sigh)

Religio Medici by Sir Thomas Browne – the theological and psychological reflections of a C17th doctor

Enchiridion by Epictetus – Bedside reading for a bad day

References:

  1. https://www.moneysavingexpert.com/news/banking/2018/08/bank-of-england-base-rate-decision
  2. http://monevator.com/r-star-trend-interest-rate/
  3. https://www.bbc.co.uk/news/business-44851363
  4. https://youngfiguy.com/palms-up-or-palms-down-person
  5. https://www.mortgage-claim.co.uk/landingpage/twitter/variant2/
  6. https://www.theguardian.com/money/2018/may/02/elderly-couple-face-losing-home-as-interest-only-loan-crisis-bites
  7. https://www.theguardian.com/money/2018/mar/19/interest-only-mortgages-payment-shortfall-remortgage-lenders
  8. https://www.ukfinance.org.uk/number-of-interest-only-mortgages-halves-in-six-years/
  9. https://www.mortgagestrategy.co.uk/rise-in-number-of-lenders-offering-interest-only-mortgage-options/
  10. https://www.telegraph.co.uk/personal-banking/mortgages/time-comeback-mortgage-lenders-return-interest-only/
  11. http://www.mortgagesolutions.co.uk/news/2018/04/03/interest-mortgages-next-mis-selling-scandal-legal-tech-firm-claims-analysis/
  12. https://www.which.co.uk/consumer-rights/advice/i-think-ive-been-mis-sold-my-mortgage-what-can-i-do
  13. http://www.financial-ombudsman.org.uk/publications/technical_notes/interest-only-mortgage-case-studies.html
  14. http://www.thisismoney.co.uk/money/markets/article-6010545/Travis-Perkins-warns-year-profits-DIY-chain-Wickes-falters-amid-tough-trading-conditions.html
  15. http://www.bbc.co.uk/news/business-45050213
  16. https://www.thetimes.co.uk/article/why-it-pays-to-be-king-of-the-castle-in-scotland-gv66nl7wm
  17. https://www.moneywise.co.uk/news/2018-08-01/exit-amateur-landlords-could-boost-private-pension-pots-28bn
  18. https://www.moneywise.co.uk/news/2018-07-31/men-splashing-the-cash-engagement-rings
  19. http://monevator.com/how-to-open-an-online-broker-account/
  20. https://youngfiguy.com/last-chance-u-and-financial-independence
  21. http://quietlysaving.co.uk/2018/08/01/july-2018-plus-other-updates/
  22. http://www.msziyou.com/net-worth-updates-july/
  23. http://www.msziyou.com/intergenerational-unfairness-part-1/
  24. http://thefireeng.com/fudging-numbers/
  25. https://quittingteachingblog.wordpress.com/

Musing on… Long-term care costs and financial savings

This post has been mulled over for a long time, trying to discern and distil a direction. It began (as these trains of thought often do) with an idle r/financialindependence post. If you’re not familiar with that, it’s a subreddit for FI-types, predominantly populated by Yanks (Reddit being a sort of forum-cum-meta-aggregator of internet waffle). In this post a group of our ex-colonial cousins were discussing long-term costs (1):

So far, so not our problem. The UK may have significantly higher tax rates (ignoring ISAs etc), but it pays for (in theory) the NHS and social care, the cradle-to-grave support system for when times are bad. The NHS and social care system are what makes FIRE and any sort of fuck-you to working possible in the UK. Check out the video and post TEA and Rhik Samadder did on the matter (2).

National, personal cover

As we celebrate the NHS’ 70th birthday, it’s worth reflecting on where this all came from. Before the birth of the NHS all doctors services were private in the UK. If you needed something, you went to your local doctor, hoped they had been trained adequately, paid your money, got your treatment, hoped it worked. There were no guidelines. There was no standardisation. This worked fine for the wealthy, who could afford the best, but for the poor would die from an inability to pay the doctor. You can find plenty of stories from that time, but if you read one, I recommend the recollections of the wonderful Harry Leslie Smith (3). He remembers a doctors visit costing half-a-weeks wages, which they sadly did not have (3). This private price has scaled with inflation. A 15 minute private GP consultation will set you back £70 (4). As a profession we remain a rare commodity, and on an open market our hourly rate is such. The NHS affords the government a position of power and collective contractual employment which, despite press vilification, means we still come relatively cheap.

In the days before the NHS, workers would club together to pay for ‘self-help’ organisations, to provide medical care for one another. Beginning in the late 1800s, the Tredegar Workmen’s Medical Aid Society was one such successful organisation (5):

By the 1920s, the society employed the services of five doctors, one surgeon, two pharmacists, a physiotherapist, a dentist, and a district nurse. For an extra sum each week, members could also benefit from hospital treatment.

During the inter-war depression, the society continued to provide services to unemployed people, even though they could no longer afford to pay a subscription. By the mid-1940s, the society was providing medical care for 22,800 of the town’s 24,000 inhabitants.

Aneurin Bevan, who was born in Tredegar, took the Workmen’s Medical Aid Society as his inspiration for the NHS, saying: “All I am doing is extending to the entire population of Britain the benefits we had in Tredegar for a generation or more. We are going to ‘Tredegarise’ you.” (5)

The fragmentation of the NHS, gradual privatisation and reduction in care available deserves a separate post. For now, with a sense of perspective, we can look across the pond and be smug about our NHS (6). Cradle to grave cover, in our most frail years, maternity and care home. Isn’t it marvellous. Except… have you ever been in an NHS care home? And how much do you think that care home costs?

Who wants to live forever?

Time and again bloggers discuss their financial plans, how they’re 50 now, and they see themselves having 30 more good years. They fall into a common trap, recent research shows 8/10 of those over 50 underestimate their life expectancy (7). Most people guess they’ll live to 82-ish, whereas the data says more like 88 for men, and 90 for women*. We have got much better at keeping people alive for longer. Those aren’t necessarily going to be good years though, and so people trot out those bleak jokes; “oh just roll me off a cliff at 80”; “I’ll just head off to Switzerland”; “I’ll just pop my clogs then”. Except those are all to varying degrees illegal/ unethical. We doctors can’t just settle you off in a dignified way when you decide you’re not much use or aren’t enjoying things anymore. How do you decide when that is? Death is so very final. As a culture we have developed a fear of discussing or even considering our own mortality.

