Huge Disclaimer: The following transcript was generated by a machine. It’s not perfect. It’s definately best to listen to the audio version!
Alex: Hello, welcome back to the equity release on podcast I’m with Mark Thompson from CS Retirement Solutions. And we’re going to talk about using equity release to gift a deposit to normally I presume children or grandchildren. So if I’m in a situation where I want to buy a property and I’ve not got a deposit, I could potentially approach mum and dad or grandparents and say, can you help me out?
Mark Thompson: Well, you say potentially as apparently a third of all deposits are gifted or loaned from parents. So the Bank of Mum and Dad is actually massive in today’s marketplace. I think the average deposit across the country is about 33,000 pounds that you know that people are paying. But as I say a high percentage of first-time buyers are relying on the bank of Mum and Dad to loan in the money. More often it’s gifting the loan.
Mark Thompson: So, in fact, the Bank of Mum and Dad in 2019 was the 11th largest moneylender in the UK, and because of an amalgamation of a couple of the banks, and somebody else pulling out of the market as we speak, it’s probably in the top 10 now.
Mark Thompson: So you’re talking about the Bank of Mum and Dad are in the top 10 lenders of the country. So very, very commonplace.
Alex: So if I am Mum and Dad, and I haven’t got just cash sitting in a savings account or anything, I can use the lifetime mortgage equity release. I can basically take out what I’ve already paid on one property and I can gift it to them
Mark Thompson: With the lifetime mortgage I mean, equity release, you are releasing money from your property. So the equity that you’ve built over the years, you can to release, but to a point of you want to take out of the property, depending on your age and your health, you’re allowed to take so much of a percentage of it from the property so yeah, in essence, it’s that simple people, you know, they’ll identify what the children want. The complication can be that you’ve got one child but then you’ve got maybe two or three.
Mark Thompson: What do you do? And you know, quite often I have clients that will decide that they want to give their inheritance to all three at the same time. So if they are going to give it to one child to buy a house and they’re going to take out an equal amount to the other children which makes them feel comfortable. The beauty of it of course, is that they get to see their money helping and assisting the children, you so they can really see the benefit in the money rather than waiting to die and leaving it when potentially the children might not need it at that stage.
Alex: What is the implication? Because I think if Mum and Dad are let’s say their 60s, 70s, or whatever, they go down the pub and talk to a friend about it, they’ll most likely say, Oh, don’t do that interest rates are ridiculous. They’ll own your home and they’ll take it off you.
Mark Thompson: Yeah, as we’ve discussed previously if they’re taking a lifetime mortgage, and it is that it’s a mortgage for life, so they can never lose the house. In reality, they will always own the home and so the last surviving partner either dies or goes into long term care. So basically, they’ve got no further need for that property before that loan is due to be paid back. So there’s no risk in terms of that situation. And also now, the equity release council certainly all the business we do is monitored and regulated by the equity release council. So they have a no negative equity guarantee. So you hear people say, Well, you owe more than you actually borrowed. That doesn’t happen under equity release council guidelines. And so you can never owe more than the house was worth. So yeah, it’s pretty, it’s pretty straightforward.
Alex: And also normal arrangement then with so they’ve got a few questions on gifting. Are there taxes involved in that on the other side? Or is that kind of a tax?
Mark: Yeah. Obviously, I’m not there to advise on taxing,people should always seek their own advice on tax. There is an implication in any given situation. So people should look at that.
Mark Thompson: So there can be implications on that.
Mark Thompson: But that’s individual.
Alex: How often is it happening? What were you saying this was kind of one of the second biggest reasons for people taking equity release.
Mark Thompson: Oh, it’s very, very common. Extremely common. So 27% I think of the equity release is for gifting. So, you know, one in four-ish. So that’s quite a high percentage. Certainly, my experience with clients is that it’s very common. And the interesting you mentioned earlier on about if the client hasn’t got any, you know, they haven’t got any money to lend the children and therefore would go down there to choose. I’ve got clients that have got plenty of money.
Mark Thompson: They’ve got their own savings, they’ve got the deposits, they’ve got their investments, but they don’t want to touch those.
Mark Thompson: You know, they want that for their rainy day and they want their security and they want to maintain that lifestyle. So I had a lady recently who decided she wanted to take the equity release product to assist her daughter who couldn’t get a mortgage. She had a few sorts of credit issues.
Mark Thompson: The previous relationship, couldn’t get a mortgage. She was living with a mother with her two children. And bless her mother was doing the best she could but there were two young lads in the house but she was finding that quite challenging.
