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Lenders begin stretching mortgage terms up to 40 years

Traditionally, mortgages would tend to last around 25 years, but the demand for longer deals has grown drastically. With people working and living longer, it comes as no surprise that there’s a higher demand for longer-term deals. Recent research has highlighted that 36% of first-time buyers now opt for a term 30 years and above compared to just 17% 10 years ago.

By taking the mortgage term over a longer period, you are in effect reducing your mortgage payments. This to some degree is beneficial since the longer the term, the easier it is to pass lenders affordability rules; but you will pay more interest in total as the loan will be in place for a longer period. Nevertheless, this option is particularly useful in parts of the country such as the Chilterns where house prices have remained high and homebuyers need to acquire larger loans.

The increased demand for long term deals can also be attributed to the slow growth in wages and increased standard of living. With more purchases being made later in life and families having to juggle multiple financial commitments, there is a real demand in borrowers wanting to stretch their terms to make their monthly payments more affordable along with borrowing later into life. It could also be said that many of the younger generations have a ‘buy now save later’ mentality which could be also attributed to why they’d rather stretch the mortgage term and spend elsewhere.

Research has also indicated that the average age of first-time buyers is rising, and this has led to home buyers wishing to take their mortgage over the age of 70 purely to meet affordability. It’s also been suggested that since the average age has risen, first-time buyers are driven to buying larger homes as opposed to buying starter homes or flats.

But is it a Good Idea?

This can work in one of two ways. By stretching the mortgage term borrowers are, in effect, reducing outgoings and this can make the qualification for a larger loan possible.

As previously stated, this does cost more. By extending the term you will pay more interest over the full term and less of the capital per month, for example:

A £250,000 mortgage over 25 years with an interest rate of 2% cost £1,059.64 per month which consists of paying roughly £640 in capital initially. In total, over the 25-year term, a borrower would pay £67,890 in interest.

However, if we extended the same loan over 40 years, payments would drop to a highly attractive £757.06 per month but only £340.39 is the initial capital reduction. The result is (assuming interest rates never change), in total, a borrower would pay £133,648 in interest nearly twice as much as the 25-year version.

It’s easy to understand why taking the longer-term option may be the best option for some but it’s best to know all the facts related to this choice before going ahead. Speak to one of our independent advisers as they can help you decide what term is the most suitable for your situation.

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

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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