What caught my eye this week.

I told to my friend we should saunter down the platform, because the tube would surely be busy. It was Friday night in London, after all.

But when the train drew in, the carriages were all half-empty.

You can visit Oxford Street and imagine things are back to normal.

But if you really cast your mind back to the crush and the rush, you know we’re not there yet.

And, as I’m steadily catching up with friends for in-person conversations, it’s uncanny how the same related topics keep recurring.

Work/life balance, going back to the office, moving out of the city – and how while we’re all happy to be seeing more people, we’re (mostly) not going back to those frazzled social lives we once thought must-haves.

Of course my friends are self-selected. They mostly know I write about financial independence and investing and all that malarkey, too.

And they know I’ve worked from home since forever, so it’s natural the subject comes up.

But even allowing for this, I’m hearing a lot more about changed habits – or at least a willingness to experiment – that no hectoring about savings rates or the hedonic treadmill could inspire back in 2019.

What a difference a virus makes

That most of us saved more money when locked in our homes due to Covid is well-understood.

We’ve also kicked about on Monevator what offices will be for now, how much we’ll stick to home working, or how we’ll mix in a mask-less world.

But could more subtle shifts be seen in the millions made meditative by successive waves of lockdown?

The substitutions they report are straight from a primer for financial independence:

1. Partying in the garden instead of partying on a far-flung beach.
2. Wearing the same clothes instead of wearing nothing new twice.
3. Learning a new skill versus chasing a new experience.
4. Working out at home compared to working out how to afford the gym.
5. Getting a takeaway (delivered) instead of eating at a restaurant…
6. …and cooking your own meals instead of getting a takeaway…
7. …in both cases saving on alcohol bought at supermarket prices.
8. Seeing a friend for a lockdown coffee versus blathering with strangers.
9. Netflix and M&S snacks versus the cinema and £10 popcorn.
10. Buying a nice home office chair instead of a £4,000 season ticket for the train.
11. (Barely out of your) birthday suit to answer emails rather than shopping for another suit for the office.
12. Saving 20% each month instead of dipping into the red at its end.

This list goes on. Let me know what have I missed below.

To many Monevator readers, such potential new habits will sound pretty pedestrian. But we’ve always been the exception.

No, I don’t think the world has caught FIRE1 along with Covid.

But perhaps some tenets of living well on less will be an easier sell for the next few years? Let’s hope so.

Have a great long weekend!

[continue reading…]

1. Financial Independence Retire Early. [↩]

Just as a twirlable moustache and a sinister laugh means you’re dealing with a villain, fund names instantly reveal much about the nature of an investment.1

Learn how to decode fund names and you can quickly parse product lists, rapidly spot index funds and ETFs, and save time finding what you want.

Here’s a typical fund name and what it means:

Let’s break the formula down.

Fund provider

This is the asset management firm who created the product. In the UK, the main players issuing index trackers are:

• Vanguard
• BlackRock aka iShares
• Fidelity
• Lyxor
• Amundi
• State Street aka SPDR
• HSBC
• Legal & General

The provider’s name may be twinned with a sub-brand. For example: iShares Core.

Core ETFs are often low-cost entries in a provider’s range, although that’s not a hard and fast rule.

Asset class

The main asset class usually reveals whether you’re getting into equity (stocks and shares) or bonds. If the fund name doesn’t suggest an asset class then you’re probably looking at an equity fund.

The sub-asset class shows where the fund’s assets are concentrated. For a broadly diversified equity fund this is typically a geographic region. For example: the Developed World.

Specialised funds will often pair the region with a tilt to an investment style, such as Global Small Cap.

The sub-asset class may be preceded by the name of the index tracked by the product. As in: Vanguard FTSE 100 UCITS ETF. That tells you the ETF tracks the largest 100 companies listed on the London Stock Exchange.

FTSE, MSCI, S&P, Stoxx and Bloomberg Barclays are the big index providers. They are often referenced in tracker names.

Bond maturities

A bond tracker’s name often signals the maturity dates of its holdings:

• iShares UK Gilts 0-5 UCITS ETF. This ETF holds UK government bonds (gilts) that will mature in up to five years. Five years and below indicates the sub-asset class is short-dated UK government bonds.

• SPDR Bloomberg Barclays 15+ Year Gilt UCITS ETF. This ETF hold gilts that mature in 15 years or more. Anything over 15 years is a long-dated bond holding.

