Landlords, Will Your Later Life Cost You Everything
So many landlords have invested in property for their retirement, but what happens when you get to retirement?
Bricks and mortar are a solid investment, right? Whatever happens in this topsy-turvy world, a property portfolio is always going to stand you in good stead. Sure, it may fluctuate a little bit, but ultimately, it’s all good.
So, when you’ve invested your hard-earned cash in such a rock-solid base, you need to think long term.
On the Mashroom Landlord Community Facebook there’s always plenty of landlords discussing their plans for the future (often a long time in the future, but in this case it’s good to be well prepared)! With this in mind, we thought it was high time we tackled the issue head on and set about uncovering the best later life planning tips to ease the burden further down the line.
In this episode:
- We caught up with Steve Humpries, proposition director at Mortgage Advice Bureau, who shares his views on why mortgage management can provide perfect pension preparation
- The pitfalls of interest only mortgages, and how failing to plan properly could see your profits (and pension fund) nibbled away
- Equity release, and why investigating this option may help free up cash without shaking the foundations of your finances
How can your property portfolio help fund your later life?
When it comes to the how, having proper planning in place early on is incredibly important, as Steve explains:
You know, there are a whole number of factors which have contributed to essentially the older generation having to borrow more money later in life.
‘If you wind the clock back to our parents and our grandparents generation, you would see that generation got to retirement and had their mortgage paid off, their property unencumbered, no loans, no debts, no credit cards. They would live off their pension or state pension as best they could. Times are so different now. If you look at the last 40, 50 or 60 years, we haven’t mentioned the lack of pension funding, the cost of living in the UK (especially at the moment)!’
It is now more expensive to live in the UK than it has ever been and that means that people need more money to live on in retirement than previous generations. People haven’t got enough money coming out of pensions that they thought they would have, a basic state pension is effectively not keeping up the same rate as inflation.
Steve went on: ‘Additionally, people want to do more things in retirement, they want to be more active. They want to go out and spend time with friends. They want to go on holidays. They want to buy nice cars and do nice things for their property. Look at property prices in the UK which are going through the roof, the property prices over the last 30 years in the UK have just gone crazy’.
With the prices of property and the potential profits available, you could have a VERY luxurious retirement if you were to sell your properties and use the profits on holidays and home improvements!
What people now want to do as well is help get their grandchildren and their children on to the property ladder as well.
‘The only way they can do that is by utilising the equity in their property to essentially help the younger generations. You look at house prices in London for example. I wouldn’t want to be a young person now trying to jump up the ladder there!
‘What many parents and grandparents are now doing is releasing equity from their property to help the kids get on the property ladder, or at least if they want to move home, reducing the loan to value of that mortgage’.
The Bank of Mum and Dad
Ah, the notorious Bank of Mum and Dad (or Nan and Grandad). With that in mind, is there a rise in the older generation looking to access mortgage products?
‘Absolutely. The over-50s in the UK are seeking mortgages now much more than ever before. And the good news is that there are so many more products and lenders out there now that are realising this ‘later life’ sector of the market is needing to borrow money, and they’re adapting quite well,’ explained Steve. ‘We know there are so many more products available now than there ever were before, so it’s making that journey for customers a lot easier’.
There’s been lots of news around landlords leaving the sector, but in your opinion, with one eye on later life planning, is property still as safe as houses when it comes to making an investment?
If you’re looking into long-term investment, property will always be a great investment option. For individuals, if you’re looking for a short-term investment opportunity, probably not. Most landlords will know that.
‘The caveat to that is what is the long-term strategy for investing in property? Is it via lending – having some kind of mortgage on the property, whether to buy-to-let mortgage or anything else – and having a strategy around that mortgage. You must make sure you pay it off or sell the property at the end of the mortgage term, that’s really important’.
‘If you’re not good at doing this yourself, always seek really good mortgage advice with a good broker or a good financial advisor – they can help you look at that longer term strategy. The last thing you want to do is get to the end of that mortgage term, have an interest only mortgage when the capital still needs repaying and have no way of doing it. That’s a really big problem in this country’.
And that is a really big problem isn’t it? There’s about half a million of those cases coming up in the next few years.
‘Yes. So up to 2030, according to data from your Financial Conduct Authority, there’s around 50 to 60 thousand interest only mortgages coming to an end every year where the customer has no way to pay the capital on the asset.’
‘That comes to a head in 2032, when there’s around 79,000 mortgages coming to an end, and the customer, on paper, has no way of repaying the capital element. What are they going to do? They are going to have a capital amount of that mortgage that’s repayable, and their options are limited.’
