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Revealed – How the Bank of Mum & Dad use Equity Release to Fund 1st Time Buyers

Saturday, July 5th, 2014

Bank of Mum & Dad

 

It has recently come to my attention, having watched my own daughter attempt to buy her 1st property, how difficult it has become for 1st time buyers to fulfil their dreams of becoming a homeowner.

 

It also occurred to me that EQUITY RELEASE could in fact play a significant role in assisting the “Bank of Mum and Dad” and others in providing funds to enable these dreams to come true.

 

First some FACTS:

  • The average age for 1st time buyers is now 29
  • 2/3rds of 1st time buyers now turn to the Bank of Mum and Dad (BoMAD) for help
  • 30 years ago 12% of income was needed for a deposit on a property. Today this is staggering 82%!
  • The cost of an average house in the UK is 10 times bigger than the average salary rising to 14 times in London
  • In all but 2 regions in the UK, prices are 7 or more times the average salary for that area (Office of National Statistics)
  • More than 3.3 million 20-34 year olds were still living with their parents in 2013

 

Although these figures clearly indicate it is becoming almost impossible for 1st time buyers to get on the property ladder, help could be at hand – YES, from the “Bank of Mum and Dad”

 

Parents are an obvious first point of call. However with rising living costs, low interest rates and diminishing savings pots, it has become increasingly more difficult for mum and dad to find surplus funds to gift to their children, grandchildren or loved ones, to assist in fulfilling the dream of property ownership.

 

However, there could be a way to take an early inheritance from parents now in order to benefit 1st time buyers when the money is needed the most!

 

A special type of retirement mortgage commonly known as Equity Release could potentially unlock cash tied up in a parent’s property. This can enable mum & dad to generate sufficient funds to gift as a deposit on a property purchase for their loved ones.

 

What is equity release?

Equity release schemes are available in two formats – home reversion & the more popular lifetime mortgage. Both of these equity release schemes enable people who own their main residence to release a percentage of its value in return for a tax-free cash lump sum. These two types of equity release mortgages then run for the rest of your life & only repaid once upon death or moving into long term care.

 

The equity release scheme known as a lifetime mortgage has proven the most popular due to its flexibility. This has been strengthened this year with providers such as Hodge Lifetime & Aviva both providing an option to repay upto 10% of the original capital borrowed each year. Therefore, control over its final balance, or even repayment of the whole scheme over the longer term could represent a serious possibility, for either parents to pay, or the children themselves!

 

Lifetime mortgages are available to those aged 55+, with a minimum property value of £60,000. The amount that can be borrowed is not always based on affordability, but on factors such as age & property value. Effectively, the older you are, the greater amount of equity you can release.

 

Following a release of the equity, the lifetime mortgage company places a first legal charge on the property. This is exactly the same as any conventional mortgage and 100% legal ownership is still retained by the client providing peace of mind.

 

Typically, someone age 60 could release equity of between 18-25.5% of the value of the property, dependent on the lender concerned. These equity release funds can be spent on anything you like, however a sensible & cautious approach is always advised. Therefore, parents looking to assist their children onto the property ladder, a lifetime mortgage could prove an effective mortgage vehicle to achieve this goal.

 

Which equity release schemes can help 1st time buyers?

Equity release schemes have become a lot more flexible and innovative these days. You can choose to make NO repayments and have the interest added to the loan which is known as a roll-up lifetime mortgage. The amount borrowed plus any interest accrued is repaid upon sale of the property. This would happen on death (last death if joint plan) or having to go into long term permanent care. Thought must be given here should there be more than one beneficiary. With an increasing balance & possibly reducing net equity figure, consideration must be afforded to any remaining beneficiaries as to what they may potentially receive at the end of the day?

 

However, there are new repayment versions of equity release schemes that have proven even more popular with parents looking to securely gift money to their children to help with a property purchase.

 

Interest only lifetime mortgages from Stonehaven & more2life will allow the repayment of just the interest only element. By repaying interest charged each month prevents the loan from increasing and thus remains level for the rest of the mortgagor’s life. This is a great idea when there is more than one child involved. The problem has always been how to separate the gift now, from the overall inheritance at the end of the day if more than one child is involved?

 

The solution is having an interest only lifetime mortgage. By knowing in advance what the balance will be, this loan amount can be deducted from that child’s share of the inheritance at the end of the day. This would be even fairer for the other siblings, should that child also pay the monthly premiums on behalf of the Bank of Mum & Dad!

