Erica and Ernie (not their real names!) asked us for help because they wanted to help their son, Victor, buy his first flat. Victor was in the classic trap of paying more in rent than he would on a mortgage but unfortunately as he did not fulfil the mortgage lenders affordability criteria, couldn’t get a mortgage to buy his first property. The flat Victor had set his heart on was ex-authority, in an ideal location for both work and leisure, and had well-proportioned rooms. This was obviously a case for Chris, our mortgage expert.
Chris started off by exploring the ‘Joint Borrower/Sole Proprietor’ option, whereby Ernie’s income is added to Victor’s to calculate affordability. Father and son would be liable for the mortgage, but Victor would be the sole owner of the flat and therefore the purchase should not be liable for the additional 3% stamp duty charge on second properties.
The issue Chris found with this approach is that even though quite a few lenders had suitable products, most would only lend up to the age of 75 or 80. Given that Ernie is approaching 72, this would, at best, be a 8-year mortgage, but the relatively short term of the mortgage made the monthly repayments quite unaffordable.
Chris also found 2 lenders who would lend up to the age of 95 but unfortunately, there were snags with both; one wouldn’t lend on an ex-local authority flat (but ironically would do so on an ex-authority house), and the other wanted Ernie to take out life assurance to cover his part of the loan, which wouldn’t be cheap at his age. In addition, their best rates were considerably higher than the best deals in the general market, with the best deal on offer a 2-year fixed rate mortgage at 3.19%, with quite a steep increase to a standard variable rate after 2 years.
Chris had already arranged a Retirement Interest-Only (RIO) mortgage for Erica and Ernie to borrow £65,000 for Victor’s deposit. In the end Chris found it worked out in their favour to borrow £85,000 more on the RIO mortgage and for Victor to borrow the rest on a mortgage in his own right. This way, they avoided possible legal complications with HMRC in respect of stamp duty and Victor was able to take advantage of the best mortgage offers on the market. He now has a 5-year fixed rate mortgage at 2.2% and overall, Chris helped the family save £180 a month.
Of course, it was fortunate that Erica and Ernie owned a house worth a lot more than they were borrowing and had enough income to cover the monthly RIO mortgage repayments.
If you, or anyone you know, is ‘asset-rich’ but ‘cash-poor’ and needs capital to help their family, please give Chris a call to find out if releasing equity from your assets is the correct strategy for you.
This case study is designed to aid discussion and should not be taken as a recommendation of any particular product or route. To understand the features and risks, please ask for a personalised illustration. No action should be taken without first seeking advice from a suitably qualified adviser.