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Dispelling 5 Myths about Equity Release

The popularity of equity release has grown significantly in recent years and for good reasons.  It has changed in recent years is proving to be a financial solution for many people so industry experts suggest it will continue to grow. However, despite the appeal to some, there continues to be misconceptions amongst the public around how equity release works. Not realising changes have taken place, many people do not give equity release any consideration even though it could prove to be a beneficial option for them to either boost their retirement funds, be a solution to a debt or home improvement issue or just provide the funds they are looking for.

Before we explore these myths, it’s worth explaining what equity release is.

Equity Release is only aimed at those aged over 55’s and, in simple terms, allows them to release money or ‘equity’ from their home without having to move. There are 2 types of products that allow this:

Lifetime Mortgages – a tax-free amount secured against your home similar to a generic mortgage with interest being added to the debt if you choose not to pay it.  Payments can be made if required but they do not have to be in which case the loan will increase over time.

Home Reversion Plan – where you sell part or all of your home in retain for a tax-free lump sum.  These are less common option but they can allow you to release more than you would with a lifetime mortgage.

Myth 1: I’ll have to give away ownership of my home

As stated above, the most common form of equity release is a lifetime mortgage. It works in a similar way to a generic mortgage in that a charge is placed on the property, but you will retain ownership of the property for as long as you live there. This is due to the ‘loan’ not becoming repayable until death or when you vacate the property (sell or go into care). No monthly payments towards a Lifetime Mortgage are necessary but they can be made either partially or in full on some mortgage if required. Doing so ensures a higher proportion of a property’s equity is retained.

Home Reversion Plans are very different and do involve selling part or all of your home. The percentage released remains constant no matter what the property’s future value is when it is eventually vacated. The main reason people may opt for Home Reversion is because they can sometimes release a required higher amount than a Lifetime Mortgage. Even in this case, you can remain in the property until death or when you sell or go into long term care.  You always retain the initial portion/percentage of the property not sold to the lender.

Myth 2: The interest rates are very high

Yes, interest rates are generally higher than some residential products but they at the time of writing (Sept 2019) they are lower than we’ve ever seen. With more lenders entering the market and higher demand, rates in recent times have been continuously dropping and can be obtained as low as 3.50%. They are often fixed for the life of the mortgage too so unaffected by future external factors such as Bank of England base rate changes. In fact, in light of the lower rates, it’s very worthwhile reviewing any existing Lifetime Mortgage as we have often been able to switch an old one to a new one with a much lower rate!

Myth 3: I’ll owe more than the value of my home

To adhere to the Equity Release Council (ERC) Statement of Principles, all members most offer a ‘No Negative Equity Guarantee’. This means that neither you nor your beneficiaries will have to repay more than your property is worth upon death or moving into long term care.

Myth 4: I can’t make repayments on a Lifetime Mortgage

As stated in Myth 1, many lenders have useful flexible features on their products which include allowing you to make full or partial interest payments every month. The benefit of this is the initial debt will remain lower throughout the course of the loan allowing either further withdrawals later and/or providing beneficiaries with some inheritance.

Myth 5: I can’t use Equity Release for a purchase

Lenders always allow Equity Release products to be used to purchase a new property providing the property meets their lending criteria. In addition, you can move your existing equity release loan on your property to a new one if you move, again providing it fits within the lenders’ requirements.

If you are considering equity release as an option to help you fund your retirement, it’s important you speak to a specialist adviser and involve your loved ones when making your decision.

At PF Financial we offer a FREE guidance and advice service and are available for home visits at your request. Why not give us a call?

Learn more about our Equity Release services here

Or contact us directly on 01494 778899 or via email: info@pffinancial.co.uk

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Is Equity Release the Solution for Interest Only Customers?

With the use of equity release surpassing 3 billion in 2017, an increase of 120% since 2016, could equity release really be the solution in helping an estimated 1.7 million mortgage customers pay off their interest-only mortgages? This issue is particularly worrying considering 200,000 of these customers have their loan maturing within 2 years, and many are in their 60s, 70s and above.

With interest only mortgages, the borrower agrees to pay the interest each month but makes no capital repayments. Borrowers are expected to have some sort of repayment vehicle in place, whether that be an investment, lump sum or endowment. However, the shortfalls produced from these vehicles can be attributed to mis-selling, poor performance and in other cases borrowers just simply never setting anything up.