 

NEW -Voluntary partial repayment plans

Equity Release Supermarket now has access to specialist equity release schemes where there is the option to repay up to 10% of the original capital released each year without any early repayment charges. These equity release schemes through Aviva & Hodge Lifetime have proved popular for those not just looking to repay the interest, but also the opportunity to repay the equity release scheme in full over approximately 16-17 years. These voluntary partial repayment equity release schemes are proving to be the next generation of the equity release market.

 

How is the Bank of Mum & Dad protected?

All the equity release schemes we recommend are members of the Equity Release Council, which means that there are certain guarantees built into them for consumer protection. As a minimum the Equity Release Council will ensure the following guarantees are included:-

  • The schemes are portable and can be transferred to another qualifying property should you wish to move in the future
  • There is a no-negative equity guarantee which means a debt cannot be left to your estate even if the value of the property becomes less than the balance of the loan outstanding
  • You can live in your house for as long as you wish and with a lifetime mortgage you retain full ownership
  • They can be repaid at any time, subject to potential early repayment charges

 

Benefits of using Equity Release

Contrary to directly gifting your property to your children, by using equity release to gift instead, would avoid any Capital Gains Tax as the main residence is retained by the client. There could still be a potential Inheritance Tax liability, but only if the client died within 7 years of the gift.

 

The lifetime mortgage would be a deductible liability against the client’s estate, reducing the value being taxed and although interest would have to be paid on the loan; this could still prove beneficial to both the client and those receiving the gift. Always consult a tax expert on these matters in conjunction with your independent equity release adviser.

 

Of course let’s not forget the best part of this!

 

The potential to fulfil the dreams of our loved ones in an age where quite frankly, property purchase is almost becoming nothing more than just a dream for some. The joys of parenthood!

 

Next Steps…

I would be delighted to offer a FREE initial consultation to discuss any of the above matters relating to how equity release can help your children step onto the property ladder.

 

Please call me on 07788 605620 or 0203 7517228 or email cathy@equityreleasesupermarket.co.uk

Can I Still Leave an Inheritance if I Take an Equity Release?

Sunday, July 8th, 2012

Equity release schemes have become increasingly safer over the past few years with inheritance protection options becoming more available. It is becoming apparent that equity release plans are now evolving further and diversifying. In today’s market a number of different providers have entered the arena with a variety of different equity release schemes. Although equity release plans prove to be a great option for many people, it is important to understand the concept & implications of equity release before going ahead with it.

 

You’re possibly wondering – is equity release a good idea?

If so then you need to understand the main reason for people being anti-equity release, which is the effect it has on their beneficiary’s inheritance. You therefore need to gather more information on equity release mortgages and the role they have to play in the retirement planning process.

 

One of the most common concerns that people have with equity release schemes is whether it will affect the amount of inheritance they leave behind. An equity release mortgage allows you to release some of the equity that is built up on your home, thus devaluing the property initially by the same capital amount. Over time however, this amount significantly increases as compounded interest gathers momentum, thus reducing the value of the estate. This essentially means that you’re using up some of the equity of the home, and leaving a devalued property behind.

 

There are different types of equity release schemes, and the two most common types are home reversion and lifetime mortgage schemes. A lifetime mortgage is a loan taken against the value of the property, which is repaid only when the owner has died and the house can be sold. A home reversion plan is the process of selling a part of the house to a reversion company, the proportional value of which is recovered once the owner has died. By selling a small part of the home, you can ensure that you leave something behind. This is one of the main advantages of home reversion plans over lifetime mortgage schemes, However, lifetime mortgages have come a long way in design & functionality over the past couple of years.

As equity release schemes have evolved they have endeavoured to become less risky. One of the characteristics of new equity release plans is that they come with a no negative equity guarantee. This means that whatever is left over after your debt is repaid goes to your beneficiaries, but if your debt is larger than the sale value of the property, the negative equity is cancelled out, and does not get carried over to your family. This is particularly relieving to those who want to release the equity on their home but are concerned about its repercussions on those they leave behind. Of all schemes this would be beneficial for would be the roll-up lifetime mortgage scheme whereby the borrower has taken the maximum advance possible.

 

Modern lifetime mortgages also have a new security option built into them which is called the ‘inheritance protection guarantee’. Equity release providers such as Aviva, Stonehaven, more2life all offer this safety feature available. By selecting a percentage of the property value you wish to protect, allows a fixed percentage of the property value to remain on the eventual sale of the property. The higher the percentage inheritance guarantee selected, reduces the maximum loan amount available from inception of the plan.

Equity release schemes have their advantages and disadvantages. While they may not work for some, they may be the perfect option for many others. As far as protecting your loved ones goes, modern equity release plans provide both a no-negative equity guarantee and an inheritance protection guarantee so as not to affect your family. However, always bear in mind taking out the equity from your house automatically reduces the value of the property you do leave behind.