(*N.B. You can’t actually use ONS life expectancy at birth figures for this. Infancy through to teenage years (and early adulthood for young men) still have higher mortality. Once you pass your mid-20s your life expectancy actually statistically increases to accommodate for this.)

So for our friends the FIRE-savers, that’s an extra half decade of savings to account for. Suddenly retiring at 55 with a 4% SWR estimating a 30 year retirement isn’t quite enough (8). Life expectancy has increased in the 20 years since the Trinity study was published (9). A 45 year-old sitting down now and estimating for a 4% withdrawal starting at age 55 may well have a good 40 years ahead of them. It’s not just the %withdrawal that’s a variable in this calculation, it’s the duration too. For some really interesting drawdown calculations, check out RIT’s recent post (10).

The final splurge

How much do you think your living costs will be too? The common practice appears to be to take roughly your current living expenses, and times that out for the number of years you need. Some people estimate less, as they figure their homes will be paid off. An interesting piece of research by investment firm Schroders casts doubt on that. It found that savers underestimated their living costs in retirement by 15% (11). Only half of people surveyed had enough to live on comfortably (11).

Coming back to people facing their own mortality, and a decline into frailty, did you include the care home fees in that cost? The answer to the previous question is that the average care home price per year in the UK is £29,270 for a residential home, £39,300 for a nursing home (12). That’s average too, as with everything the South is more expensive, and we all like to imagine ourselves in our twilight years in a beautiful peaceful home, and not being roughly manhandled by someone on minimum-wage with no dignity or care, before being hauled up on a CQC newspaper expose (13). If you want to see what it’s like in your area, the UK Care Guide has a number cruncher and area analysis (14). You can decide to stay in your own home, but there the costs can mount up too. 24 hour care can be more than £150,000/year (13). And again for perspective, your life expectancy from a diagnosis of dementia in your 60s – 6.7 years, in your 90s – 1.9 years (15).

Where’s my cradle to grave?

Too right, where’s the NHS and social care system in all of this? Broke, that’s where. Historically there were jobs that provided care and nursing homes for their retired workers as part of their payment plan (although I can’t imagine anything worse). Now the burden falls on the social care system. The boomer population is ageing, and everyone is living longer. Social care reform remains a political football as no side wants to try to tell people that their lifetime of NI contributions and tax wasn’t enough to pay for their care (16). The “squeezed middle” baby boomers (le sigh) are already paying up to £10k a year to look after their ageing parents, and this will only get worse (17).

To try and at least partially cover care home fees, the central and local Govs have created an Orwellian masterpiece of committees with opaque criteria to make decisions about who gets support and who doesn’t. It’s called NHS Continuing Healthcare when the NHS is involved, i.e. if there is ‘sufficient medical need’ (17). If you can’t qualify for that you get means tested by the local social care trust/ provider (18). AgeUK make a fair stab at explaining it on their website (19). I’ve seen people die before any decision on who will pay has been reached.

http_com.ft.imagepublish.upp-prod-eu.s3.amazonaws

The final stretch of this little essay is about the means testing that social care can use. It’s not actually free at point of care. The system used is fairly complicated in it’s own right, but the Money Advice Service has a good page breaking it down (18). Your income and capital are assessed. If you live alone, and in certain other circumstances, your home will be counted as part of your capital (18). The local authority can and will sell your home to pay for the fees, even if you don’t want them to (20. 21).

If the local authority deems you have deliberately disposed of assets, for example by gifting your child your home, to avoid paying means tested fees, it can claim them back. This quietly introduced piece of legislation is called Deprivation of Assets (22). The rules have subsequently got much tighter around gifting any asset; housing, jewellery, money, objects (23). As always, do your own research.

We can’t take it with us

To summarise, as a culture we fear death and avoid considering our own mortality or old age due to the association. This is a shame, as people are more active in their old age and living longer than ever before. We underestimate the costs and expenditure we will have in retirement. Old age will cost more than we collectively think. The last few years cost A LOT MORE. Don’t ignore your final years, embrace those calculations, and spend them in luxury if you can.

Have a morbid time!

The Shrink

References

  1. https://www.reddit.com/r/financialindependence/comments/8fyu65/do_longterm_care_costs_factor_into_your_fire_plans/
  2. https://www.millennial-revolution.com/freedom/early-retire-uk/
  3. https://www.newstatesman.com/politics/2014/10/hunger-filth-fear-and-death-remembering-life-nhs
  4. https://www.bupa.co.uk/health/bupa-on-demand/gp-services
  5. https://www.theguardian.com/healthcare-network/2018/may/22/south-wales-town-forged-nhs-points-future-tredegar
  6. https://www.reddit.com/r/financialindependence/comments/8zx7iq/health_insurance_as_a_barrier_to_fire_in_the_usa/
  7. https://www.ftadviser.com/pensions/2017/11/28/most-over-50s-underestimate-life-expectancy/
  8. https://www.madfientist.com/safe-withdrawal-rate/
  9. https://en.wikipedia.org/wiki/Trinity_study
  10. http://www.retirementinvestingtoday.com/2018/07/sobering-retirement-income-drawdown.html
  11. https://www.moneywise.co.uk/news/2018-07-03/savers-vastly-underestimate-the-cost-retirement
  12. https://www.moneyadviceservice.org.uk/en/articles/care-home-or-home-care
  13. https://bit.ly/2OiBuIN
  14. https://ukcareguide.co.uk/care-home-costs/
  15. https://www.bmj.com/content/341/bmj.c3584
  16. https://www.independent.co.uk/life-style/health-and-families/nhs-social-care-uk-reform-aneurin-bevan-health-poverty-andy-burnham-a8429571.html
  17. https://www.moneyadviceservice.org.uk/en/articles/are-you-eligible-for-nhs-continuing-care-funding
  18. https://www.moneyadviceservice.org.uk/en/articles/means-tests-for-help-with-care-costs-how-they-work
  19. https://www.ageuk.org.uk/information-advice/care/paying-for-care/paying-for-a-care-home/
  20. https://www.ft.com/content/34c336e8-3e5c-11e8-b7e0-52972418fec4
  21. https://www.telegraph.co.uk/finance/personalfinance/insurance/longtermcare/11441163/Why-you-WILL-have-to-sell-your-home-to-pay-for-care.html
  22. https://www.ageuk.org.uk/information-advice/care/paying-for-care/paying-for-a-care-home/deprivation-of-assets/
  23. https://www.which.co.uk/elderly-care/financing-care/gifting-assets-and-property/343063-what-are-the-rules-for-gifting-assets

