Never heard of let-to-buy mortgages? Not sure how equity release works? Thanks to rising property prices there are several ways to realise your assets, says Sheila Prophet
The number of ‘property millionaires’ in Britain is growing by around 9,000 every month, according to recent research by Zoopla. Half a million homes are predicted to be worth a million or more by the end of 2014.
This astonishing figure means that many people in their fifties, especially those living in London and the South-East, are sitting on a vast asset. But what’s the best way to use this equity to your advantage?
First of all, take a closer look at your current mortgage, as you are likely to be in a strong position to move to a better deal. “People in their fifties will have a credit track record and they are often at the peak of their earnings,” says Brian Murphy, head of lending at the Mortgage Advice Bureau.
“The mortgage represents a smaller part of their expenditure than it does for younger buyers and a smaller portion of the value of the property, so there is little risk for lenders.”
Mortgages worth less than 60 per cent of the property’s value are generally the cheapest available, with a number of lenders currently offering rates well under two per cent, and some deals offer incentives such as paying for the survey and legal fees. If your current rate is three per cent or above, it may be worth switching, even if you have to pay a penalty to move from your current deal.
Secondly, think about your priorities. Do you simply want to clear your debts as soon as possible? In that case, choose a deal which allows you to make overpayments or consider an offset mortgage. This offsets your mortgage against your savings, giving the opportunity to make overpayments, reduce the mortgage term and save on tax.
“Psychologically, most people as they get older want to pay off their mortgages and be debt free, which is understandable, ” says Jeni Browne, head of residential and buy to let mortgages at Mortgages for Business, “But there are other options.”
The most drastic of these is to sell up and downsize to a smaller property, but as Jeni says: “Many people in their fifties are not ready to make that move. They may still have children at home, or simply want to stay on in their family house.”
The second option is to borrow extra, either through a further advance from your own lender or a remortgage, and use that money as a deposit on a buy-to-let property.
On paper this is a simple solution. Buy-to-let mortgages are based on the rental income, rather than your own, with most lenders stipulating that the annual income must be 125 per cent of the mortgage payments. For instance, if your mortgage payments amount to £20,000 a year, the rental income must be £25,000.
If you find the right property at the right price, it could provide monthly income as well as rising in value in years ahead.
“People can get buy-to-let mortgages as long as they can provide a deposit of 20 per cent or preferably 25 per cent with current rates of around three per cent,” says Jeni.
Let-to-buy mortgages on a second home
As buy-to-let rates are higher than residential, it is important to think about future costs, including unavoidable expenses such as rental fees, void periods and upkeep of the property. And with talk of imminent rate rises growing louder, it could well be worth paying more now for a fixed rate rather than risking a cheaper tracker.
A variation on buy to let is let to buy, which allows people to hold on to their existing properties by switching to a buy-to-let mortgage and renting their property out while using a new residential mortgage to move to a second home.
A number of providers now offer specialist let-to-buy mortgages via specialist intermediaries. You will once again need to show that the expected rental income is 125 per cent of the new mortgage payments. The sector is booming, and the process is not as complicated as it might first appear.
This means your home can potentially provide a monthly income while continuing to rise in value, and it leaves your options open in future years.
Jeni says she has also seen an increasing number of people using their equity to plan for their retirement.
“They may not be ready to downsize to a smaller home while in their fifties,” she says, “but these people are planning ahead by choosing their dream retirement homes and buying them now using buy-to-let mortgages and renting them out until they are ready to take them over and move in.”
For thousands of parents, meanwhile, the equity can serve another purpose: as a deposit in the bank of mum and dad. “A bit of help from mum and dad can make a huge difference when their children come to buy their own homes,” says Jeni.
“If they only have a deposit of ten per cent they will pay mortgage rates of four per cent or more, but if they can raise that to 20 per cent the mortgage rate becomes much more affordable, at around 2.5 per cent.”
And, adds Brian, this altruistic gesture can have a happy result. “We have seen many parents wanting to borrow extra to make what’s called a gifted deposit. For instance, if they have a £200,000 mortgage, they might want to borrow £20,000 extra to help a child buy a home.
“They are often surprised to find that by remortgaging and switching to a lower rate, they end up borrowing more, but paying less every month.”