National Transfer Money to Your Daughter Day -How later life borrowing can help children fly the nest
As house prices rise and wages staying relatively stagnant, it’s becoming increasingly difficult for first-time buyers to get onto the property ladder. Demand for housing is high but supply is relatively low. And with the logistics of sourcing materials becoming increasingly difficult – and expensive – we can only expect the situation to persist.
Although there are many high LTV mortgages available on the market that could help first-time buyers secure their first home, deposits can still take time to build. And that’s before you consider potential affordability issues. This is where the ‘Bank of Mum and Dad’ can help – but how?
Later life borrowing – options and benefits
A recent research report from The Family Building Society and the London School of Economics found that helping children or grandchildren onto the property ladder was the second largest driver of later life mortgages. But what options are available to later life borrowers? And what are the benefits and drawbacks of later life mortgages?
Most later life borrowing options allow your clients to take advantage of the equity they’ve built up in their home over the years. There are three main options:
- Retirement Interest Only (RIO) – A RIO mortgage involves only paying the interest of the mortgage and borrowing against the property. The amount owed will never increase and monthly payments may be lower than a traditional mortgage (as it’s only the interest that’s being paid). However, the money is borrowed against a property, so the customer’s equity in that property decreases – by how much depends on the amount borrowed.
- Lifetime mortgage – A lifetime mortgage is a form of equity release where a lump sum is released from the property tax-free. This type of mortgage allows the customer to choose whether they repay monthly, just the interest or nothing at all. The obvious benefit is the flexibility it provides, but if the borrower chooses not to pay anything, they’ll continually lose equity in their property. The loan and outstanding interest are fully repaid once they pass away or go into long-term care.
- Home Reversion Plan – A Home Reversion Plan is another type of equity release mortgage but is slightly different from a lifetime mortgage. The main difference is the customer is effectively ‘selling’ part of their property. This money can either be released to them in a lump sum or as monthly instalments. They still technically own the property but proceeds from any future sale will need to be appropriately split between the homeowner and the lender. The split is dependent on how much of the property is bought by the lender.
Risks of later life borrowing
While later life lending has its obvious benefits, including helping dependants get on the property ladder, it also has its risks. Having a steady income (i.e. from a pension) can be more difficult in later life so having the ability to make repayments could dwindle. The amount of money steadily and readily available to the borrower will ultimately determine the number of options available to them. Whatever they choose, brokers have a responsibility to ensure it is the most suitable and appropriate option for their client.
Find the best match for your client
Do you have a client who’s considering later life borrowing? If so, why not use SmartrCriteria? Our mortgage criteria search tool is tailor-made for busy advisers like you, to make your life easier. Today it’s faster, even more accurate, includes affordability checks, and connects you with a greater number of specialist lenders – including Bridging. We’ve also added a seamless link to our affordability calculator, SmartrFit, to support your research and help you give clients a clearer picture of their options upfront.