"In the bad old days, it was often a home reversion plan that was sold (not advised), involving giving up ownership of some, or all, of the property in return for living there rent-free. When the borrower passed away, there was no inheritance left as they no longer owned the property"
- Andy Shaw - SPF Private Clients
More than half of all first-time buyers received financial assistance in getting on the housing ladder last year, suggesting that without help from parents (and grandparents) getting the requisite deposit together is an impossible task for most.
Research from estate agent Savills reveals that 173,500 first-time buyers received on average £55,572 in gifted funds, with the ‘Bank of Mum and Dad’ providing a total of £38.5 billion of assistance over the past four years.
“The research confirms what we have known for a while,” says Andy Shaw, head of later life lending at mortgage broker SPF Private Clients. “So much wealth is tied up in property, which is an illiquid asset. To access it and help children onto the property ladder, parents may wish to sell their home or take some form of mortgage against it. Given the older age profile of first-time buyers these days, parents are also that bit older and may find their options limited. A lifetime mortgage is an increasingly popular way of releasing equity to give to children.”
In addition, there may be an Inheritance Tax Benefit (IHT) if you live more than seven years after making the gift. “Gifting means you not only get to see the recipient enjoy your money, it may be a potentially exempt transfer with no IHT to pay after seven years,” Andy adds.
The changing face of equity release
Mention equity release to people, and many still recall the expensive products of the past, where interest was rolled up with no option to make payments, in some instances leaving the estate in negative equity, with the value of the loan eventually exceeding that of the property.
Thankfully, products have significantly improved since then. They are more flexible, can have short Early Repayment Charge (ERC) periods and give the option to make interest payments as standard. Early Repayment Charges are a charge levied by the mortgage lender on the customer in the event that the amount of the loan is repaid in full or in part before a date or event specified in the contract.
The protections afforded by the Equity Release Council are significant, with minimum standards to which all market participants must adhere, including a ‘no negative equity’ guarantee to avoid the situation where the loan exceeds the value of the home.
Lifetime mortgages are not home reversion plans
Andy explains: “In the bad old days, it was often a home reversion plan that was sold (not advised), involving giving up ownership of some, or all, of the property in return for living there rent-free. When the borrower passed away, there was no inheritance left as they no longer owned the property.
“A lifetime mortgage is very different in that full ownership of the property remains with the borrower. The lender has the first legal charge against the property, as is the case with a standard mortgage – there is no transfer of ownership. Also, no capital or interest payments are made, unless paid voluntarily by the borrower.”
How does a lifetime mortgage work?
The borrower takes out the mortgage, chooses whether to make interest payments or not, and when the house is sold, the lender gets its money back, with the balance going to the borrower or their estate.
As there is no obligation to make monthly payments, lenders don’t look at an affordability model; instead, the age of the borrower(s) and value of the property are considered. Lifetime mortgages are aimed at borrowers aged 55 and above, and where there are joint applicants, based on the age of the youngest borrower.
The lender calculates the maximum loan-to-value (LTV) it is prepared to advance; the older you are, the more you can borrow. There is no maximum age limit – the oldest borrower Andy has spoken to was 103. As with standard mortgages, the lower the LTV, the cheaper the rate.
Andy adds: “It is a balancing act between borrowing enough to meet your needs and driving the rate as low as possible.” The rate is fixed for life, giving certainty of cost alongside security of tenure.
Lifetime mortgages are portable, meaning in theory you can transfer them to your new property when downsizing.
Andy says: “When downsizing and porting a lifetime mortgage, the lender may require a partial repayment to keep the LTV at the same level as before. However, no ERC is applied, only legal costs and an admin fee.”
One issue that may arise with porting is the property itself. “A lender won’t let you port a lifetime mortgage to a property on a floodplain, for example, or you may have to repay it if you move to sheltered accommodation or a retirement village with diminished re-saleability,” Andy adds. “However, we can build downsizing protection into the product if moving is a likely possibility so that you avoid expensive ERCs.”
The ERCs themselves have significantly changed – historically, they were variable and applied for the duration of the loan. Now, most lenders offer straightforward percentage-based tapering ERCs over five to 15 years.
Andy says: “This means if you take a lifetime deal and rates are low in say, six years’ time, you may be able to remortgage to a cheaper product without paying a penalty, depending on the lender.
“We can build in further protections – for joint borrowers that might be a break clause with no ERCs on the first death or first move into care, when there is often a switch in perspective. The surviving spouse may decide to sell; this clause is generally active for three years from the first death or first move into care, giving the bereaved a year to grieve, a year to make plans and another year to carry them out. If, on the other hand, the survivor does not wish to move or repay the mortgage, it continues unaffected.”
Seek advice
With mortgage finance in later life, independent, specialist advice is vital. Family should be involved where possible, particularly beneficiaries, as well as tax advisers. “Our preferred approach is face-to-face advice, usually in the client’s home, and more than one in-person meeting. These are important decisions, so they need to be right,” says Andy.
As SPF is a whole-of-market mortgage broker, no lifetime mortgage lender is off-limits. Advisers can also provide a more holistic view than only recommending equity release, with all mortgage and non-mortgage alternatives considered.
“A client may come to us for a lifetime mortgage, but if there is a mainstream or other finance option that would suit them better, we can arrange that,” Andy adds.