Musing on… the future’s bright, the future’s green

A recent Grauniad article got me musing on energy futures (1).

MrsShrink works in sustainable energy and has had various roles from industrial purchasing to consultancy in the last 10 years. It’s probably the only thing she’d blog about on here, but for now I’ll lay some opinions on you with a big statement. Offshore power could be Britain’s next north sea oil. However, currently it is mainly overseas company investing, creating jobs and getting stuff done on the ground. See the massive investment by Siemens in the Humber region, which has made it ‘the envy of the world’ (2, 3). MrsShrink finds it barmy that as an island nation we can’t be energy independent using the resources around us. For a nice AV update, here’s a recent episode of Fully Charged News that covers some of the current investment:

I’m a great fan of Fully Charged, and plan to become a Patreon for all the hard work Jonny and Robert are doing (4).

The nuclear conundrum

This makes the recent decision by the government to invest massively in new nuclear power stations a bit bizarre. The new Wylfa power station on Anglesey will be built by Hitachi for >£15billion, requiring at least £5billion, but more like £9billion, of UK government money (5, 6). This is on top of the recent strike price of £92.50/MWh and investment in Hinkley Point C, run by EDF, which has been dubbed “the dreadful deal” (7, 8). This is not an argument against nuclear, per se. There is a defence argument for maintaining a number of active nuclear reactors to have the ability to produce military grade munitions (don’t let MrsShrink here me saying that). Hot off the press is commendable investment into new nuclear technology, to the tune of £200m (9). This includes £86m into a UK fusion programme (probably to replace our investment in the EU ITER, ejits), £32m for advance R&D for construction, £30m for supply chain, and commitment to clean up ‘legacy’ sites (10). Intriguingly, it will also see £56m for R&D into ‘advanced modular reactors’, seen by many as a move toward U-batteries; small reactors designed to operate intermittently or independently to decentralise supply (11, 12)

MrsFIREShrink deals with plenty of civil servants who are aware of and pushing for a decentralised grid. She was involved in recent R&D funding pushing the current decrease seen in wind cost /kwh to the grid, with a strike price of £50/MWh achieved (13). While this is likely a temporary artificial low, it follows a decreasing curve in renewable energy prices /kwh and cost for installation. International R&D is driving this. The losers here are UK based ‘big-6’ energy companies, who are mainly invested in traditional power supply methods and only now coming round to renewable sources. Interestingly ‘the city’ is fairly evenly split, probably due to the split of UK-based and world-based investment. The disconnect at a political level is between the current politicians in power and the civil servants. I wonder why…

The issue of baseload is often touted as reasons for energy not to be fully renewable. Hydro and pumped storage are one element of the reply. Building pumped storage plants like Dinorwig will provide robust, large-scale storage back-up (13). More of these are being built in abandoned industrial quarries and workings (14, 15). However this continues to follow a traditional power supply train of thought working with a centralised grid. The energy infrastructure and supply field is changing tremendously quickly, and so 10 year old articles don’t cut the mustard.

The current focus of R&D and rapid development is battery storage to solve the cyclic demand for power. Tesla have opened a massive powerbank in Aus (16), however Tesla gets lots of fanboi hype despite being considered the world leader in energy density for batteries. This work is also going on in California, and with more energy dense Li-ion and potentially solid state batteries in the pipeline, the technology is moving as fast as it can be installed (17). The grid and suppliers are struggling to keep up.

Bring the system down

The wider move to decentralise the grid, utilising the smart grid and home/ industrial supply makes sense from cost to the consumer/ company, and from a strategic point of view. Hard to blow up the power supply to an area if every home and factory is contributing. The top end consumer market is moving to home PV and wind coupled to battery storage. Again the excellent Fully Charged show covers this (18):

It’s difficult to find a clear graph to demonstrate just how fast PV costs have reduced. Most data is based on US, Asian or Australian costs, which says something about uptake. These graphs are taken from submissions made by Friends of the Earth to the old Department of Energy and Climate Change (19). Biased, but the data they’re based on is factually correct:

1605vw06.gif

1605vw07.gif

Wind:

REW_Chart3.png

What’s the picture on the ground?

The actual amount in use is again difficult to calculate. The graphs below run to 2016, and since then the Government has been playing around with the feed-in tariff, reducing and dis-incentivising (20). Capacity can be assessed on the amount of feed-in tariff being utilised and the supply being provided to the grid (21, 22):

As prices come down it will make increasing sense to have a bit of solar PV on your roof and a battery in your house to decrease your energy cost from the grid. This is limited but not prevented somewhat by our old house stock. Industrial energy use is changing more rapidly. To briefly summarise it is currently cheaper for many offices to retrofit solar PV and wind, with a hookup to the grid for peak demand, than to just buy from the grid at standard rates. For larger consumers, Combined Heat and Power (CHP) and microCHP plants running off natural gas with grid electricity sell-back is cheaper and more efficient.

The future?