 

 

Therefore, ensure you speak to a qualified equity release adviser who can explain both the pros and cons of equity release. Equity Release Supermarket provide a free initial consultation to discuss all issues around all aspects of inheritance protection including interest only lifetime mortgages.

Call the team today on 0800 678 5159 or email mark@equityreleasesupermarket.co.uk

 

Do Enhanced Equity Release Plans Provide the Maximum Lump Sum?

Saturday, June 9th, 2012

Equity release mortgages have evolved over time. Compared to a few years ago, a much wider range of equity release products are available today. Mortgages have also become more flexible in general, making them suitable for a wider variety of customers.

If you’re interested in borrowing more than a conventional equity release will allow, then there is a type of equity release called the ‘enhanced equity release plan’ that may be of interest. Similar in principle to the enhanced annuity market, the ‘impaired’ or more commonly known enhanced lifetime mortgage can now provide an even greater maximum lump sum than even selling 100% of your property under a home reversion plan.

 

Why would you consider an enhanced scheme?

There are many reasons people are looking to release the maximum lump sum. It could be that one is looking to switch to a new equity release plan from an existing one in order to release extra tax free cash. For completely new applicants, it may be the case that the reason they qualify for an enhanced lifetime mortgage in the first place is down to the fact that health is poor & longevity maybe a concern. You may also want to borrow more, but your existing lifetime mortgage company may not grant further borrowing, or top up interest rates from the existing lender could be very high. An enhanced equity release plan is a lifetime mortgage that aims to maximise borrowing, and keep interest rates relatively low.

New enhanced plans from companies such as more2life will now provide the maximum drawdown lifetime mortgage facility. Therefore, should a retiree require only a small initial lump sum, but require as much as possible over the longer term, then products such as the more2life enhanced plan could be the solution. The underlying decision to go for a maximum equity release maybe to enjoy oneself before health deteriorates further. Once it does, holidays, new cars etc may not be on the list of priorities for the future.

 

Enhanced lifetime mortgage criteria

Enhanced equity release schemes are designed for individuals over the age of 55 years. As people live for longer, it is important to tailor equity release schemes to meet changing demands. As such, an enhanced equity release plan is designed for those who have certain lifestyle requirements due to long standing health conditions – from relatively minor conditions such as excessive smoking, early retirement due to ill health to serious illnesses like cancer & heart attack.

 

Lenders take several factors into consideration while working out the size of the loan. Underwriters calculate the amount that the lender can afford to lend, depending on the individual case and the answers to the health & lifestyle questionnaire. By taking into account the health condition or impairment, how this affects the client’s life expectancy, the lender can increase the amount loaned compared to a regular annuity or equity release scheme. An enhanced equity release plan could allow customers to borrow as much as 15% more than a regular home equity release loan. This can be a significant increase for many people who require the additional income or capital to cope with their day to day needs.

 

Who provides enhanced equity release schemes?

The three main providers of this type of equity release mortgages are currently Aviva, More2life and Partnership. If you are looking to maximise borrowing and suffer from health impairment, however minor, you could benefit from an enhanced equity release plan. A wide range of health conditions are considered for this type of equity release, to see if you qualify consult a financial adviser who can work out whether this is a viable option for you.

 

 

Independent equity release experts such as Equity Release Supermarket can study your case in detail and give objective advice. Using the enhanced equity release calculator  on the website will advise how much you can potentially release.

To receive further information or advice on enhanced lifetime mortgage schemes, call Equity Release Supermarket on 0800 678 5159 or email mark@equityreleasesupermarket.co.uk

 

Equity Release Schemes – Do The Sums Actually Add Up?

Wednesday, February 16th, 2011

The main concern of equity release schemes is the reduced inheritance which is passed down to beneficiaries. Here we discuss the pro’s & con’s of roll-up equity release plans.

 

First, let’s look at the effect on the beneficiaries & the source of the causes for concern. This then leads us to the equity release calculator with facts & figures showing how these schemes fair for the beneficiaries on final redemption of the plan.

 

Ok, we’ve have all heard the saying; bad news travels faster than good news & this is synonymous with terminology ‘equity release’.

Although equity release plans were initiated in 1965, the news damaging these schemes generally dates back to the late 1980’s when the first home income plans were launched.

Linked to an annuities or regular income investment bonds & an interest only mortgage, plans such as these were destined to fail, relying heavily on investment performance in a period of falling property values & rapidly rising interest rates.

 

The mid 90’s then introduced the much derided & chastened Shared Appreciation Mortgages (SAM’s), the focus of most causes for campaigns against equity release including Trevor MacDonald’s Tonight TV programme.