Mark Thompson: But that lady wanted to take equity release because she didn’t want to impact on her existing savings and investment.
Mark Thompson: Which you could all do. In that particular case as well. What was interesting is that the daughter was prepared to service the interest so the daughter couldn’t get a mainstream mortgage. So mother would take equity release, but again didn’t like the idea of the interest compounding and building up so it was an arrangement and this is very common where the daughter that was benefiting from the deposit would pay the interest on the loan, so it was never going to increase, which made the mother very much more comfortable with the whole situation.
Alex: I can imagine. And then for the gifting if I’m taking responsibility for those payments, will that affect my mortgage affordability on the property I’m buying as well?
Mark Thompson: Technically, depends on the situation. But yes, it could do and you could have to disclose that it depends on your available forms, so to speak. This particular lady had plenty of income.
Mark Thompson: The daughter, she just had bad credit, so she just couldn’t get a mortgage. So for her, it wasn’t a question of affording. It was a question of I just can’t get a mortgage. So it was a solution to that particular problem.
Alex: What other instances are there? So that person she’s got high income, bad credit that just needed some extra cash to get? Get them all right and what easy, people have got a good income, they just don’t literally don’t have enough deposit or any deposit or …
Mark Thompson: There is but you get people that just I mean, just having any deposit.
Mark Thompson: You know, generally speaking in the old days, people would go and get a 100% mortgage.
Mark Thompson: Well, of course, those are a thing of the past.
Mark Thompson: I know. There’s talk about bringing them back in, but most people need a 5% deposit as a minimum.
Mark Thompson: And you look at, you know, people’s lifestyles, it’s very difficult to generate a 5% deposit and obviously, the more you borrow in the terms of the loan to values if you’re borrowing 95%. So it’s quite an expensive, still cheap in real terms of a mortgage, but it’s still quite expensive because you’re putting less deposit down so and again, depending on people’s creditworthiness or previous credit history, that the higher the loan to value, the more difficult it can be to get a mortgage in the first place. So a lender might say, I’ll lend you an 85% loan to value all day long. I’m not gonna lend you 95%.
Mark Thompson: So that balance could be that you know that loan or gift from the parent or bank of Mum and Dad is the difference between making it happen or not. And interestingly, I know we’re just jumping away with weddings. A quite a very common thing. I mean common weddings now and people are affording weddings and obviously a lot more glamorous now than ever. You know, but weddings are a massive issue for people looking to take a equity release and you know, where parents are able to support the children to have a good wedding or honeymoon, etc, where it wouldn’t be in a bit of a spot on the first so that that’s quite a common one in that sense.
Alex: Yeah. Because I was just thinking with my property head on thinking about the deposit for a property, weddings, and what are there any other sort of common reasons?
Mark Thompson: Well, the biggest one is home improvements. So believe it or not, home improvement is the biggest reason for people taking action with equity release, I think there’s 67% of some part of the loan is to do some home improvement, conservatories, you know, and just generally improve the living standards, you know. So, in other ways, you could argue that they’re not losing that money because they’re just reinvesting money that was in the property back into the property to increase value.
Alex: I was gonna say, yeah, how does that work? Because the value of the property would increase if you were, yeah.
Mark Thompson: The value of the property increases, because you’ve just spent money on your property. So the equities have gone up.
Mark Thompson: So you’re taking, you could argue you’re taking money out and really reducing your equity, but that one is and being reinvested. So you almost just moving your money rather than just taking it out. But yeah, but that’s, that’s a very common, a very, very common reason for people taking equity release. And they can have all sorts of reasons for doing it. You know, I mean, divorce in the 60s, the divorce rate in the over 60s is not going down, unfortunately, it is under 60 now, which is really nice to hear. But you know, the 60s it’s not. So you just imagine you’re in a relationship. You’re living in your matrimonial home, and all of a sudden you’re going your separate ways. That’s a very costly exercise. And people are turning to equity release for one of the partners to stay in the property and buy the other one out. It’s a solution that so not all just general debts, people have general debt. So the debt consolidation. It doesn’t make sense to be struggling in life.
Mark Thompson: Depending on the situation, but why struggle with things when there is a potential solution? And we know people are because I think the market was 4.9 billion last year was either lent or reserved in terms of products available officially. So it’s a huge market.
Alex: Cool. Just to circle back to the gifting size a minute. We may have already sort of covered this, but I’m kind of thinking if I’m listening and I other than wanting to have the awkward conversation with parents about borrowing money. What’s the best way to explain it overall. Say, Mum, Dad, I need some help. Have you heard of equity release?