So to get back to the original point, we are reaching a crossroads where either the ‘big 6’ or others recognise that offshore wind coupled to onshore solar PV and battery storage are most cost effective over lifetime of installation than traditional power plants for supplying grid baseload. The cost cross-over is nicely demonstrated when looking at long-term solar PV changes (23):

To date experts have been astonishingly bad at predicting the uptake and use of renewable energy (24):

IEA Solar Predictions for Global Installations

I like graphs

What we find interesting is who is going to invest in this and when; is it the ‘big 6’ (E.On are starting to), is it foreign energy companies, or will it be a smaller network of UK based suppliers (25). The government can’t seem to decide, but is erring on the big companies side; vis Hinkley C’s strike cost of £92.50/MWh for EDF vs solar PVs £50/MWh strike cost and offshore winds £57.50/MWh (8, 12, 26). Big oil companies like Shell are starting to clue up and get in as a way of surviving the death of fossil fuels (27). We’re looking at using a small renewable-only energy supplier for our home. It’s a time of huge change and potential for the energy industry, with lots of great opportunities for investors and new companies. We just hope the UK can find a way to lead the change again.

Have a great week,

The Shrink

References

  1. https://www.theguardian.com/environment/2018/jun/19/huge-mistake-britain-throwing-away-lead-in-tidal-energy-say-developers
  2. https://www.bbc.co.uk/news/uk-england-humber-43808806
  3. https://www.hulldailymail.co.uk/news/business/siemens-boss-says-humber-become-1513169
  4. https://www.youtube.com/watch?v=HYr7aGf0-wA
  5. https://www.thetimes.co.uk/article/taxpayer-bankrolls-15bn-nuclear-plant-at-wylfa-in-wales-0p7dnxfhq
  6. https://www.theguardian.com/environment/2018/jun/04/uk-takes-5bn-stake-in-welsh-nuclear-power-station-in-policy-u-turn
  7. https://www.ft.com/content/00be1bc4-64c2-11e8-90c2-9563a0613e56
  8. https://www.theguardian.com/news/2017/dec/21/hinkley-point-c-dreadful-deal-behind-worlds-most-expensive-power-plant
  9. https://www.gov.uk/government/news/new-deal-with-industry-to-secure-uk-civil-nuclear-future-and-drive-down-cost-of-energy-for-customers
  10. https://www.bbc.co.uk/news/uk-wales-politics-44634580
  11. https://www.theengineer.co.uk/nuclear-industry-sector-deal/
  12. https://renewablesnow.com/news/solar-pv-gets-lowest-strike-prices-in-uks-cfd-auction-465462/
  13. https://en.wikipedia.org/wiki/Dinorwig_Power_Station
  14. https://www.theengineer.co.uk/first-new-uk-pumped-hydro-scheme-for-30-years-given-go-ahead/
  15. https://www.theengineer.co.uk/pumped-hydro-storage/
  16. https://www.bbc.co.uk/news/world-australia-42190358
  17. https://www.theguardian.com/sustainable-business/2017/sep/15/californias-big-battery-experiment-a-turning-point-for-energy-storage
  18. https://www.youtube.com/watch?v=Ym8emBsYdMs
  19. https://publications.parliament.uk/pa/cm201012/cmselect/cmenergy/1605/1605vw34.htm
  20. https://www.theguardian.com/environment/2018/jun/27/uk-home-solar-power-subsidies-costs-battery-technology
  21. https://www.r-e-a.net/member/uk-solar/feed-in-tariff
  22. https://www.solarpowerportal.co.uk/news/exclusive_uk_installed_1.553gw_in_q1_2016
  23. http://ramblingsdc.net/Australia/SolarPower2.html
  24. http://www.visualcapitalist.com/experts-bad-forecasting-solar/
  25. https://uk.reuters.com/article/uk-rwe-renewables/rwe-ceo-eyes-15-billion-euros-annual-investment-in-green-energy-idUKKBN1JJ00R
  26. https://utilityweek.co.uk/orsted-orders-turbines-record-breaking-offshore-wind-project/
  27. https://www.edie.net/news/10/Shell-collaborates-with-Carbon-Trust-to-drive-lower-offshore-wind-costs/

Frugal Motoring – The PCP black hole

Sadly not an angel dust-fuelled night club.

Once upon a time you walked into greasy Tony’s car dealership, slapped down your hard saved cash, and walked out with a creaky Lada/ British Leyland motor with build quality as questionable as Katie Hopkins.

Now we walk into a car megamart warehouse to be met by bright young things in shiny suits and pleather brogues. If we feel we are worth it we walk into glass prisms of monochrome and steel to be fed posh coffee by bright young things in shiny suits and pleather brogues who tell us we are definitely worth it, sir.

The world of buying a car has changed a lot, and numerous products now cater to whim and desire to self-indulge. The current petrol on the bonfire of consumer car culture is PCP, or Personal Contract Purchase, sometimes confused with Personal Contract Leasinging which is a more traditional rental option.

What is PCP?

A very clever tool to sell cars.

PCP is essentially a loan on the depreciation on a car you ‘buy’. You don’t really own the car despite assurances to the contrary (although this is a whole other thorny area). You pay a deposit, then a monthly payment on the loan that finances the value the car loses in your use, then hand it back to the finance company at the end or buy it off them. Money Saving Expert says it better than I can (1):

It’s one of the more complex financial products available to help you buy a car, but it can be broken down into three main parts:

The deposit (usually around 10% of the car’s price).Dealers offering PCP finance will typically want around 10% of the car as a deposit. Some car manufacturers’ finance arms offer valuable ‘deposit contributions’ of £500-£2,000 or more if you’re buying a new car but only if you take their finance – eg, VW Finance offers £1,000. The larger the deposit, the less you’ll have to borrow.

The amount you borrow. The amount you’ll have to borrow is based on how much the finance company predicts the car will lose in value over the term of the deal (usually 24 or 36 months) minus the deposit you’ve put down. You’ll pay this amount off during the deal, plus interest. So you’re not paying off the full value of the car. Typical APRs are 4%-7%.

The balloon payment (a balancing payment you pay IF you want to own the car). Also often referred to as the Guaranteed Minimum Future Value (GMFV), this is how much the dealer expects your car to be worth after your finance deal ends. It’s agreed at the start of your deal. You don’t have to pay this, as you get a choice of what to do at the end of the deal. But it is the sum you’ll pay if you want to keep the car.