Therefore, its no wonder the industries reputation was soured.

 

So what has the equity release industry done about repairing this negative sentiment?

At the time of the SAM’s debacle, SHIP (Safe Home Income Plans) was launched. Formed from its originators – Ecclesiastical Life, Hodge Equity Release, Home & Capital Trust & GE Life all members agreed to abide by a strict code of conduct, which still exists today.

Soon new lenders entered the equity release market, with household names such as Norwich Union & Northern Rock with their newly developed roll-up equity release schemes bringing a significant boost & trust to the industry.

Although equity release schemes began to blossom around 2003 with approximately 25,000 equity release loans completed, a lack of regulation still overshadowed the equity release sector. The market was still somewhat bighted by the previous misdemeanours.

 

Thankfully, partial regulation was soon imposed on the equity release industry with lifetime mortgages coming under the auspices of the Financial Services Authority on 31st October 2004. Home reversions soon joined lifetime mortgage schemes & by 2007 full regulation & confidence was brought back to the equity release marketplace.

Therefore, the market has evolved & strived to restore pride; a far cry from the negative perceptions of decades ago.

 

So what does this all mean for today’s beneficiaries?

The main ‘clean up act’ came with the introduction of SHIP & its rules imposed on the members. The ‘no negative equity guarantee’ affords the greatest level of protection the industry has to offer.

Safe in the knowledge that any amount borrowed by their parents can never escalate to more than the eventual sale price of the property, they are at least guaranteed no debt can be passed onto themselves.

A crumb of comfort maybe, but certainly peace of mind for parents.

 

As an equity release adviser, encouragement must always be shown to involve the heirs to the estate. With their input & assurance, feelings can then be vented either for or against equity release being taken as for many this is a major financial proposition.

Again qualified advisers should play an important role in explaining the pro’s & con’s of equity release mortgages & convey these issues to all parties concerned.

 

What else does the equity release sector afford by way of protection?

Interest rates for home equity release schemes, albeit not the lowest ever, are still historically low. One positive feature of these schemes is the lifetime fixed rate on all equity release loans now.

 

So what is the benefit of this?

If you borrowed an amount of capital, with a fixed interest rate for life it enables you to calculate the exact future balance.

This is building further reassurance for potential equity release applicants.

We know the equity release balance escalates over the lifetime of the scheme; this is the nature of plans & should never be entered into unless this has been clearly explained. The effect of the interest compounding annually, approximately doubles the balance every 10-11 years, depending on interest rate charged by the equity release companies.

 

Sounds daunting? Well, let’s now look at the sums as promised earlier:

One of the lowest interest rates around at present would be the Aviva Lifetime Lump Sum scheme, which  currently has a fixed interest rate of 6.65% (6.9% APR) annual.

 

A male, aged 65 borrowing a lump sum of £25,000 on the 6.65% Aviva Lifestyle lump sum would know exactly what the future balance will be, even before taking out the equity release scheme. The Key Facts Illustration provided by the equity release adviser will confirm these figures & also the costs & additional features involved.

For instance, based on a release of £25,000 in this scenario would lead to a balance in 10 years of £47,594 & after 20 years would be £90,606.

This may seem expensive given only £25,000 was borrowed initially; however there are two factors that could still rule in the equity releases favour.
One common issue overlooked is the potential for property prices to increase. If so, & with 100% ownership of the house still retained the homeowner will fully benefit from any future escalation in the house price. This will then offset some of the compounding effect of the interest & mitigate its effect on the overall estate. Again, we are looking longer term & no guarantee can be given prices will go up; nevertheless historical data confirms they still have.

As a consequence, a rule of thumb is never to borrow anymore than required beyond the initial 12 months. Plans are now flexible enough with drawdown schemes being available that funds can even be drip fed over time as & when required.

Hence, by taking a lower initial amount would result in less interest being charged, meaning more inheritance passed to the beneficiaries.

 

 

The second factor affecting the balance accruing & is the main cause of equity release roll-up is purely down the fact that NO monthly payments are required. This helps retirees to have access to the equity tied up in their property & at the same time leave their budget unaffected.

Nevertheless, equity release schemes do have an increasing role in retirement planning for the over 55’s. Care must always be taken & never rushed into without discussion & involvement of third parties.

Advice should always be provided by an industry qualified equity release consultant. If so, & in the right circumstances equity release can provide a comfortable & enjoyable retirement.

 

Finally, hopefully lessons have been learned from the past & the industry can move forward, innovate & develop further over time.

 

To discuss any of these issues & with no obligation whatsoever, please contact the Equity Release Supermarket team on 0800 678 5159 or email mark@equityrelease supermarket.co.uk

 

 
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