In a press release headlined “French holiday homes for free”, property sales firm Assetz said investors can now use an interest-only mortgage to buy a holiday flat in France.
You can then lease it back to a French-based property company for nine to ten years in exchange for a “cast iron rental income”, which will cover your mortgage costs — your mortgage, we are told, would cost you about 3% in interest, and even if you used the property yourself for a few weeks a year you could get a rent guarantee of 4% for the rest of the year. The result? “Effectively a free holiday home,” said Assetz.
This is, of course, utter nonsense. There is no mention of how you pay off the mortgage on your “free holiday home” at the end of the term: remember it is interest-only, so you still have to pay back the capital. There is no mention of the fact that mortgage rates fluctuate. What are the odds of mortgage rates in France staying at 3% for the next 20 years?
And how “free” is your property going to look if rates move to 15% in 10 years and you are still getting a yield of 4% (or less — your guarantee will have run out by then)? And there is no mention of the fact that you have to pay tax on your rental income, which will bring your income from the guarantee below your costs if you are a 40% taxpayer. Finally, there is no mention of the fact that property prices sometimes fall.
Note that while prices in France rose by more than 10% last year, there is ample anecdotal evidence that sales are slowing, particularly in areas where the Brits like to buy, and even the leaseback salespeople say “the rate of growth is in a downward trend”. Free holiday home? It isn’t very likely, is it? The interesting point, however, is that Assetz and its public-relations company clearly think announcing this kind of misleading muck is worth doing — and the irritating thing is that they may be right.
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Why? Because so many of us are so hopeless at understanding how money works that enough people will fall for it to more than cover the costs of sending out a few press releases.
As Sunday Times readers will know, the British have more than £1,100 billion in personal debt and rising, much of it made up of horribly overpriced credit-card and store-card liabilities.
We are overstretched in every direction, and my bet is that a large number of us have no idea how we will ever get in the clear. This will come as no surprise to the Institute of Financial Planning (IFP), which has recently announced that as far as it can see financial literacy in the UK is “at crisis point”.
The good news is that the IFP is actually doing something about it. It has come up with two qualifications (a Certificate in Personal Finance and an Intermediate Certificate in Personal Finance) for schools to offer to 14 to 16-year-olds from September this year.
The course will offer lessons on everything from the best ways of borrowing, how to decipher pay cheques and how mortgages work, to car insurance and budgeting — all with a view to helping the young make more informed decisions about their finances in the future.
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This isn’t a perfect qualification (it teaches too much about how to get the best kind of debt and not enough about why we shouldn’t get into debt at all), but it is an excellent start. I know the education secretary, Ruth Kelly, has a lot on her mind at the moment, but if I were her I would step in and take the whole thing a bit further, making this not just a certificate but a compulsory GCSE.
It just couldn’t be more important. What difference does it make if you can’t read a menu in French, if you don’t really know what an oxbow lake is, or if you can’t tell your Shakespeare from your Chaucer? None of these things is really much of a problem for most of us, a faint embarrassment maybe, but not a problem.
However, not to know what an APR is, or understand how compound interest escalates your debt, or grasp that using a savings account that pays interest of 1.5% a year means that you are actively making yourself poorer in real terms — all these things are huge problems.
To my mind untold misery could be prevented with a little compulsory financial education. Imagine if everyone understood that there is no such thing as a free holiday home — or free credit, and why. Wouldn’t the world be a better place?
Merryn Somerset Webb is a former stockbroker and now editor of Money Week. Her views are personal and investors should always seek professional advice