The giveaway – Most but not quite all index funds pop the word index or tracker into their name to make things slightly easier.

Active fund names don’t feature indexes, but not all trackers do either.

Share class

A single fund may offer itself in more guises than Zeus, as denoted by its share class. Instead of turning up as a bull or swan like a Greek god, a fund simply puts some letters in its name (e.g. Class A or D or I) to indicate that exactly the same product is available at different costs.

Index funds tend to be limited to three types:

• Retail – Available to individual investors like you and me. The fund name may include the abbreviation Ret instead of a share class letter.

• Institutional – Available to pension funds and the like. Sometimes available to you and me when a deal has been cut between the fund provider and a particular broker. Inst funds are cheaper than their retail counterparts.

• Platform exclusives – Some fund managers furnish large online brokers like Fidelity and Hargreaves Lansdown with slightly cheaper versions of their index funds. The fund will offer a small discount on its annual charge but will otherwise be the same fund that’s found everywhere else bar an ‘exclusive’ letter designation in its name.

Share class letters have specific meanings in the US. That doesn’t apply here in the UK, where classification notation is all over the shop.

Income treatment

There are two varieties: Accumulation and Income.

Accumulating funds reinvest your dividends and interest back into the product without you lifting a finger.

Income funds pay out dividends and interest as cash money into your broker account. You can then reinvest or spend at your leisure.

Accumulating funds are also termed ‘capitalising’ and usually contain one of the following abbreviations:

• Acc
• A
• C
• Cap

Income funds are also known as ‘distributing’ and may feature these abbreviations:

• Inc
• D
• Dis
• Dist

UCITS regulated

You’ll notice most ETFs include the abbreviation UCITS. This memorable acronym refers to EU regulations that enable funds to be sold across European markets.

UCITS funds are meant to maintain certain standards that protect retail investors, such as a minimal level of diversification.

UCITS rules also apply to index funds.

Non-European ETFs are not governed by UCITS regulations. Neither are other exchange-traded products like ETCs (Exchange Traded Commodities).

Take the hint. Exercise caution and conduct more research on non-UCITS products.

There is now a UK UCITS standard that facilitates post-Brexit harmony.

Other info

As we hit the tail end of a product’s name, you may see a cavalcade of cryptic codes, scattered around at the provider’s whim.

Some ETF names are gilded with their replication method.

For example: Lyxor Core MSCI World (DR) UCITS ETF – Acc.

DR stands for direct replication and indicates that the ETF physically holds the securities in the index.

The alternative is a synthetic ETF that’s occasionally signalled by the word ‘Swap’.

ESG stands for Environmental, Social, and Governance. ESG funds are meant to favour companies that make an effort to reduce the harm they inflict on the planet. Mileage varies.

Currency

ETF fund names often quote a currency, such as GBP, USD, or EUR. As in the Vanguard FTSE Emerging Markets UCITS ETF (USD). 

The USD label typically tells you the fund’s base currency and may also tell you its trading currency. 

Base currency is the currency a fund reports its Net Asset Value (NAV) in. It distributes its dividends in this currency, too.

Trading currency is the currency an ETF is traded in on the stock exchange. Usually the London Stock Exchange for ETFs available via UK brokers.   

If an ETF’s base currency is not GBP – you’ll be charged FX fees on the dividends you receive (assuming it distributes income). 

If it’s trading currency is not GBP – you’ll incur FX fees on every buy and sell. 

Check out your ETF’s base currency on its homepage. Base currency may also be called denominated currency or fund currency.

Its price and dividend distributions will be reported in its base currency. 

Check the ETF’s entry on the London Stock Exchange website to see its trading currency. You’ll be able to see which currency recent trades were made in. 

Currency hedging

Choosing a fund with GBP in its name doesn’t protect you from currency risk.

Funds that are GBP hedged do neutralise the risk of swings in foreign exchange markets.

Most providers helpfully mention currency hedges in the fund name.

For example: Xtrackers Global Government Bond UCITS ETF 2D GBP Hedged.

This ETF hedges its return to the pound. Its returns to UK investors should be mostly unaffected by jostling in the currency markets.

Incidentally, 2D in this name refers to the share class.

Domicile

You’ll occasionally see the letters IE, IRL, LU, or LUX dropped into a name.