What are the options?

Many could be considering the recently introduced products from mortgage lenders such as Hodge Lifetime, offering lending into retirement; but this will only go so far with affordability assessments still being required along with provable repayment plans and minimum equity requirements. Similarly, lack of pension planning has resulted in small pension pots, declining annual pension income and 1 in 8 retirees in 2018 retiring with no private pension at all! Therefore, with consumers facing retirement with high mortgages; how will they fund these when their income is low and affordability checks are still taking place?

With this lack of pension provision, the alternative is to downsize. However, a recent survey carried out by L&G signified that poor housing and inflated house prices have resulted in over 50% of over 65s stating they would not consider downsizing an option. This poses the question that if they can’t afford to sustain the mortgage and don’t intend to downsize, what other options do they have?

Property prices have increased five-fold in the past 25 years so many people have the majority of their wealth tied up in their homes. It comes as no surprise then that the public want to access this cash without having to downsize

Could Equity Release be the answer?

On one hand, equity release or more specifically lifetime mortgages operate differently to generic mortgages. In most cases, monthly repayments aren’t required (but are an option) and therefore income multiples aren’t taken into account when determining the loan size. Instead, interest is rolled up with the initial borrowing that is calculated based on the age and health of the applicant, and the property value.

Equity release also doesn’t require downsizing. As previously mentioned, the interest is added to the initial borrowing which although increases the debt, does provides peace of mind that you don’t have to move to a smaller or cheaper property. Most lenders include a ‘no negative equity guarantee’ on their lifetime mortgages and this ensures that the roll up of debt does not exceed the property value; but the added interest will eat into the equity and reduce the potential inheritance for the beneficiaries.

 

However, borrowers may be able to build in an ‘Inheritance Protection’ on a lifetime mortgage which will provide a useful benefit to those wishing to avoid repayments and still provide some inheritance to their beneficiaries. Although the initial lump sum will be reduced, this proves beneficial to those wishing to leave a percentage of the property to their loved ones.

Equity release products are available for the older generation – the minimum age is usually 55 or 60 with big player providers such as Aviva or Legal and General. At the lower end of this age group lender will release approximately 35% of the property value so it’s worth bearing in mind, if your conventional mortgage is operating at a high loan to value ratio (LTV), then equity release may not work for you

What Interest rate can you expect to be charged?

Interest rates on equity release products have always been higher then generic mortgage rates, but the growth in the market has led to intensified competition leading to rates being available under 4% (as at September 2018). Considering no payment is required, this is highly competitive and under most conventional mortgage lenders Standard Variable Rate (SVR).  Halifax, for example, are the part of the largest lender in the country and their SVR is currently 4.24%.

Equity release will not be the right option for everyone, but it may be worthy of consideration for many older customers, particularly those on low incomes who face losing their homes if they cannot find a way of paying back their interest-only mortgages.

At PF Financial we have continued to grow and develop our understanding of this ever-growing market. We are graduate members of the Later Life Academy so have an excellent understanding of the requirements of older clients. As independent advisers we will ensure you fully understand all your options relating to equity release, so you can make an informed decision on whether it can help you.  Please contact us for a free, no obligation initial discussion.

Learn more about our Equity Release services here

Or contact us directly on 01494 778899 or via email: info@pffinancial.co.uk

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Is an Offset Mortgage right for me?

If you usually have a reasonable amount of cash sitting in a savings account earning a low interest rate but have an outstanding mortgage balance, then an Offset mortgage could be right for you! An Offset mortgage links your mortgage account to a savings account and offsets – hence the name- the balance of one against the other. For example, if you have a £300,000 mortgage and generally around £70,000 in savings, you would only pay mortgage interest on the net debt, so £230,000.

So why would you do this? Some people would argue you should just make a lump sum payment of the mortgage and granted, this is an option.  The problem is, you would lose access to your savings which you may require either for a future plan or just to provide security.  Whatever the reason, an Offset means you retain that access and are able to make use of your savings.

Flexibility is a key benefit to the Offset. As well as being able to withdraw and deposit funds if and when required, it gives you peace of mind that should you need emergency funds relatively fast, you have total access to your savings without any penalty.

