October 2019 | Equity Release

Steve Ellis: Helping out family safely

Steve Ellis is head of risk and protection at Premier Choice Group

The difficulties young people are facing getting on the housing market ladder are well documented.

The disparity between earnings and house prices will not change any time soon – certainly not in the higher priced localities around the country – and are there any areas not highly priced?

The Bank of Mum and Dad and of the grandparents has also been open for some time. New figures reveal that increasingly advisers are being approached by the over 55s for options to help children and grandchildren get onto the property ladder.

According to equity release adviser Key, 47% of first-time buyers are partially funded by grandparents or parents and retired homeowners are increasingly considering cashing in buy-to-lets, acting as guarantors as well as remortgaging or taking out new mortgages (including equity release) to help children and grandchildren on to the property ladder.

We can see why this is happening – and it maybe when discussing with younger clients as to their finances that mortgage brokers ask the question whether there are other sources of funding for a deposit, ie can the parents help?

But should we step lightly going down this route? Because once those funds have gone over it is wise to assume that they won’t be coming back again. And on that assumption is the giver protected?

Key says 95% of parental funding comes from savings and 21% from pension funds (there’s a tax consideration right there).

According to the mortgage advisers Key spoke to 19% had enquiries from older customers about selling buy-to-lets and holiday homes (another tax implication), 32% have been asked about acting as guarantors (where is the protection there?); 28% of clients are investigating the option of remortgaging and 21% taking out new mortgages.

Now this is good business for mortgage brokers and the pressure is on to find the right solutions for all parties – the funder and the funded.

But as ever there are protection considerations: insurances need to be in place to cover the mortgage payments – and assuming the children are the ones making those at least they should be putting income protection or critical illness in place.

And what of the parents or grandparents making the gift – depending on their age it might be possible to review and extend protection insurances they already have.

Certainly, some life insurance could be considered – to protect their partner and the children if it is the case that the money handed over is considered a loan.

We all want to help the younger ones into their first home if we can – let’s help our clients do it in such as way as it won’t create problems down the line.

Debt delivery

The problems down the line with any form of gifting or funding of family members is debt if something befalls the one who has made the gift – it really does have to be money they are sure they can do without.

But debt is of course an issue at any age and time and debt charity StepChange has published some new statistics: 331,337 people contacted StepChange for help with their debts in the first six months of 2019.

Unsecured personal debt is rising: of the 190,484 new StepChange clients who received full debt advice, the average level of unsecured personal debt was £13,799, up 2% in the past six months and 6% since 2016. Some 31% of new clients’ outgoings were more than their incomes – the average monthly shortfall for clients with deficit budgets is £365.

It’s all enough to mean that if they have a mortgage, paying it might be a problem.

And of course, the figures show that unexpected life events are the three biggest causes of problem debt: 18% of those seeking help had had a reduction in income, 16% an injury or illness and 16% had been hit by unemployment or redundancy.

We can’t prevent any of these events but what we can do as professional intermediaries is to stress the need to budget – before and after taking out a mortgage and to if at all possible have a margin of funds to act as a contingency if things get tight.

And to shore up that budget plan and that contingency pot to factor in whatever protection insurances are most appropriate and affordable. Even a little, that won’t debilitate the day-to-day finances could make a real difference when finances are hit by events beyond the client’s control. 

Positives all round

It may or may not be related to the Bank of Mum or Dad or the Grandparents but statistics from the Department of Work and Pensions show that employment rates for older workers are growing.

In the 50-64 age group employment rates have risen to 72.5% in 2019 from 55.8% in 1984.  And in the 65+ age group employment rates have gone up from 11.4% from 4.9%.

The number of workers overall is up 369,000 on last year and encouraging again all round wages for UK workers have continued to grow with wages rising faster than inflation, up by 1.9% in real terms on last year.

Whether any of this amounts to new businesses for any of us; mortgage brokers or healthcare and protection intermediaries is not self-evident.

But if more people are working and more older people are still working there is potential for business all round – people might venture into the housing market with more security or remortgage to size up.

And it means that if there are those working later who might have paid off their mortgage or still have mortgage to pay off it is still income which needs protecting and more income means clients can afford to give themselves that protection.