That’s because Ireland and Luxembourg offer favourable witholding tax rates if a fund is based there.

Some providers use that as a selling point. You won’t see less competitive tax jurisdictions being flagged, however.

You can confirm your fund’s domicile using its International Securities Identification Number (ISIN).

ISIN numbers contain a handy two-letter country code, which helps you recognise your product’s domicile:

• IE = Ireland
• GB = Great Britain
• LU = Luxembourg
• FR = France
• US = US
• NL = Netherlands
• DE = Germany
• CH = Switzerland
• CA = Canada
• GG = Guernsey
• IM = Isle of Man
• JE = Jersey

An ISIN number looks something like this: GB00B59G4H82. The GB means this fund is resides in good old Blighty.

It’s less well-known that the Irish and Luxembourgian investor compensation schemes are less generous than the UK’s.

Whatever you do, record the ISIN number of the fund you’re interested in.

This catchy number is the one way I’ve found to reliably distinguish between fund versions, and ensure I buy the right one when I place an order.

More to know than fund names

Want to learn more?

• How to read a fund factsheet.
• How to read a bond fund webpage. 
• Our best global tracker fund (equity) recommendations.
• Find the best bond funds.
• Ideas for the cheapest index trackers.

Take it steady,

The Accumulator

1. An ETF is a type of investment fund, so I’ll use the term ‘fund’ when referring to generic characteristics shared by traditional funds and ETFs alike. [↩]

This article on choosing the best mortgage rate is by The Dink from Team Monevator. Check back every Monday for more fresh perspectives on personal finance and investing from the Team.

The email from my bank practically begged me to pay attention: “Dear Mr Dink, it’s almost time to switch to a new mortgage rate.”

I’ve only renewed my mortgage once before. That time it dropped my monthly repayments by £70. So I’m excited by the prospect of more of the same.

Renewing a mortgage was not always pleasant. Speak to anyone who had a mortgage in the 1970s and they’ll tell you that. The 17% minimum lending rate some saw back then could be life-changing – if not life-threatening.

At 17%, my monthly mortgage payments would triple to £1,800.

Ouch!

My bank’s email also reminded me to be grateful to simply be on the housing ladder at all.

As a millennial, many of my friends are stuck in a cycle of not being able to save for a deposit. The high cost of rent is too high.

The average house costs around £300,000. Buying one requires a 10% deposit of £30,000. You need to be saving about £1,000 a month for three years to cover the deposit and associated buying costs. All while paying rent.

Ouch, again.

My mortgage history

We bought our house in 2016 for £172,000 with 90% Loan To Value (LTV) mortgage at 2.49%, fixed for two years. The monthly payment was £820.

In 2018 we switched mortgage and topped up. This got us into a better 75% LTV bracket. We fixed at 1.99%, with a £750 monthly payment.

Today in 2021 the house is valued at £220,000. The mortgage balance is £120,000. Our LTV has come down to 54%.

We didn’t overstretch ourselves in 2016. This despite the bank offering us five-times our salary and the standard advice being to get as big a house as possible to leverage house price growth.

Instead, we bought a modest house to give us more flexibility.

Sure, in a good year a £500,000 house might go up by over 3%. That’s £15,000 in extra net wealth! However, you don’t get to see that money until you sell. Even then, selling is a painful process that takes months.

A cheaper house also fitted our lifestyle back then. Our smaller mortgage was not a burden. At a pinch we could pay it with a single salary if we had to (albeit by living on bread and water.)

The money we would have spent on a £500,000 mortgage has instead been funneled into our ISA accounts. Those have done pretty well so far!

Should we pay off the mortgage?

At the start of my FIRE1 journey I wrote up a rough allocation, which I believe matches my risk profile.

My asset allocation manages my inner conflict between three competing tendencies – active investor, sensible passive investor, and wannabe crypto punk.

This is how I divide my assets:

• 60%: Passive ETFs
• 30%: Actively traded
• 6%: Cash
• 3%: Gold
• 1%: Crypto

This allocation enables me to sleep at night. I’ve stuck to it and rebalanced as required.

Now, after seven years of maxing out my Stock and Shares ISAs, we have enough to pay off the mortgage should we choose to.

It is tempting. But would it lose me money overall?

