May 19th, 2014

The Financial Conduct Authority (FCA) has now implemented the Mortgage Market Review (MMR). In fact, the Financial Services Authority began the process in 2009 after the subprime mortgage debacle. The idea of the review is to reform the mortgage market to ensure avoidance of a worldwide disaster like that of 2007. For many first time homebuyers it is making it more difficult for them to secure the down payment and get onto the property ladder whether it is in London or not. The good news is that many retirees, over 55s, are in London and they have significant equity in their homes. This equity can be released to help their children with the down payment they require. There are different equity releases such as interest only lifetime mortgages, impaired equity release schemes and drawdown lifetime mortgages.

Help to Buy Scheme
Before children might take money from their parents, there is one option they can try and qualify for. Most children are starting out on the property ladder much later in life, which is why parents can already have reached 55 or more in age ensuring they can offer help with equity release. Yet, children may not wish their parents to enter into a product there is a lot of negative press about.

They may also wish to try and go it on their own. The government has set up the Help to Buy Scheme in which first time property buyers can buy an existing or new build home with just 5 per cent having been put down. The property can value at £600,000. While it can be nice to use the government scheme there are certain things that will make it more difficult. First, to qualify, one must still have the 5 per cent down payment. They must have the income to support the housing price and the loan for 95 per cent plus interest that accrues.

Parents with Equity Release
Parents would rather see a mainstream loan that offers more affordability in monthly payments. It is more difficult for first time homebuyers due to the MMR rules and the stringent criteria they now have, which comes back to the London equity release option. If the Help-to-Buy scheme does not seem plausible or someone does not qualify for it, then parents who are willing to help can use any variety of equity release mortgages to secure the down payment.

An equity release London plan is a mortgage with the options of making payments or not each month. When no payments are made, interest accrues and compounds during the life of the loan and repayment is made when the homeowner sells or dies. Alternatively, borrowers could opt to repay the interest, thus preserving a level balance for the future.

Several London lifetime mortgages are available including the interest only and flexible repayment choices that Aviva and Hodge supply. It is possible with the right first time home for the children that they would have enough left over to make the monthly interest payments on the interest only lifetime mortgage for their family.

It all depends on the situation, of course, but with the London interest only lifetime mortgage there is a need to make a monthly interest payment. Based on the loan amount the APR is calculated and broken down into a monthly payment. However, even these schemes have come under the auspices of the new MMR regime. Both Stonehaven & more2life’s interest choice plans now require affordability checks by the lender themselves. Afterall that is why MMR was introduced – to prevent another credit crunch through irresponsible mortgage lending.

However, if due to MMR the interest only lifetime mortgage is not a viable option for the lender, there are other products like the equity release drawdown mortgage that could supply the small income a family member needs for their down payment, plus a little help as needed should the parent’s wish to gift the loan amount.

Impaired equity release schemes are another option and best for parents who have an ailment that could impact their longevity. This type of equity release is offering a larger lump sum due to a health issue. It might be the one way to get a larger down payment for children as the enhancement would offer a bigger cash sum than standard London equity release plans. Its horses for courses, & by speaking to a qualified equity release adviser you can learn all the different options available and put the best plan into place.

Inheritance Now instead of Later
With the Help-to-Buy scheme and various lifetime mortgages, parents can help out their children in the now. Londoners can even help get their children on to the London property ladder with the right interest only lifetime mortgage. The benefit is that children get to use their inheritance now when they need it rather than later. It also saves the children from a huge inheritance tax bill at the end. As long as the lifetime mortgage home owner lives 7 years longer than the gift they made it cannot be taxed under inheritance.

Whether impaired equity release, interest only, drawdown, or another version of equity release works best for you and your children, at least they can secure a place on the property ladder. If you are a Londoner, or looking to move into the area, call our London Equity Release team on Freephone 0800 678 5159.