Playing the equity cardPosted on: 11 March 2015 by Steve Wanless
Steve Wanless looks at the fallout of the Mortgage Market Review and how it has drastically reduced the home-owning pensioners’ options.
The ‘baby boomers’ are sitting pretty, property-wise. Some have lived in the same house for over quarter of a century and seen its value rise many times, and that increase is all tax free.
That’s not quite true. There is tax to pay in the form on Inheritance Tax (IHT) and the success of that property investment can come back to bite their children and grandchildren.
IHT is paid at 40% over the threshold of £325,000 (effectively £625,000 for married couples) and that might be less than the value of the house itself.
Another more pressing problem had been the introduction of the Mortgage Market Review (MMR) last April, which has drastically reduced the home-owning pensioners’ options.
With mortgage rates at record lows and many enjoying fixed-rates deals that are portable, it should be the perfect time for these oldies to downside (as has been requested to free up the housing shortage) This will release equity to help others getting on the property ladder and, hopefully, reduce the Treasury’s take when it comes to IHT.
It seems a simple, sensible plan, with no losers, other than the exchequer! Unfortunately, the MMR and the mortgage lenders are combining to create a major obstacle where there should be none!
This potential problem was something the lenders brought to the attention of the Financial Conduct Authority while the MMR rules were being drawn up.
With stricter regulations and tests, there was the potential to create mortgage “prisoners” – those homeowners with long-term mortgages or perhaps fixed-rate deals that would switch to the variable rate after two or five years. Also those with perfect credit records, plenty of equity, with substantial assets, perhaps living on a pensions who might want to “port” their mortgage to another property.
It was unlikely these people would satisfy the new “affordability” rules, especially as the MMR decided not to recommend that selling “the property” was an acceptable way of repaying the mortgage loan. It makes very little sense to have all your money tied up in one investment, the home, but this is what the MMR seems likely to achieve.
Now, many of these loans are interest-only and there is understandable concern that some owners have not put plans in place – ISAs, pensions, shares and other savings to repay the mortgage loan. They will answer that it was always the intention to sell the property to clear the debt.
Eventually, to prevent the above problems, the FCA came up with a “transitional” period, which meant that existing customers would not be subject to the new “affordability” tests.
Unfortunately, lenders are applying the new strict rules, even when the existing borrower is downsizing, reducing the loan and the monthly payments. Customers have a mortgage that will run its term, provided they stay where they are.
It gets worse; even if they find them a new lender that is more accommodating, the older lender will impose an early repayment charge (ERC) if they are still in the fixed period of their loan.
According to your current lender, you don’t have a mortgage when you are trying to move – but you do have one if you want to change to another lender!
Even the FCA thinks this unfair. It said: “There is no requirement for lenders to apply the affordability rules when a borrower is simply porting their mortgage and not borrowing any more.”
But, apparently it is hard for the FCA to enforce this. The FCA’s rules say lenders can ban porting if the change in affordability has a “material impact”.
This is gobbledygook! The FCA statement is clear - the affordability rules don’t apply for existing customers when porting with no new borrowing.
One of the major problems with the FCA’s “affordability” rules is the almost total emphasis on the applicant’s spending and commitments – and very little on their assets and overall financial position.
The FCA has said it will review the MMR next year, but it’s clear that action is needed now. The FCA could start by issuing a directive to all lenders, emphasizing the transitional period for existing customers – and fining them – as well as “naming and shaming” - if they ignore it.
Small wonder Independent Financial Advisers (IFAs) have been inundated by confused clients who are desperate to find a way out of this mortgage “prison.”
These new rules have also had an impact on housing construction. The Office for National Statistics (ONS) blamed reduced orders on the introduction of these tougher lending rules.
It has meant that the only place for elder homeowners to turn to is equity release, where the interest rates are around 6% - several times what is available on the mortgage market.
Last year equity release totaled £1.4 billion, according to the Equity Release Council, which was 29% up from 2013.
A recent article showed that Marie Brace, who had taken out a £81,000 equity loan 13 years ago, now has a current debt of over £300,000.
Equity loans look attractive; customers can continue living in their homes and there is no interest to pay. Unfortunately, as a rough guide, the loan doubles every ten years. That doesn’t sound too bad until you realize that £100,000 borrowed when you’re 65 years old, will reach £400,000 when you are 85!
Equity release did have a bad name, but it is better regulated now. Some plans allow you to repay the interest, so that the original debt doesn’t grow. That makes more sense, and will probably be much appreciated by your heirs!
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