With a mixed portfolio it’s very hard to estimate what return you can expect over the next five years.

Compare that with using the money to pay off your mortgage. In this instance all the numbers required are known upfront. You can therefore calculate a certain ‘return’ on paying off some debt to the nearest penny.

To get an approximate idea, I turned to a compound interest calculator. I assumed my portfolio would return 4% over the five year term of my next mortgage fix.

Scenario #1: Pay off the mortgage

Let’s say I withdrew £120,000 from ISA to fully pay off my mortgage.

Obviously there would be no more mortgage repayments after that.

So I assume I will pay the freed-up £640 – which the mortgage would have been costing me each month if not paid off – into my ISA.

After five years – at that guesstimated 4% – I would have £42,431.

To recap, after five years:

Remaining mortgage: £0

ISA balance:  £42,431

Net: £42,431

Scenario #2: Don’t pay off the mortgage

Alternatively, what if I left the £120,000 in my ISA (assuming again 4% return on my portfolio) and continued to slowly pay down my mortgage?

Five years after not paying off mortgage:

Remaining Mortgage: £86,992

ISA Balance:  £146,519

Let’s say I then – after five years – used the ISA balance to pay off the mortgage – so £146,519 minus £86,992.

Net: £59,527

The financial difference

On these numbers I’d end up £17,000 better off by waiting another five years before paying off the mortgage.

This is my personal situation. It is based on that 4% estimated return from my portfolio. Different numbers would obviously change the final result.

My portfolio might well earn less than 4%. However I’d be willing to take that risk. I think 4% is fairly conservative compared to historical returns – and there’s also a chance I would earn more than 4%.

Paying off the mortgage completely will not give me a chance of reaching financial independence any sooner.

Having more money growing in my ISA just might.

LTV thresholds

Last time we renewed our mortgage we paid in a few thousand extra pounds to get us into the next 5% LTV bracket.

This money came from my ISA. I believe it was definitely worth it to reduce the monthly mortgage payments by qualifying for a better interest rate.

Since then, the recent house price boom has increased the value of our home by enough to get under the top 60% LTV for best rates.

Offset Mortgage

I’ve previously found it hard to see a situation where an offset mortgage would be useful to us. But based on my comrade’s enthusiasm on Monevator, I re-ran the numbers.

If I converted everything outside of my ISA – that is gold, crypto, and cash – to a savings account to offset against the mortgage, it could give me £10,000.

The bank would now calculate the mortgage against £110,000 rather than £120,000 – but at a higher rate of 1.39%

This gives me £40 a month cheaper mortgage payments of £600.

Honestly, the offset is more competitive than I thought it would be.

However, I’m happy to take the chance that my £10,000 left in mixed assets will grow enough to beat the £40 a month saved – and maybe by a lot more.

Again, something to decide based on your situation and risk appetite.

The best mortgage rate

I don’t get wound up striving for the absolute best mortgage rate. There is not a life-changing difference between most fixed deals I look at.

For the convenience of renewing with my current provider, I don’t mind paying an extra few quid a month. It helps that my current provider has consistently ranked at the top of the mortgage rate tables.

What you must avoid is ending up on an expensive variable rate.

Premier customers

Because of the large lump in my ISA, I’m a premier customer at my bank. This sounds great, but I really struggle to make use of any of the perks.

My bank offers a ‘5-year Fixed Premier’ account with a good rate. But the large arrangement fee means it’s not worth it on our small mortgage.

Lounge access at the airport, though, is brilliant!

What if we move home?

Well-meaning friends have told us we should not renew our mortgage if we intend to move within the next 18 months. Instead, they say, we should go onto the variable rate

We’ve lived in this tiny house through lockdown. With the prospect of working from home a lot more, of course we would like a larger home soon.

Our friends’ advice centres on the Early Repayment Charge (ERC). This becomes due if you pay off a fixed-rate mortgage before the term is up.

On our current mortgage the ERC is 1% of the amount repaid early, for each year remaining of the fixed rate.

However our mortgage advisor has assured us that most people can ‘port’ their mortgage when they buy their next house. So hopefully by doing so we can avoid any penalty payment when we eventually move house.

I’ve heard of another life event that this fee can nail you on. That’s if you get divorced and have to sell the house.

If in that situation you need to pay off the mortgage early you might be liable to pay a charge. So if your relationship is a bit rocky don’t sign up for a five-year fixed mortgage with potentially a near-5% ERC.

