Lifetime Mortgage in order to provide "bank of mum and dad" help with first house purchase

reheat

My wife and I are considering taking out a lifetime mortgage (LM), in order to help our son and his wife get onto the property ladder, as an "advance" on their inheritance. My wife is in her early 60s. I am in my later 60s and still work 30 hours a week, remotely for this last year. We currently live in Suffolk, but in about a year or so plan to move back down to Sussex, nearer to family. We anticipate buying a property outright for a little over £300k.

We currently own a property of about £300k, so there is no spare cash to be able to just gift, and if we downsized by paying much less for our next home, especially moving from Suffolk to Sussex, we would end up living in a shed more or less.

We also have a daughter. When the time comes we want our son and daughter to each have a 50/50 split of our estate.

I am very aware of the potential pitfalls of LMs, but appreciate I will not know all of them. Also aware that lenders seem to have got their act together on this, no doubt because of so much bad press. Also aware that nearer the time would need to get independent professional advice, but as part of my current research would be very grateful for any help the MSE community can offer.

Looking to take out a £50k LM, with 50% inheritance protection. Our son and his wife would be liable for paying the loan off out of their 50% of the inheritance, along with any interest that remains outstanding. My wife and I would make a will clarifying that our son's inheritance would be 50%, minus any loan amount outstanding. We would have the will professionally prepared. We would be sure to only go with a lender approved by the Equity Release Council.

We would only go for a LM that allowed at least the interest to be paid off, giving our son and Dil the choice of whether they effectivly had an interest only mortgage, or one with nothing to pay until inheritance time, but then capital plus rolled up interest. At 3% I reckon it would be about 23 years for it to double. But they would have some control over their choices throughout.

Although rolled up interest sounds horrific, provided their £50k was invested in property, then I would expect that £50k property equity also to roll up significantly more in the long term, though I appreciate nothing is certain. But property price increases seems to have weathered most storms to date so far as I can see, in the long term anyway.

My wife and I would need to ensure the LM would be portable to another property if we needed to move, without early repayment charges (ERCs). Our aim is for this to be our final property move, but it would be unwise to lock ourselves into such a constraint.

The LM would be on a joint basis, so the loan only had to be paid off once the surviving one of us either died or goes into long term care. I'm not sure what happens if the long term care clause kicks in, because there would then be house sale and proceeds to be sorted, before our will became activated. Grateful for any thoughts on this please.

There is also the big issue of inheritance tax, if my wife and I both died within 7 years of our son and Dil receiving the money as part of a house deposit. Especially as a significant part of the money owed to the lender would likely be loan interest.

We dismissed the idea of a retirement interest only mortgage, because that then poses a repossession risk to us, if our son and Dil ever hit hard times and could not make the repayments. At our time of life that is not a risk I am prepared to put on either of us. The LM also gives our son and Dil much broader options anyway. 

Our son and Dil will be able to put up their own £20k deposit in addition to the £50k we could provide, and they will be able to make monthly repayments of about £1000. On this basis, and assuming a 25 year mortgage term, I reckon (ignoring fees and insurance etc) they would be able to afford a house of around £190k with no help from us; about £220k if they decided to pay the interest on the £50k as they went, and about £240k if they let the interest roll up on the £50k, and put all their £1000 pm into their mortgage (I'm assuming 5% for their mortgage, and 3% for our LM). If they opted for a 30 year mortgage of theirs, then I reckon the latter two figures would become around £233k and £256k. Still not great figures for Sussex, but they could initially start out with a 1 or 2 bedroom house. 

A key factor is that with the £50k their initial equity will be then £70k, which is a nicer starting point for your first home.

Things seem so very different to when my wife and I bought our first property in the 80s. Property prices were going up, but so also were wages. Now property prices still seem to be going up, but with wages almost stuck and going nowhere. The upshot of that seems to me that getting onto the first rung of the property ladder is like chasing a bus that is pulling away from you; no hope of catching it unless someone gives you a lift to the next bus stop.

Would be grateful for any thoughts or advice regarding this.

Many thanks.

MWT

I've been through this process recently with similar objectives and at first glance it does seem like your plan is at least possible as long as your wife is at least 62 currently.

The calculations are very tight though and you don't have room for any reduction in the valuation of your property which is likely to give you some issues when you look at moving to a new property...

In essence you would probably need to be moving to a property of slightly higher value than the one you are currently in and you would not be able to take out a mortgage to help with that.

The issue is that the portability is based on the outstanding value of the loan at the time of the move and while you do benefit in terms of the youngest life being a little older, that may not keep pace with the total outstanding on the Lifetime Mortgage...

Also there is the possibility that the property you wish to move to might not meet the criteria for porting the mortgage...

This would feel like a more certain plan if you were doing it after your 'last' house move, not before it...

reheat

MWT said:

This would feel like a more certain plan if you were doing it after your 'last' house move, not before it...

Sorry, I did not make that bit clear. Yes, this is all just preliminary research, ready to do this after we have moved down to Sussex, definitely not before. Need to go through just one mortgage application process, not one then a mortgage transfer soon after. The LM would therefore be against that property, not the one we are currently in. 
Interested why my wife would have to be at least 62 currently?

MWT

reheat said:

Interested why my wife would have to be at least 62 currently?

The amount you can release with a Lifetime Mortgage is determined by the age of the youngest life.

There is some variability between the lenders on how much exactly that is, but as a rough guide, currently, with a property valued at £300k and a 50% inheritance protection, to get £50k the youngest life would need to be at least 62.

Obviously this could be different by the time you want to proceed, but it is at least a guideline.