‘The main option, for landlords especially, is to sell the property, use the equity to pay off the capital and hope that there’s some left over that will become their profit. A lot of landlords use property investment as their pension, but it’s only a viable pension fund if there’s a profit left over by the time you’ve paid the capital element back to the lender.’
Can landlords utilise equity release?
Lots of people are investigating equity release as a means of freeing up capital from their portfolios. Is it a safe option?
There are two types of equity release in the UK. One is the lifetime mortgage, one is a home reversion plan, and they are two very different products.
‘The most popular type is the lifetime mortgage, that is essentially a first charge residential mortgage secured on the property. Same as any other mortgage in the UK. The difference with a lifetime mortgage is that they are only available for customers that are 55 and over. What it means is that the customer can place a charge on the property, release equity from it, and within reason they can do what they want with that equity.’
‘They haven’t got to make any repayments to the lender at all, if they don’t want to. They can of course service the interest, they can make capital repayments, but they don’t have to. It works really well if someone is in some financial distress, they haven’t got a large monthly income but they’re asset rich and cash poor. There’s over two trillion pounds worth of assets sitting in property in the UK with the over 50s. I don’t even know how many zeros that is, but it’s a lot!’
‘Equity release is a really good option for customers who have a great asset but not a lot of income coming in. It gives you cash in your hand now. You should always seek advice around this sort of thing, because it’s not without its pitfalls, but it can be right for the right people. It’s absolutely an option’.
Home reversion plan
‘The other option, a home reversion plan is a little bit different’, explained Steve. ‘That’s where you actually sell a portion of your property now, but you can remain that property rent free for the rest of your life. But you are actually selling a portion of your property right now. It is a very small element of the equity release sector market. It’s probably 1% of all equity released in the UK is done this way, the other 99% lifetime mortgages.’
If you choose an equity release route, what happens at the end of the term? How is the debt cleared? Where does the property ultimately end up?
‘Throughout the rest of your life with a lifetime mortgage, there is a debt accruing on that mortgage. That debt will accrue at various rates depending on whether you are servicing the interest that’s applicable to that mortgage’.
‘You haven’t got to service it if you don’t want to. If you’re not servicing it, obviously, every year you’re paying interest on the interest that’s been accrued as well – the loan is growing quicker than it would be otherwise. And whether you’re also paying the capital payments over and above the interest if you want to as well’.
What happens to your property after you die?
It’s a morbid question, but what happens when you are no longer around to make the decisions on your property? What will happen to your property when you’ve died?
‘Upon your death, the property will be sold by the personal representatives of your estate, your executives, said Steve. ‘They will sell the property, or repay whatever amount is due on that lifetime mortgage back to the lender.’
‘Turn the clock back 20 years, some of these products didn’t have the best reputation, but it’s a totally different landscape now that everything is fully regulated. This means that the amount you owe on the lifetime mortgage can never be worth more than the property is worth. So if the house is worth £100,000, the loan will never be worth more than £100,000.’
So the people that inherit your estate will never be left with a whacking great bill to pay?
‘The lender is never going to come back to your estate, your personal representatives or your beneficiaries for more. You’re not loading debt onto them. So that works really well depending on what you want to do with your property on your death,’ stressed Steve. ‘But it’s more important to worry about what’s right for that customer, that person, right now. If their only option is to release equity because they’ve got no other way of living, it’s a good option’.
Can equity release help to expand your portfolio?
‘In some cases, yes, but not in all cases’, warned Steve. ‘You know, it’s a really difficult question to answer because there isn’t a carte blanche statement for it. I suppose the difficulty in saying yes, is that what lenders have got to be really concerned about is about the interest that the customers are being charged on that lifetime mortgage. Is it going to be higher or lower than the rental income, the investment return, that they’re going to get from the property? And that’s a really difficult one to answer. Because you can’t always say ‘yes, it will’ or ‘no, it won’t’. It’s a difficult question. So, yes, it’s possible, but not in all circumstances’.
‘What a lot of customers have done with us in the last few years, especially going through COVID and lockdown, was release equity from their property and use it to purchase holiday homes in Devon, Cornwall, Wales, Kent, because they just wanted to get away. I can’t say hand on heart it’s going to work every time, but it can be looked at and it can be done in some circumstances’.
‘This is a really long-term investment. It’s not a quick return. It does what it says on the tin – it is a lifetime mortgage. The beauty of a lifetime mortgage is that when you take one out, you’re going to get an interest rate applicable to that loan. It may be 5%, 6%, 7%, whatever the rates are at the time. That rate is fixed for the whole life of that mortgage, which is the length of your life’.
‘It is possible to re-mortgage a lifetime mortgage if rates do come down later on, same as any mortgage, but it’s a bit more difficult to do because of the interest rate that’s fixed, but it can be done’.
