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We’re Borrowing How Much?

We’re Borrowing How Much?

The Wealth and Assets Survey of Great Britain is conducted by the Office for National Statistics (ONS) every two years.  The latest survey covers the period April 2016 to March 2018.  Here is a quick review of some of its key findings along with a guide to its limitations and its real-world implications.

Overall property debt in the UK is on the rise

According to the Wealth and Assets Survey, total property debt in the UK is now £1.16trn.  This figure is a 3% rise as compared to the last survey.  The number of households with property debt also increased from 9.1M to 9.2M (approximately 1%) and the median household property debt increased by five per cent to £96,000.

NB: In the context of the Wealth and Assets Survey, the term “property debt” covers both mortgages and equity release secured on properties.  This is technically accurate since the “lifetime mortgage” format of equity release is a debt secured against a property.  It can, however, be different from most forms of debt in that there may be no repayments required during the borrower’s lifetime.

Property debt is concentrated in the middle wealth bands

The Wealth and Assets Survey placed each of its respondents into one of ten wealth bands.  The top band comprised the wealthiest 10% of households while the bottom band was the poorest 10%.  The survey found that in deciles four to seven, 45% to 54% of households carried property debt, whereas only two per cent of households in the lowest decile had property debt.  The lower deciles were more likely to have financial debt (non-property-related debt).

Total financial debt rose by 11% or £12bn to £119B.  This was mostly due to hire purchase and student loans.  It should be noted, however, that student loan repayments are adjusted depending on income which makes them somewhat different to other forms of debt.  In principle, it also means that repayments should always be manageable even if an individual’s financial circumstances change.

Four per cent of households were identified as having problem debt, although, perhaps surprisingly, this figure does not include mortgages in arrears.

The limitations of the Wealth and Assets Survey

The Wealth and Assets Survey does not split out equity release from mortgages, nor does it split out different kinds of mortgages e.g. investment versus residential or repayment versus interest-only.  Likewise, the survey only expresses the amount of debt held by any given household.  It does not express this data in comparison to the value of the property.

Last but by no means least, this Wealth and Assets Survey is a survey of UK households.  It, therefore, does not include property debt held by companies as this is, by definition, not owned by a private individual even if they are the sole owner of the company in question.  This means that it does not capture data relating to buy-to-let investors who work through a limited company.

Full details on the Wealth and Assets Survey and its methodology are available on the ONS website.

The practicalities of mortgage debt

While the Wealth and Assets Survey provides an interesting snapshot of property debt in the UK, it does not give any great degree of insight as to what it means in practical terms for each household.  For example, although it collects data on property debt for each wealth band, it does not collect data on the percentage of a household’s income which is used to service the debt (which, in some cases may be none, since the survey counts equity release as property debt), or how much equity they have in the property.

 

Your property may be repossessed if you do not keep up repayments on your mortgage

For equity release products we act as introducers only. Equity release refers to home reversion plans and lifetime mortgages. To understand the features and risks ask for a personalised illustration.

The FCA does not regulate some forms of buy to let mortgages

Interesting times lie ahead for lenders and borrowers

Interesting times lie ahead for lenders and borrowers

The (hopefully) short-term impact of the Coronavirus, although undeniably brutal, may turn out to be nothing compared to the long-term economic damage it could cause. Quite simply, people may find that their lives have been saved but their livelihoods have been lost. The government is clearly aware of this and is working hard to keep the UK’s economy moving insofar as it can – and it is placing the financial services industry to come on board with its plans.

Keeping the money flowing

The UK government has pledged to pay 80% of the salaries of all employees furloughed due to the Coronavirus.  Separately to this, it has pledged to provide government-backed loans to businesses.  When the loan scheme was initially announced it was overwhelmed with applications, but relatively few loans were issued.  This fact was blamed on the restrictive rules and the government is believed to be looking at revising the scheme.  It’s therefore advisable to keep an eye on the news for updates. The new “Bounce Back” loan has just been released aimed and small businesses, offering loans of a quarter of turnover up to £50,000 over 5 years with 0% interest on the first twelve months and no repayments for twelve months.