Mark Thompson: Yeah, good. You just hit the nail on the head there is it a difficult one to raise? I mean, generally speaking, we would always want to sit down. In any equity release case, I think it’s important to know that we always encourage people to sit with their families anyway. So we always say to bring your daughter and your son and your family. Several, you’re fully comfortable with lots going on until you understand it. So obviously, we would just offer to speak to the parents jointly with you know, whoever was looking to discuss the daughter, whatever. So I just have a joint general chat as we are doing now. an educational chat to give them an understanding of a solution that might be pertinent to them.
Mark Thompson: And what’s available. If it’s something they want to pursue, then it is pursued. But initially, it’s just an educational thing, letting them know exactly how it works, what the impacts would be making sure that they can explore the impact of it. It has a bad reputation for many years ago, actually, as we’ve discussed more. And it’s nothing like nowadays, rates are totally different, products are different, regulation is different. So most people want to get over that initial “I don’t like the sound of it, because I’ve been told that it’s not a good thing.” I see it as a very straightforward solution to certain life situations.
Alex: Because to me, in terms of the gifting thing, it feels as simple as I’m going to get it. That equity anyway. What harm is there in delaying or in terms of taking that out now rather than wait until my parents pass away.
Mark Thompson: Well, it is that simple. You know what are the benefits? The benefits are that the parents can see their children benefit and they can have the pleasure in thinking I’ve given them this money, give them the step on the ladder, support them in their hour of need when they need. I’m only going to give it to them at a later stage, as we said, potentially stage when they don’t necessarily need it.
Mark Thompson: I mean, what is interesting nowadays, a lot of people, you know, you get the thought it was the clients that are desperate to leave money to the children. I can’t spend their inheritance. My mother was like that. And then those that say actually the kids have already got three times more in life than we ever had. You know, why am I going to leave them it because I know what they’re going to do with it the first day they get the money, they’re going to go and spend it so I might as well do that myself. So my Dad and my Mother have opposing views on the way equity works in it in our property. But yeah, that’s the way people see it can be. And there are ways of protecting the equity. So there are equity guarantee schemes. So, again, nowadays if somebody’s thinking, well, I don’t want my equity to diminish too much I want to retain so much, they can take a product which ensures that their equity is always going to have a certain amount. Now, they might not be able to borrow as much because obviously protecting equity, you might be surprised, but you can see there are products that enable you to do that.
Alex: Yeah. I think I’ve got one question. I think I know the answer to it. But if I’m taking the gift for the deposit, my mortgage that I get myself as that as the recipient of the gift there’s no link to that other properties if anything goes wrong with either while they’re completely separate.
Mark Thompson: Yeah, absolutely. That’s a really, really good question. They are completely separate. And in fact, they can’t be connected because the lenders of the children’s mortgages would not want any link to exist. So there can’t be any hold on that particular property. So even if loaning the money, it can’t be a loan that is secured. Usually, it’s a gift. So usually they’re happy that the parents just gifting them the money that so they don’t want anything back. They don’t want any interest in the property. In the odd case where they loan it on the base of the loan you it and you’re going to pay it back. There can be no situation where they’ve got a shall we say, an interest in that problems so that the parents would have to sign away their rights as an occupier in a household if they do, you know, to say, look, you know, our rights don’t override those of the bank. So yeah, very good question.
Alex: Yeah, I thought that was a rubbish one.
Mark Thompson: No, no, no. I’m impressed with that one. Good question.
Alex: I’ll leave it on that. Let’s leave it like that. So we’ve got your number, a mobile, if anyone’s got any questions, I’m sure there might be some. So if you’re open to a sort of if someone send you an email, call, if they’re unsure of.
Mark Thompson: Always happy to help with a chat initially, with clients, it’s just an educational thing to start with just you know, they can take some time to take quite a while to come to the decision that they want to go down that path. It might not always be right for them. And I’ll have to look at other solutions as well. So I just look at equity release as a first protocol will look at every solution that exists to ensure that it’s the right one for that. But yeah, happy happy to chat. And, you know, I enjoy helping people and helping them understand, you know, what the ramifications are and how it works. Always happy to have a chat which costs nothing and certainly no pressure on anybody when they ring, you know, just a very, you know, just as we are now you know, that’s what questions they want. We’ll ask the questions and just educate them on what they’re thinking about doing.
Alex: Fantastic. Thank you mate.