Since the 2008/9 worldwide economic downturn worldwide interest rates have been at or around historic lows. In the UK rates are currently 0.75% and while there is speculation they could move lower in the short to medium term, nothing is guaranteed. As a consequence, we are experiencing a steady flow of homeowners looking to refinance their properties on relatively low rates. Many clients are retired with minimal regular income although very often asset rich in the form of investments and physical assets.
This case study is a relatively common occurrence nowadays, a retired couple with no regular income looking at equity release from a relatively large detached residential property. The idea was simple; the equity release would be used to carry out home improvements which would have a long-term positive impact on the property value. So, the challenges were fairly obvious, with no regular income we would need to find a mortgage provider who would accept their investment portfolio and also consider other assets as security.
The term “baby boomers” refers to a generation born between 1946 and 1964 which accounts for nearly 14 million of the UK population. This generation were given the specific tag as they are believed to have lived through the strongest economic growth the UK has seen for many years. As a consequence, there are many retired couples now sitting on properties worth a multiple of what they paid. A number from this era have also benefited from the performance of stock markets and investment markets overall, leaving many with a significant nest egg from which to fund their later life.
So, we have a retired couple who own a relatively large detached residential property looking to secure circa £260,000 to fund home improvements. On the surface, an LTV ratio of around 55% is not onerous and leaves sufficient headroom for mortgage lenders, but the client has specifically requested an interest only mortgage product. The idea was relatively straightforward; an interest only mortgage would keep their monthly payments to a minimum, allowing them to live off their investment income/periodic investment redemptions – while increasing the value of their property with home improvements.
So, the basic scenario was as follows:-
Client: Retired couple
Income: No regular income
Living expenses: Investment income/periodic redemptions
Property value: £475,000
Property type: Large detached residential property
Required funding: Circa £260,000
Provisional LTV ratio: 55%
On the surface, while the clients had investments which they could use as security, not all mortgage providers will accept this as income for their affordability tests. On the subject of security, the pool of potential lenders was reduced yet further with many unwilling/unable to consider the client’s investments as a potential repayment vehicle for the mortgage capital. However, one of our many roles in this situation is to dig deep into the client’s financial circumstances and see whether there are opportunities to use additional assets as collateral.
As we went through the procedure of reviewing the clients overall financial background and assets, we were informed that they owned two very valuable classic cars. While not necessarily of interest to traditional lenders, some of the more flexible private banks/niche lenders may consider these as a secondary security against a mortgage. So, pardon the pun, we may well have found an additional repayment vehicle for the mortgage. Now, we had to find a mortgage lender willing to consider them!
Issues to address
While we often hear talk of the “baby boomers” generation, very few people fully know exactly what this means. In effect, there are many retired couples sitting on properties which have shown a huge increase in value not to mention additional investments which have also risen significantly. As a consequence, they are often asset rich but have limited regular income. In this particular scenario the challenges were fairly obvious; we had a retired couple with no regular income, living off their investments. They were looking to release equity from their property as a means of funding home improvement which would in turn increase the value of the property going forward.
A relatively small issue in principle, but one which would have a huge impact on the funding was the fact that the couple owned two very valuable classic cars. This is not only a fairly liquid market, with many classic car collectors, but due to the rarity value of this type of asset the long-term capital appreciation can be significant.
In summary the issues to address were as follows:-
Regular income: Zero
Main income: Investment income/investment redemptions
Assets: Property, investments and two very valuable classic cars
Equity release: Circa £260,000
LTV ratio: 55%
Even though the two valuable classic cars were significant assets we would need to find a mortgage provider willing to look at the overall picture and use these cars as some form of security. The LTV ratio in itself was not onerous but it was more the lack of regular income and the diminishing pool of investments (due to regular redemptions) which were the main issues.
As an independent mortgage broker we have access to more than 300 traditional, private bank and niche lenders. Our experience allows us to approach the most relevant parties for a particular client’s requirements and financial background. It was fairly obvious from the start that we would need to utilise the services of a private bank/niche lender in this particular situation. The client had no regular income, were living off investment income/redemptions but they did have significant equity in their property and two valuable assets in the shape of classic cars.
After approaching a number of suitable mortgage providers, we managed to instigate a degree of competition amongst those willing to use the two classic cars as secondary security for a mortgage. So, on one hand we have the underlying property as security and then a second level of security, in the shape of the two vehicles, which could be used as a repayment vehicle for the mortgage.
The exact details of the funding solution were as follows:-
Funding partner: Specialist lender
Property value: £475,000
Mortgage funding: £261,250
LTV ratio: 55%
Interest rate: 4.89%
Mortgage term: Five years
Initial security: Property
Secondary security: Two classic cars (mortgage repayment vehicle)
In many ways this case study perfectly illustrates the need to utilise all of your assets when looking to secure mortgage funding. This not only offers an additional degree of security for the mortgage lender but can also help to reduce headline mortgage interest rates. There were obvious “risks” with this particular fundraising but the use of additional assets helped to alleviate these. The clients were very content with their interest only mortgage, long-term repayment plan in the shape of the two classic vehicles and were able to carry out home improvements which would in turn increase the value of the property.
What can Enness do for you?
Even though the UK property market has gone through a relatively difficult period in light of the Brexit referendum of 2016, many so-called “baby boomers” are still sitting on significant equity in their properties. Releasing this equity while at the same time securing sufficient capital for living expenses is not always easy. Thankfully, in recent years we have seen a significant increase in the number of mortgage lenders able to accommodate retired couples with significant property assets. As this particular case study shows, many also have an array of different assets which they can use as additional collateral. Even though many of the more traditional mortgage lenders have strict criteria they tend not to divert from, there are numerous private banks/niche lenders who are more flexible and more accommodating.
It is not inconceivable that there are many individuals/couples out there in a similar situation to the retired couple in this case study. While we offer traditional mortgage funding services we are also experts in creating bespoke arrangements for those with less traditional financial scenarios. So, if you find yourself in a similar situation we would welcome the opportunity to discuss your requirements in more detail and look at the options. We would be able to put together a number of alternatives for your requirements taking in real-time market rates. This would allow you to compare and contrast cash flow as well as short, medium and long-term financial liabilities. Then it is simply a case of choosing the best solution for your scenario, one you are comfortable with, without overstretching your finances.