Moreover, Offset mortgages can also be utilised as an efficient way of making tax savings. Even with the new introduction of the savings allowance, interest earned on savings accounts with higher balances is still taxed; however, by offsetting you effectively remove all tax implications. In most instances, the interest you are charged on your mortgage will be higher then what you can earn in a normal savings account. Therefore, you will be better off as you would be making a tax-free saving at the higher mortgage rate. In addition, for higher rate taxpayers, it works especially well, as the savings made on the mortgage will not be tax deductible.

Why doesn’t everyone do it then? Well, a slight drawback of an Offset is that the mortgage interest rate can be slightly higher than some mainstream products. Therefore, if you don’t have much savings to put in the offset, it might not be the most cost-effective use of your money. However, for those with a decent sum of money in savings who want to retain access to it, I would suggest optimising an offset facility if you have 20% of more of the mortgage balance in savings.

If you are think an Offset mortgage might be right for you, it is important to contact a broker who can talk you through all your options and ensure you find the best possible deal. Give us a call on 01494 778899, email us at info@pffinancial.co.uk or use the link below to get in touch.

Learn more about our mortgage services here

Or contact us directly on 01494 778899 or via email: info@pffinancial.co.uk

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Brexit vs Mortgage Rates

Unsurprisingly, one of the questions we’ve been asked the most over the last few months is

What will happen to mortgage rates post-Brexit?

Like everyone else, we can’t give definitive answers, but we can give you an idea of what we think is likely based on our years of experience as mortgage brokers and analysing the housing market.

Remember though, that everyone’s circumstances are different, so if you want a free chat about your own personal situation, just give us a call or chat online.

Interest rates:  Will they rise? 

Last November was a bit of a shock for many homeowners when interest rates rose for the first time in a decade. Well, we may all be in for a shock again. Just last month, Mark Carney, Governor of the Bank of England said that an interest rate rise is ‘likely’ this year, but any increases will be gradual. Many experts believe that there will be a 0.25% rate rise later this month, although Carney has said it’s by no means a foregone conclusion. Watch this space.

So, what does this mean for mortgage rates? 

Mortgage rates are now at the lowest we have ever seen them, with some deals below 1%.  Given interest rates could be on the rise, now would be a good time to fix your rates and lock in your monthly repayments.  Some 5 year deals are extremely low, so it would probably be worth taking advantage of them to avoid any future rate rises from Brexit. We don’t know for sure if mortgage rates will go up, but if you can give yourself peace-of-mind for the next 5 years and you won’t be moving property, why wouldn’t you?

What’s going to happen to house prices? Should I buy or put my plans on hold?

We’ve all heard the horror stories of buyers pulling out because they are worried about the “Brexit Effect”, but have they got the right idea? We’re not so sure.

While it’s true that the annual rate of house price growth is at its lowest level for almost five years [Halifax], and house prices in London have fallen by as much as 15% over the past year [Your Move], other areas of the country, especially the North West are flourishing. And even though house prices across Buckinghamshire, Hertfordshire, Berkshire and Bedfordshire are experiencing some of the slowest growth in the country, experts believe that prices won’t go down, but will either stop going up in 2018, or go up by no more than 1%.

For most homeowners, house prices are relevant to each other so if the one you are selling loses a little of its value, so has the one you are buying.  Falling prices may have more of an effect on first-time buyers than any other purchaser and they could be in danger of losing money if prices fall.  But we think buying your own home is more of a lifestyle choice than an investment choice so, if you want or need to buy, then we suggest you should.  In fact, the way house price growth has slowed, could work in your favour as it might make sellers more willing to accept offers well under the asking price.  The good news for first-time buyers is that currently, if you buy a property for £300,000 or less, you won’t have to pay any stamp duty.

Brexit has been a bit of a shock for many and nobody can be 100% of its impact on the housing market and mortgage rates. If you would like to talk through your own personal situation, to get a clearer idea of how it might affect you, please give us a call. Most of our clients come from across the Northern Home Counties of Buckinghamshire, Hertfordshire, Bedfordshire and Berkshire but if you live further afield we are also more than happy to help.

Learn more about our mortgage services here

Or contact us directly on 01494 778899 or via email: info@pffinancial.co.uk