So far so clever, the difference to a more standard agreement such as Hire Purchase being that you are not paying for the whole of the vehicle, just the depreciation. Therefore the monthly payments are much lower. This, combined with various incentives such as the ‘scrappage scheme’ (hack-spit) have meant that new cars are available to people previously unable to afford them. Often with these contributions and incentives the cost of a new car is lower than a used car for monthly payments. A worked example from Carbuyer (2):

– A new car costs £25,000
– The GMFV after three years is £15,000
– Over three years, you need to cover £10,000
– Subtract the a deposit of £1,000
– You’ll pay the remaining £9,000 over 36 monthly payments of £250

And some from national car retailers:

As Graham Hill, director at the National Association of Commercial Finance Brokers, says (3):

“Drivers who might have been looking at hire purchase on a second-hand Ford Focus can find themselves paying less on PCP for a brand new BMW 1 Series or a Mercedes A-Class”

Which is where some of the warnings begin.

The cautions

PCP is a complex product often used to sell high value items to people who may not be as financially savvy. As a complex financial product, there are often T&C’s to be aware of. A recent survey by the CarGurus found 9 out of 10 people didn’t understand the small print of their PCP contract (4). Though there are many online guides to PCP, that same survey found although 91% of people thought they had a good grasp of car finance, only 47% knew what PCP meant (4, 5).

Two big stings are the condition the car is returned in, and the agreed mileage limit. The condition is a standard agreement that the car will be returned in good condition ready for sale at the end of the term. This is usually assessed by the finance company, and repairs charged at in-house rates. That parking ding can quickly becomes £hundreds to repair, with limited ability to contest. If you happen to crash the car, or it is seriously damaged, you have to buy out of the deal, usually with a penalty. For servicing, some PCP deals require you use the manufacturer/ sellers in house servicing department, placing you over a barrel.

The agreed mileage limit is another bit of small print worth looking at. In seeking a good GMFV most finance companies set low average mileage limits (5-10k common). Go over that and every additional mile can be charged, typically at 5-10p a mile (5). So that 5k extra a year costs you £500 at 10p/mile, but with some bombsite backstreet dealers charging 30-50p/mile (6). Going back to that CarGurus study, more than half of those surveyed didn’t know what the penalty charges were on their contract (4).

The Canary

Warning sounds are beginning to be made about PCP for two reasons. The first is a flashback to 2008’s grim figure, sub-prime lending. It is unclear how many loans made for PCP in the UK were sub-prime, that is to people who will probably default. The car finance industry states it to be around 3% (7), but given the demographic PCP is aimed at this seems low. Outside of those selling PCP, economists at the BOE have privately expressed concern (8). The sale of sub-prime auto loans in the US is already becoming big business (9).

The BOE’s concerns touch on some of my own. PCP leaves the lenders exposed in many ways. An economic downturn could mean a default on that PCP loan (10). The same economic downturn could knock value of second hand car values and residuals, therefore devaluing the asset. The value is highly dependent on the GFMV.

PCP is often sold as ‘this is the minimum it will be worth at the end, but if it’s worth more then the equity can be used on another car’. The issue I have with this is that values are estimated years in advance, while on the ground prices change with fashion, numbers sold and all the other factors that effect car residuals. If most cars are being bought on PCP, as the people who used to buy the cheap secondhand car now buy a new one on PCP, the demand and value drops off in the second handmarket. We’re already seeing that at the bottom end of the market, with a bumper crop of cheap serviceable vehicles. Additionally a car manufacturer may be the focus of a scandle (say relating to falsified emissions results), which knocks consumer trust and desire for the brand and knocks prices. Ultimately someone will be left holding the difference between the predicted value and the actual value; an overexposed lender or a broke consumer. We are beginning to see this, but the train is still coming down the tracks. Rant over.

The final caution is on the reason people buy PCP deals. Some argue they will save on tax or help the environment compared to their old car (false economies for the most part, and a sad endictment of our broken car tax system). Others want a reliable car that’s in warranty that functions as a white good and can just be used. Here the disconnect is new=reliable, which is a cognitive bias that’s not always the case. More on that another time.

TL:DR

PCP is good if:

  • You read the small print
  • Maintain the car impeccably
  • Do less than the mileage limit
  • Don’t mind an unfashionable, unflashy car
  • You can afford to buy out of the PCP if something untoward happens.

PCP is not as good if:

  • You don’t read the T&C’s
  • You do big mileages and work the car hard
  • You want a flashy fashionable car
  • You can only just about afford it

As with any purchase, a car on PCP is a personal choice. There are risks, but with discipline and sense it can work. Just not my cup of tea.

Next time on Frugal Motoring- Bangernomics

Have a great week,

The Fire Shrink

N.B. If you are thinking of getting a car on PCP, check out Ling’s Cars, if only for the WTF.

References:

  1. https://www.moneysavingexpert.com/car-finance/personal-contract-purchase
  2. http://www.carbuyer.co.uk/tips-and-advice/152049/pcp-deals-explained-what-is-pcp-finance
  3. https://www.google.co.uk/url?sa=t&source=web&rct=j&url=https://amp.ft.com/content/8bd9da60-0a5d-11e7-ac5a-903b21361b43&ved=2ahUKEwiJ_8Sa6rnbAhXJNcAKHYeaB9kQFjAIegQIARAB&usg=AOvVaw36J7T_jfEnveDLZBnGirde&ampcf=1
  4. http://www.thisismoney.co.uk/money/cars/article-5380867/Britons-oblivious-costs-risks-car-finance-deals.html
  5. https://www.thecarexpert.co.uk/how-to-understand-a-pcp-car-finance-quote/
  6. http://www.thisismoney.co.uk/money/cars/article-5388333/Avoid-mileage-penalties-car-finance-deal.html
  7. https://www.theguardian.com/money/2017/jul/02/car-leasers-publish-sub-prime-lending-figures-mps-charities
  8. https://bankunderground.co.uk/2016/08/05/car-finance-is-the-industry-speeding/
  9. http://www.ifre.com/sub-prime-auto-puts-more-junk-in-trunk/21343681.fullarticle
  10. https://www.theguardian.com/business/2017/jun/10/car-loans-personal-contract-plans-vehicle-financial-crisis-pcp

Musing on… Mortgages, what’s your risk tolerance?