It’s clear that a lifetime mortgage probably isn’t for everyone, but there are clear benefits. Are there any major red flags that people should be aware of?
‘There’s a whole number of factors that decide whether it’s right for someone or not. Someone should always sit down with a really good financial adviser, a mortgage broker, a later life specialist to understand their own scenario’, explained Steve.
‘One of the biggest complications that we get when customers are looking at equity release is with family members. We don’t advise customers to release unless we know 110% for sure it’s the right thing to do, and we encourage customers to bring in any interested family members and parties to the meetings that we do with them, to make sure they’re all aware of what we’re doing and why we do it.’
‘In a situation where that doesn’t happen, the queries that we get from customers aren’t really from the customers because we explain everything fully, the questions we get are from the family members, their lawyers, their sisters who think we’ve done something untoward! So, make sure that family members are fully aware of what the situation is because they’re the ones that are expecting to receive this property as inheritance, and they’re probably not going to get it because the property is going to have to be sold to repay the lifetime mortgage.’
What about if you change your mind? Is there any going back once you’re signed up?
‘That’s one of the pitfalls. It is a long-term contract – once you’re in it, they’ll be very difficult to get out unless you’ve got a way of repaying back the loan to the lender with the associated interest,’ agreed Steve.
That and family upset are the two big pitfalls, but any good advisor should take the customer fully through that process. They understand the pros and the cons of any type of product.
We keep mentioning the term ‘later life’, and then the age range of mid-50s and above – certainly, mid-50s seems very young to be considered later life, but considering age, is there a point in which setting up a ‘later life’ planning is too late?
‘Anyone over the age of 50 in this sector is classed as a ’later life borrower’. I don’t like using the term later Iife borrow because I’m in that sector and I don’t class myself as being in later life!’ laughs Steve. ‘But it’s just a generic term given to you, and we are where we are, but it’s never too late’.
‘We deal with customers that are in their 50s and are looking to get a new mortgage and a new mortgage into retirement, and that person is classed as a later life borrower as far as a lender is concerned because you’re taking the mortgage into retirement. At the same time, we’ve dealt with customers that are in their 90s that are struggling financially and need some help. As we discussed earlier, plenty of people nowadays are asset rich and cash poor, they’ve got a property, no mortgage on it, unencumbered, but they can’t maintain the standard of living that they really want. It’s never too late to look at the products that are available now from lenders – they have really come up trumps with some really good innovative products.’
What sort of mortgage products are new to the market?
‘You’ve got standard first charge mortgages, which can now be taken up to and into retirement’, listed Steve.
‘You’ve also got a new product called a Retirement Interest Only Mortgage. This was brought out around five years ago to the industry. Again, it’s a first charge residential mortgage and is interest only so the customer does have to service the interest, but only the interest. There is no fixed term on that mortgage so the mortgage can go right up until your death, whether that’s 20 years, 30 years, 50 years. You service interest all the way up to your death and again, on someone’s death the property will get sold and the capital element of the mortgage will get repaid by your estate’.
‘Then as we said earlier, then mix into the lifetime mortgage. The difference for a lifetime mortgage is again it goes right up until the death but you don’t have to service interest if you don’t want to. If you don’t want to, you don’t have to make any repayments for lifetime mortgage. There are so many options available for later life borrowers now’.
It sounds like there is an option out there for everyone! With so many flexible solutions, could you use equity release on your property portfolio to clear debts in other areas, your main residential mortgage for example?
‘It’s not quite that simple, I’m afraid,’ said Steve. ‘Equity release is only available on your main residence, you can’t use it on other buy-to-lets. There are a lot of mortgages where you can do that, so you can release equity via other mortgages, but not using a lifetime mortgage I’m afraid, that’s only available on your main residence.’
What about doing it the other way round, freeing up capital on your main residence to clear debt on your buy-to-lets?
‘Debt consolidation is more than welcome in equity release land! laughed Steve. ‘There’s a lot of times when customers at the moment do use a lifetime mortgage for debt consolidation to pay off credit cards, loans, and existing mortgages. We mentioned earlier about interest only mortgages coming to an end with no repayment vehicle up until 2032. One of the options for anyone in their 50s, 60s, 70s and 80s is they get a letter from the bank saying ‘your interest only mortgage is coming to an end in the next 12 months. What are your plans for repaying it?’ A lot of people have no plans.’
Their main option would be to downsize the property to repay the loan and any equity leftover to purchase another property. But a lot of people don’t want to do that. So, using a lifetime mortgage to release equity in the property and repay the capital element of that interest only mortgage is becoming more and more popular.
‘For landlords, paying off buy-to-let mortgages on properties, if classed as debt consolidation, so they can absolutely use it to do that!’