Housing, pt3: the pressure mountsPosted: 2015-12-19
For anybody following the saga, I’m trying to do something before Christmas which wasn’t even on my agenda in November – buy a new home.
In the last week, I’ve had to track macroeconomics, speak to the estate agent over ten times, find professional advisers, trade my way out of some longstanding holdings, and consider my funding options in three timezones:
- An earlier bidder has upped their offer, to about £100k ahead of me. They need mortgage finance and so can’t move as quickly as me. They are trying to mitigate that by offering a non-refundable deposit in order to go exclusive.
- The seller has agreed to indemnify me against my survey costs if I don’t get the property. I have commissioned a survey, and await the written report on Monday. The verbal report was as expected.
- The seller hasn’t released legals to anybody. How they are hoping to exchange before Christmas beats me.
- I have found a property lawyer. Not my usual one, who can’t do it. Bizarrely, one of the lawyers I tried actually has the vendor as a client already. It’s a small world, London, at least in the £3m+ home bracket.
- My funding strategy has developed quickly. I’ll discuss this more below. I have the funds available for the deposit, albeit scattered across a few accounts.
- The UK stock market has recovered slightly to 6050 from 5950 a week ago. In the meantime it fell to 5880 and rose to 6160. Nervewracking stuff.
- The US Fed raised interest rates for the first time in almost 10 years. Markets rose, then fell, in the two following days. Overall this move doesn’t seem to affect me too severely at this point, though if the Bank of England follows through then my borrowing costs rise.
In theory the seller is going to decide what to do on Monday. In effect I have been bounced into a sealed bid process in all but name. I am majoring on my ability to move quickly, and hoping that I don’t need to match the other bidder on price. My fingernails are being bitten.
Though it is a bit too early for reflections, I have made some minor discoveries this week:
- Margin funding is a thing. For buying houses. Yessirree. I must give @stu credit for bringing this to my attention, as well as my private banker who has been (un?)surprisingly constructive about lending me some money. A mortgage doesn’t really work, partly because it will need to replace an incredibly cheap one I have right now. But I’m intriqued and beguiled by the ease and low rates of margin loans. My bank is offering me 2% loans (above base) with around 70% LTV against my portfolio. Interactive Brokers is offering me a mind-boggling 1% (above base) on 50% LTV. Both of these offers are pretty compelling.
- One of my banks, a US bulge bracket bank I won’t name, can’t offer margin funding to UK residents out of the USA. So much for global service. In fairness to them there are some peculiar historical dynamics here.
- Even when I have sold some funds pretty sharpish, I have not managed to get cleared funds into my current account. Some of this is because equities settle T+2, which I find fair enough. The fact that I can’t then get a BACS transaction same day, but must wait 3-4 working days so that Selftrade/whoever can sit on the interest, I find highly annoying. In the scheme of things a week’s delay isn’t too bad here but I wasn’t counting on it a week ago.
- My private bank, who is a bit like Coutts but not Coutts, charged me over a grand for selling one big block of shares. Over £1000! It was well under 1% but seriously. If I’d had this block with Interactive Brokers I’d have been paying £6. Normally I don’t really notice the commissions because I have hardly any funds with them on this basis but ouch. The next bite I’m going have taken out of me is FX, where I haven’t got time to use TransferWise to shift some EUR and USD funds into GBP. Grumble,
This leaves my strategy as follows:
- Ready a deposit, of 10% of the Dream Home’s value, to get me into the race. I have pretty much completed this process; I think I can exchange on Monday if I have to. If I have to pay a few grand of fees/commissions for this, so be it – this is roughly akin to legal fees / surveyor fees and is the friction of being in the chase.
- Liquidate further funds only when I get to exchange contracts. If that happens, I will liquidate around 40% of the Dream Home’s value. I will look to do this within 48 hours of exchanging, to minimise the chance of the market moving against me abrubtly.
- Concentrate my remaining portfolio on my two margin-able accounts. This means selling assets in accounts that can’t offer me margin. And I will move some existing positions (either by closing out, and re-opening similar-but-not-identical positions) into the accounts that do offer me margin. I’m aiming for having 100% of the Dream Home’s value invested in assets split between my two margin-enabled accounts. These assets will have at least FTSE-average yield, let’s call it 4% yield.
- Use a margin loan of 50% of the Dream Home’s value. This loan will cost me between 1.5% and 2% above base rates. As a proportion of the full home value, this means I’ll have interest costs of between 0.75% and 1%. Even after tax these costs are amply covered by the yield from the assets that are supporting this margin.
- Use cash income to reduce the margin loan. I will have some remaining assets that are in non-marginable non-tax-sheltered accounts. I will funnel cash income from these accounts into the marginable accounts, to repay the margin loan slowly even while I sell the old house.
- Risks. I’ve got a few. The most obvious one is the stock market plummeting by over 30%, triggering margin calls or worse close outs. My portfolio is diversified in such a way that such a fall has never happened before, even in 2008/1997/1929. So I’d be very unlucky if this happened. More realistically a drop of 10-15% – i.e. to FTSE below 5400 – would see me scrabbling a little to consolidate assets further into the marginable accounts. But I’d hope that I could repay the loan by 5% a year and get a long way out of the danger zone quite fast.
Which leaves me asking you, dear readers, two questions:
- Any tips on funding strategy?
- Any tips on what to do on Monday to clinch the deal out of the other bidder’s grasp?