I’ve recently been thinking a lot about mortgages, because I’m getting a new one. At the same time I’ve been educating myself about investment risk tolerance (1,2). I’ve done lots of online questionnaire’s to evaluate mine, which broadly show I’m willing to tolerate a lot of risk; I’m youngish, can wait most storms out and have a background in a profession where I have to manage risk daily. I also have the capacity to tolerate that risk; I make a good, secure salary and I won’t be investing money I can’t afford to lose. That’s not the case for my mortgage though, the single last purchase/ cost I’ll probably ever make. A post last week on r/UKPersonalFinance got me thinking:

Stick or twist?

Are you mad Shrink? You need to fix, fix, fix, before the rates go up. Everyone says they will: the BBC (3,4), Newspapers (5,6,7,8), lots of blogs (9,10).

Is what everyone was saying when I was looking last week. Except the rates didn’t go up. We had crappier than anticipated economic results, and the BoE said no (11). It cut it’s growth forecast and interest rates remained on hold at 0.5%.

Well they can’t stay that way!

No, they probably won’t. But they could do, pollsters and pundits have been off before. They said Lehman Brothers, Northern Rock etc were too big to fail. They said Brexit wouldn’t happen. Predicting the future is Mystic Meg’s domain.

Carney  
Mark Carney – will the last one out please turn off the lights.

 

Opportunity cost

Four years ago MrsFIREShrink and I were looking at putting our hard-earned deposit down. As 20-something millenials we were pretty unusual to be in that position. We leveraged a 90% LTV on a do-er-upper in the area we both loved, worked and intended on staying in. In those pre-Brexit, pre-May/Corbyn, pre-economic flatline days everything pointed to fixing for as long as we could. 4.29% fixed for 5 years was the best we could manage. That was ok as when we bought we planned to renovate and stay there for 5-10 years.

Fast-forward four years and we’ve moved 150 miles for job opportunities we couldn’t pass up but never anticipated. Our old house is for sale, and we’re trying to port our mortgage to save paying our eye-watering (5%!) exit fee. We’ve learnt that long fixed rates have their downsides (12). We look at others fixing for 10 years, who have no plans to move, and think about their flexibility (13,14).  Going back to those trackers *affix hindsight glasses* had we selected a three year tracker rather than fixing we would have saved thousands in interest. This time we’ve taken information from a number of different sources, and used online calculators to think about our best financial options (15). Cardinal rule learnt: Always consult multiple sources, references and opinions before purchasing.

Where’s the risk?

Why didn’t we go for a tracker 4 years ago? We wanted to minimise our risk to a rising base rate. Despite being tolerant of risk in work and in cash/ stock investments in the past, I’m not for my housing. I started to think about why, and where the risk lay:

  1. LTV – How much you’re willing (or the bank is) to leverage your cash against future earnings.
  2. Monthly repayment figure – How much you’ll be paying back a month, and if you can afford it.

The two are obviously inextricably linked. Our LTV has improved to 80%, which looks to be optimal for interest rate offers. Risks/ costs worth considering:

  • Under-leverage – borrow less, with LTV 60-80%, and pay less on interest due to better rates and lower value. Buy a smaller property, but risk missing out on the extra equity caused by a potential increase in house prices.
  • Over-leverage – borrow more, with LTV 80-95%, and pay more interest due to higher rates. Buy a larger property, put more money in monthly, so more equity in the long run. Greater exposure if there is a house price falls resulting in more negative equity.

The tolerance for this definitely varies amongst my friends and acquaintances. The common theme amongst blogs I’ve read has been to leverage to your max, 90% at least, as long as you have a good duration (25 years+) of work-life human capital left. This seems to be driven by the view that property remains a good long-term investment option. Monevator does an excellent piece on this, although as it’s 2012 it’s a bit out of date (16). Just look at the long term trends below to get the picture:

house-prices

real-house-prices

Anecdotal evidence; I have a close friend who bought on a 85% LTV five years ago. He bought a property in an up-and-coming commuter belt, and the house value increased by about 25% (good on him). He took this and leveraged at 90% LTV on a thumping great Barratt executive home (le sigh), so in his early-30s is sat in a half-million pound house. He’s willing to tolerate the exposure because it’s their dream home and they intend to stay there 10+ years.

Historic Value

Digging a bit deeper into those trends to understand whether now is a good time to go max-LTV is difficult. The question; Have property prices always been a good investment? Could be a whole separate post in itself, but suffice to say it’s difficult to answer. Most property prior to the post-war housing boom was owned by landlords and rented out (are we heading back that way?). The British obsession with owning your own home is a new one. UK house price index data only reliably starts in the 1950s, but this LSE blog looks at land prices going back to 1892 (which helpfully are no longer published) (17).

Cheshire-fig-1

To unpick this data note that the value of the home is made up of the value of the structure and the value of the land combined. This blog by James Gleeson summarises dis-aggregating house price value (18). From it I take this graph:

test2

So, we see that the value of the structure increased slightly once inflation-adjusted, but residual values, i.e. that value of the land, is the source of most of the increase. This is also visible in the price of undeveloped land. Review the historic trends from the former LSE graph and we see that the increase in value is a modern phenomenon, and the long-term investment strategy of property is not so long term.