(Of course if your relationship is already shaky then explaining why you want to avoid a five-year commitment might itself lead to an interesting conversation…)

Exploring the fixed rates on offer

My bank seems to always be near the top of the mortgage tables. Handy.

I therefore started my search by creating a spreadsheet with all my bank’s fixed mortgage options, over two, three, and five years.

Once I decided what rate suited us best, I plugged it into a couple of mortgage comparison sites. Just to make sure it was fairly competitive.

I’m not going to share my spreadsheet. It’s a brilliant exercise to write one yourself. (Also, I’m scared of any liability or criticism that may be directed at my sheet!)

The deals in detail

These are the mortgage deals my bank offered me:

Product	Fee	Rate %	Years
2-Year Fixed Fee Saver	£0	1.14	2
2-Year Fixed Standard	£999	0.94	2
3-Year Fixed Fee Saver	£0	1.34	3
3-Year Fixed Standard	£999	1.09	3
5-Year Fixed Fee Saver	£0	1.34	5
5-Year Fixed Standard	£999	1.09	5
5-Year Fixed Premier Standard	£1,499	1.06	5

I then turned to the basic mortgage calculator at Money Saving Expert. I plugged in my mortgage debt (£120,000), mortgage term (17 years), and the interest rate of each deal.

This gives me a monthly repayment and a remaining debt figure (at the end of the term) for each deal:

	Fee	Rate %	Years	Monthly	Remaining
2-Year Fixed Fee Saver	£0	1.14	2	£648	£107,063
2 Year Fixed Standard	£999	0.94	2	£637	£106,853
3-Year Fixed Fee Saver	£0	1.34	3	£658	£100,761
3-Year Fixed Standard	£999	1.09	3	£645	£100,412
5-Year Fixed Fee Saver	£0	1.34	5	£658	£87,498
5-Year Fixed Standard	£999	1.09	5	£645	£86,992
5-Year Fixed Premier Standard	£1,499	1.06	5	£643	£86,931

Using the monthly repayment I then calculated the total paid over the period for each deal. This is the monthly repayment multiplied by 12 and then by the number of years, plus the arrangement fee.

Subtracting the remaining debt from the initial loan amount of £120,000, I get the amount that has been paid off the mortgage at the end of each product’s term.

Show me the money

In the table below, the ‘Total cost’ is then the difference between ‘Total paid’ and the amount ‘Paid off’.

Finally – based on total cost and the amount paid off – for each mortgage option I calculate the true cost for each £1 paid off of the mortgage:

	Monthly	Remaining	Total Paid	Paid off	Total Cost	Cost per £
2-Year Fixed Fee Saver	£648	£107,063	£15,552	£12,937	£2,615	0.20
2-Year Fixed Standard	£637	£106,853	£16,287	£13,147	£3,140	0.24
3-Year Fixed Fee Saver	£658	£100,761	£23,688	£19,239	£4,449	0.23
3-Year Fixed Standard	£645	£100,412	£24,219	£19,588	£4,631	0.24
5-Year Fixed Fee Saver	£658	£87,498	£39,480	£32,502	£6,978	0.21
5-Year Fixed Standard	£645	£86,992	£39,699	£33,008	£6,691	0.20
5-Year Fixed Premier Standard	£643	£86,931	£40,079	£33,069	£7,010	0.21

(Please refer to the tables above for rates and fees for each product)

Looking across all of the deals, none of them are significantly different enough to have a life-changing effect on my finances.

It is scary when you work it out like this though. It’s costing me at least 20p for every £1 that I pay off my mortgage.

But don’t panic. Go back and reread the section ‘Should I pay off the mortgage?’ for some perspective.

What am I going to do?

Last time I renewed, I fixed for three years. I was sure that the interest rate would go up due to Brexit. But I was wrong.

This time I’m even more certain that interest rates will go up. So I’m going to fix the mortgage for five years.

But it doesn’t matter if I am wrong. I’ll sleep well at night having locked in a monthly payment – one that we can comfortably pay and have budgeted for.

However if interest rates do shoot up, I’ll be unbelievably smug for the next five years. That alone is worth the risk!

You can see all The Dink’s articles in his dedicated archive.

1. Financial Independence Retire Early. [↩]