How to Save £70pm and Make Your Bank an Extra 10 Grand!

 

There can be no industry other than banking that is so patronising in the way it treats it customers. Utilities come fairly close, but in order to be thoroughly nannied, try applying for a mortgage. In the thirty odd years since I opened my first mortgage brokerage, now is probably the worst time to try and get a loan to buy a house. It is still possible, but the processes that are now in place make it an entirely unpleasant affair. I was talking to a mortgage broker friend, who is still practicing, and he said that the job was now akin to that of a doctor managing a patient through a difficult course of treatment rather than helping someone achieve the purchase of a house.

A few years ago the whole mortgage industry was subject to the Mortgage Market Review. A whole new set of rules from which lenders now have to comply. Many of the new rules were long overdue and welcome, such as stricter rules on the qualifications needed in order to arrange a mortgage. But, by far the most contentious area though is the way a lender assesses affordability when determining how much they are willing to lend you. And that is where the culture of patting you on the head, saying “there there, it’s for your own good that we have turned you down” is getting more than a few people a tad annoyed.

Nobody is saying that responsible borrowing shouldn’t be based on the ability to repay the loan, a responsible lender should take into account both the financial history and current commitments of the applicant. But this is where I start to see some blurred lines. A lender will ask for at least six months bank statements, I don’t have a problem here, it’s the right thing to do. However, I see a difference when the statements show a commitment to a car personal lease plan that is costing  £150 a month and is a contractual obligation which impacts on affordability because you can’t get out of it for a number of years, and the fact that the statement shows you spend £15 a week on a takeaway.

For as long as I can remember, people’s spending habits have changed when they take on a mortgage, and  things like the weekly takeaway are first in the firing line when a tighter budget is needed. If you factor in the reality of an applicant currently paying more in rent than the proposed monthly mortgage repayment, then you can see why there is frustration when a lender declines an application on the grounds of affordability.

Which brings me to the lenders own interpretation of affordability.

There has been a trend for first time buyers to move away from the traditional 25 year mortgage and take loans of 30 years, or even more. The obvious reason for this is the lower monthly cost, which, at one level would seem to satisfy the more stringent affordability costs. But, while achieving this, it actually costs a lot more in the long run. So just how should affordability be defined?

The new rules put some considerable weight on not only the affordability at the start of the loan, but affordability should interest rates go up, so reducing the monthly cost by extending the loan period will actually have the effect of making the monthly repayments affordable in the event of a rate rise. Interest rates are incredibly low at the moment, and should they go up to 5% they would still be historically low. But what an effect it will have on repayments. A quick look at the table below will show that a £170k mortgage over 25 years will cost £719 a month at 2% interest. If that were to go up to 5% then the monthly repayment would rise by over £250 to £982 per month. So what happens if the loan is 30 years instead of 25? Well, on the face of it the monthly cost at 2% is now £628 and a rise to 5% would make it £912. A noticeable saving indeed.

But wait a minute, look at the total amount you will actually pay back. At 2% interest the total you will repay over 25 years is £215716, but over 30 years it will be £226207. An extra £10491! At 5% interest you will pay an extra £33683!! So, here’s the conclusion. In order to save you money, you will pay a lot more, and it is perfectly within the guidelines set out regarding affordability. In short, the current trend toward longer mortgage terms seems to be saying that the extra £10K which you will pay is more affordable than the extra £70 per month it would cost you to stay at 25 years.

Interest RateMonthly Repayment
25 years
Monthly Repayment
30 years
Total Repayable after 25 yearsTotal Repayable after 30 years
2%719628215716226207
3%802716240775258020
4%890811267187292177
5%982912294850328533
6%10781019323656366922

 

Please treat the above table a guide, it’s a good guide, but in reality the exact figures will vary slightly according to an individual lender’s application of interest rates.

Should you be told what to do with your own money?

Anyone who has read any of my blogs should have got the idea by now that I am passionate about people making decisions about their money based on asking the right questions and getting the right information. Last week I posted the picture shown below on twitter as a way of encouraging people to read a series of blogs on Equity Release. The response was amazing, with more views than I have ever seen before and a number of comments that kindly indicated that people found them useful. The picture below though did open a train of thought that I hadn’t expected. As you can see, the first thing written on it is the phrase “For the right person”. This obviously was a bit obscure to a couple of people who questioned the use of Equity Release for the purposes subsequently listed. had I not put “For the right person” in the picture, then I would probably had some sympathy with the argument. But I did, so there is no sympathy! However, it did raise the idea of just what you should be allowed to do with your own money?

 

In a blanket reply someone dismissed all the suggestions on the list as not being appropriate as a reason for taking an Equity Release plan. If you haven’t read my blogs on Equity Release, it may be a good idea to have a quick look here for an idea about just what they are. Dismissing anything in such a way is obviously just as daft as saying it is a brilliant idea for everyone, but a more fundamental question goes along the lines of “If I own a house and I meet the criteria to take an Equity Release plan, who’s business is it but mine what I use the money for?”