Short-term LTV Outlook

Again, another whole post in itself. In 2016 the UK Value Investor reckoned that UK house price forecasts weren’t looking good (19). Two years on and the market, as discussed in recent Full English Accompaniments, looks to be stodgy. Back then, UK Value Investor reckoned that house prices were in a bubble and due a crash. This was based on price to earning ratio data:

UK-house-price-chart-2016-11

From UK Value Investor (19)

Here’s a quick description of what that chart shows:

  • The black line – The average house price in each year
  • The red zone – Where the average house price would have been if houses were historically expensive, i.e. if the PE ratio had been between 5.5 and 6
  • The yellow zone – Where the average house price would have been if houses were at historically average valuations, i.e. if the PE ratio was between 3.8 and 4.5
  • The green zone – Where the average house price would have been if houses were cheap, i.e. if the PE ratio had been between 3 and 3.3″

The whole article is worth a read if you haven’t before. John predicts:

Expected capital gains from UK housing are zero over the next ten years

Which two years on looks pretty fair. His assumptions hold that house prices won’t crash, but will stay relatively flat while wages catch up. Worth considering if you’re buying now expecting a 10-20% increase in the value of your holding. Why waffle about this – it nullifies one of the arguments for a 95% LTV.

2. Monthly Repayment Figure

Back to our original list and the monthly repayment figure. A function of mortgage duration, principal sum and interest rate. I’m not going to go into duration so much, as this appears to be more a personal choice and dependent on how much human capital you have left. Opting to pay a short duration means more/ month, a long duration = less. People modulate their monthly repayment on big houses with high LTVs by going longer on their duration. The risk here is about what % of your earnings you’re going to be spending on your mortgage. Lenders set their affordability calculators on earnings, up to 4.5x, but this has got stricter. There have been concerns that borrowers who were previously approved will now struggle to remortgage due to the affordability rules (20, 21, 22).

The traditional model argues to aim for 35% of your pretax income to go on your mortgage, 45% at a push (23). Dave Ramsey advocates a conservative 25% of take-home (24). UK-wide this is on a downward trend, with Halifax reporting it’s dipped to around 29% in 2017/18, but with massive regional variability (25, 26). This has a complex interplay with affordability and price-earning ratio.

Mortgage Payment as %

4A420BC000000578-0-image-a-1_1521210565456

Bottom line – you don’t want to be paying so much on a mortgage you can’t afford other day to day activities. Money Advice Service and Money Saving Expert have good tools to work this out (15,27). The balance between fixing or tracking affects interest rate. Generally go for a tracker and it’ll be closer to the BoE base rate, go for a fixed rate and you’ll pay some percentage for the choice. Money Saving Expert also includes tools to compare trackers, or calculate if paying out of a fixed rate mortgage could be better value (28). People are fixing to avoid a base rate rise, and there’s various calculators available to help with this too, allowing you to calculate how much extra you would pay (27,29,30). The risk if you don’t fix – the BoE base rate skyrockets and repayments become un-affordable.

Anecdotal evidence; I have a colleague who’s a bit of a flash git. At 28-29, he owns 3 properties (from a standing start) and drives a new LR Discovery (on PCP/ lease). He achieved this by buying a small property straight out of university, sub-letting rooms, using the cash created for a second BTL property, and then leveraging that for a flat. All on about 80% LTVs. He works full time 48 hours a week in the medical profession, then does another 20 hours on top overtime to pay his mortgages. Just thinking about it gives me the collywobbles.

What have I learnt?

My risk tolerance for my mortgage is substantially lower than for investments. Our LTV is now 80%, we’ve opted for a shorter (2 year) fixed rate on our extension while our other fixed rate runs out, and combined these make up 39% of our take-home income. Once burnt, twice shy. We’re hoping to fix next year on the other larger principal, and that rates remain low. This seems likely looking at conditioning paths (31). Even if it rises to the long run UK average of 5-6% we’re comfortable. In face we’ve calculated that we can tolerate up to a 10% BoE base rate and still be ok. Those would be days of property price collapse, repossessions, defaulting and as Ermine over at Simply Living in Somerset teaches us the hooded figure of negative equity (32,33). We’re not at the 15% of the the mid-’80s, and it seems unlikely we will be any time soon, but my tolerance for the chance of losing my home is minimal (34,35). But if you have the stomach and the wallet for it, then maybe a tracker is a decent current option. Ultimately I’ve learnt I’m not willing to gamble my home or my family, and I’m not so gung ho after all.

The Fire Shrink

References:

  1. https://www.forbes.com/sites/mitchelltuchman/2014/03/14/understanding-your-own-investment-risk-tolerance/#7f0edac140f5
  2. https://www.thebalance.com/what-is-risk-tolerance-2466649
  3. http://www.bbc.co.uk/news/business-44055400
  4. http://www.bbc.co.uk/news/business-41831777
  5. https://www.theguardian.com/money/2018/mar/05/mortgages-fixed-rate-loans
  6. https://www.theguardian.com/money/2018/apr/21/mortgage-rate-highest-two-years
  7. https://www.standard.co.uk/news/uk/rush-for-fixed-mortgages-as-bank-of-england-rate-rise-looms-a3816071.html
  8. https://www.thesun.co.uk/money/6120079/interest-rates-could-go-up-twice-this-year-but-how-will-it-affect-you/
  9. https://moneytothemasses.com/owning-a-home/interest-rate-forecasts/latest-interest-rate-predictions-when-will-rates-rise
  10. https://mortgageadvisers.which.co.uk/about/blogs/
  11. http://www.bbc.co.uk/news/business-44065472
  12. https://www.ftadviser.com/mortgages/2018/01/18/downsides-to-long-term-mortgage-fixes/
  13. https://www.independent.co.uk/money/mortgages/is-a-10-year-mortgage-deal-a-fix-too-far-10237879.html
  14. https://www.moneyadviceservice.org.uk/blog/how-long-should-you-fix-your-mortgage-for
  15. https://www.moneysavingexpert.com/mortgages/mortgage-rate-calculator
  16. http://monevator.com/historical-uk-house-prices/
  17. http://blogs.lse.ac.uk/politicsandpolicy/land-prices-the-dog-thats-lost-its-bark/
  18. https://jamesjgleeson.wordpress.com/2017/04/03/historical-housing-and-land-values-in-the-uk/comment-page-1/
  19. https://www.ukvalueinvestor.com/2016/11/uk-house-price-forecast.html/
  20. https://www.theguardian.com/money/2014/apr/12/need-mortgage-new-rules-lenders-check
  21. https://www.telegraph.co.uk/finance/personalfinance/borrowing/mortgages/10787446/How-to-pass-the-new-mortgage-affordability-tests.html
  22. https://www.mortgagestrategy.co.uk/borrowers-lose-tightened-mortgage-affordability/
  23. https://www.moneyunder30.com/percentage-income-mortgage-payments
  24. https://www.moneyunder30.com/dave-ramsey-financial-peace-university-review
  25. http://www.thisismoney.co.uk/money/mortgageshome/article-5510061/Mortgage-payments-compared-disposable-income-region.html
  26. http://www.thisismoney.co.uk/money/mortgageshome/article-5510061/Mortgage-payments-compared-disposable-income-region.html
  27. https://www.moneyadviceservice.org.uk/en/tools/house-buying/mortgage-affordability-calculator
  28. https://www.moneysavingexpert.com/mortgages/fixed-mortgage-calculator
  29. https://www.which.co.uk/money/mortgages-and-property/mortgages/getting-a-mortgage/bank-of-england-base-rate-and-your-mortgage-albl35s6phq0
  30. https://www.uswitch.com/mortgages/interest-rate-rise/
  31. http://www.thisismoney.co.uk/money/news/article-1607881/When-UK-rates-rise.html
  32. https://simplelivingsomerset.wordpress.com/2014/04/06/when-not-to-buy-a-house-a-cautonary-tale-from-a-quarter-of-a-century-ago/
  33. https://www.financialsamurai.com/what-if-you-buy-a-home-at-the-top-of-the-market-and-a-recession-hits/
  34. https://www.theguardian.com/business/economics-blog/2014/mar/03/uk-interest-rates-a-brief-history
  35. https://www.theguardian.com/commentisfree/2018/may/10/celebrate-house-prices-falling-britain-property-values

