Housing, pt5: The liquidity rushPosted: 2015-12-28 | |
Avid readers will know I’m in the process of buying a Dream Home. This event has not been pre-planned and is happening at speed. This means I’m not yet selling my previous home, but instead I am frantically liquidating my investment portfolio. This is quite a bizarre thing to do in a hurry and is taking a lot of time and energy.
The housebuying process in the UK involves two key steps: exchanging contracts (at which point a 10% deposit is paid), and subsequently completing the transaction (at which point keys are handed over, the 90% balance is paid to the seller, and property taxes are paid to the government). In my case I exchanged contracts a few days before Christmas (shown on the lighter green triangle below) and I complete the purchase at the end of January (shown as the yellow/dark green triangle).
Having managed to rustle up the 10% deposit in a few days, I now have about a month to find a further 100% of the purchase price – enough to pay the 90% balance and the ~10% property taxes (stamp duty).
After a week of doing more Sell Orders than I’ve done in the last two years combined, my bank account remains depressingly modest. While some of this is because money is in transit, it has led to me mapping out in detail what I need to find the money to complete at the end of January. My action plan has no fewer than 62 steps in it, 24 of which have happened already.
I’ve plotted below my notional target trajectory for liquidating funds.
I’m not trying to liquidate all at once for a couple of reasons; firstly because some of these accounts take a while to implement a Sell Order, and secondly because this process started just after the UK stock market had dipped below 6000 and I bet that the market would likely rebound within a few days and it would pay me to time-cost-average my sales over 30 days rather than all at once. With FTSE having rebounded to 6250, my bet is paying off so far.
So far I have liquidated about 25% of the total I need to find. I have also instructed sale of another 10%. Liquidating just 35% isn’t quite as pedestrian as it sounds, because I plan to use a margin loan for a further 35% of the total (represented by the jump in the last week of January in the graph above). This means I have liquidated about half of the net amount I need to sell.
However, I have even more work than is shown above, because as well as raising funds I am also transferring funds into brokerage accounts that will offer me margin loans. In total I am doing this with funds worth about 15% of the Dream Home.
Transferring funds by selling them is quite a complicated dance thanks to capital gains taxes. At the moment I think I have managed to liquidate assets in a way which leaves me with almost no capital gains liability. What I need to watch out for is that, for the assets I am selling to transfer rather than selling for cash, I can’t re-buy these assets for 30 days without screwing up my capital gains tax position. I run the risk that the market moves against me in this time; I figure I’m running enough risks in this process that I will have to swallow this one.
Finally, I think I have an answer to the question I posed a couple of weeks ago about the risk of losing cash if a bank fails. The UK’s deposit protection limit is just about to drop to £75k per institution, which doesn’t touch the sides on a multimillion pound transaction. However, there is also protection of up to £1m (I think, maybe actually €1m (£740k)) for temporary large balances – specifically including house purchase sums. While I haven’t checked the fine print, I believe that if my funds are assembled across three or four accounts I should have reasonable grounds to feel protected. Treating my lawyer’s client account as one, my current account as another, my joint account as another, and my private bank as another means I have four accounts with completely separate institutions. I’m now feeling fine about this risk.