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Essentially Mortgages Spring 2019

9th May 2019

LENDING MONEY TO YOUR FAMILY – HOW TO DO IT RIGHT

Rising property prices relative to incomes have made it increasingly hard for young adults to raise a deposit for their first home. Unsurprisingly, research shows that the Bank of Mum and Dad continues to be a major lender, supporting more people than ever. It’s estimated1 that 27% of all buyers in 2018 received help from friends or family, up from 25% in 2017.

Offering a helping hand

If you decide you want to help a family member afford a major purchase such as a home, you need to go about it in the right way. It’s important to ensure that you aren’t prejudicing your own financial security by giving or lending the money. Putting your interests first isn’t selfish, it’s common sense.

You will need to decide whether the money will be a loan or a gift, and you may need to consider getting advice on the tax consequences. Giving money away can have Inheritance Tax implications; a lump sum would be a potentially exempt transfer, as long as you survived seven years after making the gift. If you charge interest on a loan you make, the interest is liable for income tax.

If you lend the money, it’s important to put the details in writing, so there can be no disagreement regarding the terms at a later date. It also makes sense to draw up a schedule of repayments, or stipulate a trigger event, which could be when the property is sold.

Mortgage and pension options

Some parents become guarantors for their child’s mortgage, either by depositing cash or using their own home as security, or they can enter into a joint mortgage with their child. Others choose to gift part of their pension tax-free lump sum on retirement.

With property prices in many areas of the country having risen substantially over the last few years, many older home owners are choosing to release some of the equity they have built up in their property. The cash raised through equity release can be used by parents to give their children an early inheritance and help with the purchase of their own home. Interest on the sum raised is often allowed to accumulate, which may significantly reduce the amount inherited later.

If you’re considering providing financial help to family members, it’s a good idea to seek financial advice, so that the financial needs of all the parties involved are fully considered in finding the right solution.

1Legal & General, 2018

IF YOU DECIDE YOU WANT TO HELP A FAMILY MEMBER AFFORD A MAJOR PURCHASE SUCH AS A HOME, YOU NEED TO GO ABOUT IT IN THE RIGHT WAY.

EVEN SMALL MORTGAGE OVERPAYMENTS MAKE AN IMPACT

When you take out a mortgage, your lender calculates how much your monthly repayments need to be to ensure your mortgage is paid off at the end of the term. This is based on the interest rate, the number of years you are borrowing for, and the total amount you have borrowed.

The advantages

Making mortgage overpayments simply means that you pay more than the amount set by your lender. As the amount you overpay goes towards repaying the mortgage itself, not on any interest you owe, overpayments help you pay off your mortgage sooner, and can thereby reduce the amount of interest you pay over the course of your loan.

Research from Santander shows that if a borrower took out a £200,000 mortgage over a 25-year term, they could save £1,146 in interest (based on current rates) by making a monthly £10 overpayment, becoming mortgage-free four months earlier.

Those who can make a £100 overpayment each month on a £200,000 mortgage could save £9,948 in interest and reduce their mortgage term by three years in the process.

Those with a £500,000 mortgage making the same £100 overpayment could save over £10,000 in interest and become mortgage-free one year and five months earlier. The combination of paying off capital and consequent reduction in interest results in the time reduction, rather than the interest saving alone.

Rules may apply

You will need to check if your mortgage plan allows you to make overpayments. Some mortgages restrict the amount you can overpay to a percentage of the amount owed. If you’re paying your lender’s standard variable rate (SVR) you can usually overpay as much as you want. However, SVRs can be expensive, so you may want to consider remortgaging to a better rate instead.

MILLIONS RETIRE UNEXPECTEDLY EARLY – MAKE SURE YOU HAVE PLANS IN PLACE

Whilst many people look forward to the time when they can retire, for some people this decision is thrust upon them by circumstances outside their control. Recent research3 has shown that around 3.6 million people aged over 65 found themselves retiring earlier than they had planned because of an unexpected change in their lives. This is despite record numbers of those aged over 50, remaining in work.

In 25% of cases, retirement came as a result of illness, whilst redundancy was responsible for 21% leaving the workplace. Caring was mentioned too, with 10% of people giving up work because of the demands of caring for someone else. Roughly twice as many women (13%) found themselves having to retire early to care for family members compared to men (6%).

Putting plans in place

Sadly, ill-health, redundancy or the need to care for others can become a reality at any time and becomes more likely with age. So, although many people may well plan to work on past their state pension age, they may find that events overtake them.

This research underlines the need to put plans in place well ahead of retirement, to cover a range of possible scenarios. The survey data shows that only 26% of those who retired early did so because they had enough pension or savings to provide for their needs in retirement.

Taking holistic financial advice as early as possible will ensure that you don’t leave your pension planning too late and that you have the right protection plans in place to help you cope with unexpected events.

3Just Group, 2019

IN THIS ISSUE

CONCERN FOR CARERS WITHOUT PROTECTION POLICIES

The majority of care provided doesn’t come from the NHS or care homes, it comes in the form of unpaid assistance from relatives, friends and neighbours. Around seven million people act as carers for other people4, and the services they provide are estimated to be worth £132 billion a year and can come at the cost of a carer’s emotional and physical health. In a recent survey, 61% of carers said they suffered physical ill-health as a result of the help they provide to others.

Carers have little protection

Research5 shows that more than seven out of 10 of those who care for family members, or other people, do not have any protection policies in place. This could mean that those they look after might not receive the care they need if they were to fall ill themselves. Only about three in 10 of those who look after others have life insurance (28%), while just 12% – approximately 1.2 million – have critical illness cover.

If you need advice on choosing the right protection policy for your needs, do get in touch.

4Carers Trust
5Scottish Widows, 2018

SUBSIDENCE CLAIMS CONTINUE TO REACH NEW LEVELS

The long hot summer of 2018 has led to a huge rise in subsidence problems. The Association of British Insurers7have reported that claims quadrupled to the highest level in more than a decade. In just three months of 2018, over 10,000 households made subsidence claims worth a total of £64 million. This increase represents the highest quarter-on-quarter jump since records began more than 25 years ago.

Spotting the signs

Subsidence is often found in areas of the country where homes are built on clay soils. It occurs when there is a sudden sinking or downwards settling of the ground on which the property stands. Clay soils shrink in prolonged dry weather, putting strain on the structure of the property, causing cracks to appear.

Not all cracks are due to subsidence, but cracks caused by subsidence tend to be more than 3mm wide, diagonal, wider at the top than the bottom, and found around doors and windows.

If you’ve noticed cracks appearing and are concerned that your property might be experiencing subsidence, contact your insurer for assistance.

7ABI, 2018

It is important to take professional advice before making any decision relating to your personal finances. Information within this document is based on our current understanding and can be subject to change without notice and the accuracy and completeness of the information cannot be guaranteed. It does not provide individual tailored investment advice and is for guidance only. Some rules may vary in different parts of the UK.
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