Frugal Motoring – Should I buy a diesel?

Well, no, obv… Except yes?

What started as a rant post, I shall turn into a mini-series.

In Frugal Motoring I will discuss how to cheaply purchase cars, the pros and cons for various purchasing methods (straight up cash, loan, PCP, lease), ongoing political/ government motoring related machinations and how to keep your car running.
This week I will discuss why and when you should purchase a diesel instead of a petrol.

Diesel’s bad rep

As discussed in the last Frugal Motoring post, diesels have a bad rep. Audi continues to push the slide into mediocrity with the recent news that even new build A6/A7 cars are affected.

http://www.bbc.co.uk/news/business-44037673

But this does not extend to all manufacturers. Many (Mazda/ Merc/ Ford/ Kia) continue to produce diesel vehicles with low emissions and good MPG. The diesel brush tars them unfairly, suggesting all manufacturers have ignored the NOx as particulate emissions problems. If we take a look at AutoExpresses list of best ‘green’ cars for 2018, there slap bang in the middle is a diesel Astra.

http://www.autoexpress.co.uk/vauxhall/astra/86341/vauxhall-astra-16-cdti-ecoflex-best-low-emissions-green-cars

While if we look at the website Next Green Car, there’s a huge raft of diesels with low emissions. It’s important to note as well that most of these are general family cars, not flash executive motors sporting the latest tech. The technology for low emissions has trickled down to the mainstream. http://www.nextgreencar.com/emissions/low-emission-cars/diesel/

Changes, changes

Taxation is being increased on new cars, and some of the new rules will only affect future vehicles. Additionally, depending on emissions the extra taxation could be as little as £20/year, but are more likely to be around an extra £100-200/year for new low emissions models. Residuals for diesels remain strong but are expected to drop in the future with increased taxation. Governments decreasing taxation on diesels seems unlikely.

http://www.autoexpress.co.uk/car-news/102928/new-diesel-car-tax-rules-april-2018-changes-explained

Recent technology advances by Bosch also claim to mean lower emissions in the future, with a new tech targeting the pesky problem particulates and NOx:

http://www.autoexpress.co.uk/car-news/103331/new-bosch-tech-drastically-cuts-diesel-nox-emissions

https://www.driving.co.uk/news/new-nox-emissions-tech-bosch-save-diesel-engine/

When is diesel a good thing?

Diesel engines continue to offer generally better MPG when running at moderate RPM for long periods. So if you’re doing lots of long distance journeys diesel is probably best.

Diesel also offers better torque at low RPM. This means if you are regularly making long journeys or towing then diesel is a better fuel choice.

Which? offers an excellent calculator to work out how much you could save with efficiencies of a diesel engine:

https://www.which.co.uk/reviews/new-and-used-cars/article/driver-calculators-and-tools/petrol-vs-diesel-calculator

But it’s worth remembering most of these efficiencies rely upon turbos being spooled up, engines being warm and DPFs operating properly. Short journeys will kill Diesel Particulate Filters, and by nature most diesel engines will struggle to get up operating temperatures doing stop-start work in traffic. Around town this will also mean more invisible pollution for local pedestrians and residents.

Diesels also generally continue to cost more to purchase. This means that unless you’re doing starship mileage you may not save on fuel cost what you initially paid out extra in engine choice. Most buyers will only see a diesel recouping it’s cost after 6-7 years. The new taxation system is set to worsen this.

https://www.which.co.uk/reviews/new-and-used-cars/article/petrol-vs-diesel-cars-which-is-better

Summary

Broadly, diesels are better for:

  • Towing
  • Long distance commutes or frequent long distance journeys
  • Heavier vehicles
  • Multi-stop journeys

If you think this fits you, consider that new diesels will be cheaper to tax and more efficient, but will have a payback time calculation to make. Second hand with have less of this payback due to depreciation, but will be taxed more. Both may see a future drop in residuals. As with all big purchases think carefully about your requirements before buying.

Have a great week,

The FIRE Shrink

Further reading:

https://www.rac.co.uk/drive/advice/buying-and-selling-guides/should-i-buy-a-diesel-car/

https://www.moneyadviceservice.org.uk/en/articles/choosing-between-petrol-and-diesel-power

http://www.autoexpress.co.uk/car-news/103111/should-i-buy-a-new-diesel-car?amp