The other consideration is that the closer you are to the maximum allowed the higher the interest rate will be as well...

Given that you are not planning to do this until after you have made the move, just take care to ensure that the property you pick meets the criteria of most lenders.

This includes things like traditional construction, not located adjacent to industrial/commercial property, not subject to any limiting covenants or other restrictions on ownership etc. and of course in a good state of repair and able to meet the valuation you need.

Given you will be a cash buyer for this move do take care on that valuation point as it will not impact on your purchase but could bite you when it comes to getting the mortgage later on...

As you know, you will be needing to take advice on this when you decide to move ahead, you'll find there are a number of routes available for the advice, some paid and some 'free'...

From my own experience I would suggest considering 'Step Change Financial Solutions', they will not charge you a fee but like every other advisor, including those who do charge a fee, they will get paid by the lender you eventually choose. They are part of the 'Step Change' charity that provides debt counselling, but clearly not that part of the organisation. 

reheat

MWT said:
Given that you are not planning to do this until after you have made the move, just take care to ensure that the property you pick meets the criteria of most lenders.

This includes things like traditional construction, not located adjacent to industrial/commercial property, not subject to any limiting covenants or other restrictions on ownership etc. and of course in a good state of repair and able to meet the valuation you need.

What would be the best way to check these things do you think, when we are purchasing our next property? 

MWT

A very good question...

I would certainly pay for a survey & valuation even though you would not need one for the purchase and tell your solicitor about your intentions and ask them to pay close attention to anything that might be a red-flag for a future lender.

In general though you are looking for anything unusual that might put off a future buyer so if you find yourself thinking that something is less than ideal but you love the house so you want to proceed, think how a lender would view it...

... so for example if it has solar panels fitted but the current owner is unable to provide all the documentation and certification, that isn't something you can leave to sort out later... Solar installations are something that will be looked at very closely as the home owner may have leased their roof in exchange for free power and that isn't something you'll find the lenders willing to deal with.

A house with a chalet on the property that you can let as a commercial proposition would not usually qualify either...

I'm not sure how you can get certainty before you purchase but the aim is to keep it simple and saleable, usually you'd have a mortgage lender involved doing those sanity checks but you will have to deal with that yourselves in this case with the aid of your solicitor so pick a good one not just a cheap conveyancing service...

reheat

MWT said:

A very good question...

I would certainly pay for a survey & valuation even though you would not need one for the purchase and tell your solicitor about your intentions and ask them to pay close attention to anything that might be a red-flag for a future lender.

In general though you are looking for anything unusual that might put off a future buyer so if you find yourself thinking that something is less than ideal but you love the house so you want to proceed, think how a lender would view it...

... so for example if it has solar panels fitted but the current owner is unable to provide all the documentation and certification, that isn't something you can leave to sort out later... Solar installations are something that will be looked at very closely as the home owner may have leased their roof in exchange for free power and that isn't something you'll find the lenders willing to deal with.

A house with a chalet on the property that you can let as a commercial proposition would not usually qualify either...

I'm not sure how you can get certainty before you purchase but the aim is to keep it simple and saleable, usually you'd have a mortgage lender involved doing those sanity checks but you will have to deal with that yourselves in this case with the aid of your solicitor so pick a good one not just a cheap conveyancing service...

Many thanks. That is very helpful.

reheat

Pondering this further, and looking a bit more on the web, I'm worried that my assumption of getting a LM at 3% or less may be flawed. My perception of this being viable is heavily dependent on that. But I'm now getting the sense that I may be getting drawn in by headline low % figures, that my not be applicable to our particular circumstances.

By the time we get to do this, in a year or so, I will be 68 and my wife will be 63. Is this going to significantly impact how good a % rate we get? Or the fact we would be looking to have 50% inheritance protection on a £300k property when wanting to borrow £50k? How do lenders use these factors to influence what the rate is?
I've been looking at https://www.equityreleasesupermarket.com/compare-deals/lump-sum, which shows ...

Any  thoughts on this please? I really don't want to get drawn into long winded discussions with advisors at this moment, all trying to sell us something we are not yet ready to buy.

Kat78MFW

Have you seen the Nationwide Family Deposit mortgages? You would need to get a small mortgage with the Nationwide for your new property in Sussex. But then you are able to borrow with Nationwide against your property value to help your son with his deposit. I'm not sure if that suits your circumstances? 

MWT

reheat said:

By the time we get to do this, in a year or so, I will be 68 and my wife will be 63. Is this going to significantly impact how good a % rate we get? Or the fact we would be looking to have 50% inheritance protection on a £300k property when wanting to borrow £50k? How do lenders use these factors to influence what the rate is?

The biggest impact is going to come from the 50% inheritance protection as you are effectively doubling the LTV percentage which rules out those 'Lite' products you are looking at.

Without the inheritance protection you will find it easier to hit the sort of LTV that those sub-3% products will require.

Also keep in mind that the age requirements for the percentage that you can release are whole year based, so one day over 63 is the same as one day under 64, part-years are not a thing.

So if your wife has a birthday near the date you are likely to want to start the mortgage, nudge it to the other side if possible. Loosely speaking each year adds 1% to the maximum amount you can release and therefore makes it a little easier to hit a slightly lower LTV to get a better rate.

MWT

Also do remember that inheritance protection is not a feature of all Lifetime Mortgages so do check the details, same goes for making repayments, so make sure the features you want are there...

This is something your advisor will watch for when recommending a product to you, but right now while you are looking at the options you'll have to do that for yourself.

Do go look at the product pages on the lenders own sites as they will usually contain a lot more details on things like LTV limits by age, which are not always on the 'supermarket' pages...