When I was actively involved in arranging these plans, the application always asked what the money was to be used for. I never had a problem with the provider questioning the answer or turning the application down because they didn’t approve of the purpose. I’d like to think this was because a serious discussion, including all the consequences of taking the plan, were talked through thoroughly first.

More than most products, an Equity Release plan is personal. Sometimes the reasons for taking one out are obvious. Take the “Home improvements” idea and look at it from two extremes. A couple in their seventies have mobility problems, and they are set to become worse. With no other means available to them an Equity Release plan will provide the funds to install rails around the house, fit a stairlift and turn a bathroom into a wetroom. All of these things will improve their quality of life many fold. The next situation involves a couple of the same age, no health issues and a life long obsession with steam trains. After years of planning they have finally decided to convert their loft into a model railway, complete with purpose built access to the loft and only the best quality scenery and engines. It may be that those who feel that Equity Release should only be used for “proper” reasons would approve of the first couple but not so the second. But why?

Far beyond the debate about whether a model railway is a good use of money is the more disturbing question about who has the right to tell someone what to do with their own money? Do these people who disapprove of model railways confront BMW drivers because the car is on finance and the owner should have bought a cheaper vehicle that could be bought outright. I might actually have some sympathy with that argument, however – it’s none of my business!

The fact is that everybody’s circumstances are different as are their needs and aspirations. If you are thinking of taking an Equity Release plan then what you want the money for is important, but it’s important to you-no one else!

What Is An Equity Release Plan?

 

 

1. What Are The Different Types Of Equity Release?

The most common type is a “Lifetime Mortgage” which is a loan secured against the property, but unlike standard mortgages, the loan typically does not have to be repaid until the borrower dies or moves into permanent long term residential care. The original loan plus interest which has been added during the term of the loan is then repaid from the sale of the property. There are several variations of this style of Equity Release that can allow further borrowing or monthly repayments during the life of the loan.

A different type of Equity Release is the “Home Reversion Scheme”. This type of scheme involves actually selling all or part of the property to the scheme provider. The person taking out the scheme is then given the right to continue living in the property for the rest of their life. This blog will only look at the Lifetime Mortgage style of plan as it is by far the most popular.

Video courtesy of Dennis Perry at The Right Equity Release.

2. What Age Can You Do Equity Release?

Typically, these plans are available to people age 55 and above. If you are entering the arrangement as a couple then the youngest must be 55 or above. The amount you can borrow is shown as a percentage of the value of the house. Each plan provider is slightly different, but the basic concept is that the percentage you can borrow increases as you get older. Such plans are designed to be repaid on death, or taking permanent residence in a care home. With this in mind, someone entering an Equity Release arrangement at age 55 should understand that if they live to 100, then the plan will last or 45 years. Something to think about considering the mortgage that was probably used to but the property in the first place was over a 25 year term!

3. Are all Properties Eligible For Equity Release?

No.

Okay, I’ll expand on that a bit more. Not all properties are eligible as security for these plans. Here are the most common rules that apply as of now:

  •  The property must be owned by you and be in the UK. This property must be your main residence and occupied by you. If you are a couple, but the property is in just one name, then it will need to be transferred into both names before proceeding
  • If the property is leasehold, then the remaining term of the lease must be over a certain number of years. Different providers have different rules.
  • Just like any mortgage, the proposed lender will have their own criteria regarding the construction, age and minimum value for the property. If you have a 400 year old, cob built house worth £80,000, you are going to find that the market is somewhat smaller than if you have a 50 year old standard built property worth £300,000.
  • You will need to use the money you borrow or “release” to pay off any existing mortgage or loan secured on the property immediately. You are then free to use whatever money is left over for your other financial needs.
  • Your property must be in a reasonable condition.

4. Are Equity Release Plans regulated?

Yes.

Advisers for this product have to be qualified, and in addition to taking exams they have to show that their knowledge is up to date and of a certain standard. Like all mortgage related products, equity release products, providers and advisers are regulated by The Financial Conduct Authority (FCA).

In the FCA’s own words, taken from its own website, a purpose of the FCA is to ensure that “Financial markets need to be honest, fair and effective so that consumers get a fair deal”. In the event of any complaint you may have, it is the FCA you can turn to for help if you are unable to reach a satisfactory conclusion with the company you are in dispute with.

Although not a regulator, The Equity Release Council represents over 300 firms and individuals working within the equity release sector. These include providers, advisers, solicitors and intermediaries amongst others. Members of the ERC agree to a Statement of Principles which highlight a number of safeguards for consumers.

You are well advised to seek out the best qualified and experienced people to help you make your decision!

Next: Why Take An Equity Release Plan? 

Got A Question About Equity Release?

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