It has further pledged to help the self-employed or at least some of them. As has already been pointed out, there are significant cracks in this help. In particular, it does nothing for those who became self-employed during the 2019/2020 financial year nor for those people who are part employed and part self-employed but who earn less than 80% of their income from self-employment.

Theoretically, these people can fall back on the Universal Credit system.  Unfortunately, this has been plagued by problems and if reports are to be believed is struggling to cope with the sudden upsurge in applications. It’s also unclear how the minimum income floor will be assessed for people in non-standard situations, like the newly self-employed or the part-employed/part-self-employed.

It’s also worth noting that the impact of the loss of income experienced by these individuals has the potential to spread far beyond the individuals themselves, even if they aren’t breadwinners for a family. As a minimum, it has the potential to impact the income of landlords and companies which provide essential, basic services such as utilities. Under normal circumstances, non-payers might be evicted and/or have their utilities cut off but right now that would be politically-sensitive, to put it mildly.

Finding other ways to help

The government seems to be aware of this and looks to be trying to address the problem from both ends. In other words, if people are falling through the cracks of the income-support measures, then the government can still help them by reducing their expenses. It has to act with a little caution here, to avoid causing problems along essential supply chains. It can, however, certainly ask, or potentially force, certain industries to adapt their behaviour to contribute to the common good and the financial services industry is clearly in its sights.

At the end of March, for example, the Bank of England’s Prudential Regulation Authority contacted banks to make it clear that it expected them to cancel dividend payouts and bonuses to staff. It took a softer line with insurers, just advising them to “think carefully” before making payouts. Another regulator, the FCA has also been communicating with the banks to propose emergency measures to help struggling borrowers.

It has proposed that customers with arranged overdrafts should be allowed to use them interest-free for up to three months and that customers with loans and/or credit/store card debt should be granted a repayment freeze also for up to three months. As with many of these emergency measures, however, they answer some questions but raise others.

For example, if borrowers are in a situation where they are paying more in interest (fees and charges) than they are in capital repayments, taking a payment holiday could hurt them over the long term unless their lender also agreed, or was forced, to freeze interest on the debt. Some people might see this as a very reasonable action on their part given the help the industry received in 2008.

Your property may be repossessed if you do not keep up repayments on your mortgage.

Unlocking your properties value, to help your loved ones

Unlocking your properties value, to help your loved ones

Many customers have contacted us to see how they can financially help their children, grandchildren and others in their family through these difficult financial times. As the stock markets have dropped so significantly, accessing any investments held to release funds to help can mean crystallising loses. Additionally, savings we all hold are precious to help many of us cushion the financial impact of the crisis, and we want to keep hold of them.

So how can you help? – I have been sharing ideas with some of my clients on how accessing the value within their properties could be an option to help loved ones. We are in difficult and unprecedented times so I wanted to share these thoughts with as many customers and indeed their extended families, friends and networks as I can. We all need to pull together with thoughts and ideas, on how we can help those close to us through these uncertain times.

Later Life Lending – for those over 55 years of age, releasing money from their property could be an option. There are different options available from a “Retirement Interest Only mortgage”, where you make monthly interest payments like a traditional mortgage but won’t owe more than the initial amount borrowed.  A “lifetime mortgage”, sometimes referred to as equity release is where you’re able to take a tax-free lump sum, from the value of your property, that is secured as a loan against your home, typically without monthly repayments. Through, either way, you won’t need to pay back the money until you die or move into long-term care.

A mortgage or re-mortgaging  – releasing new or additional capital from your property. A simple straightforward way to use your property value to release a percentage into cash. The Bank of England has cut the base rate to 0.1% in an emergency response to the “economic shock” of the coronavirus outbreak. This makes the interest rate the lowest ever in the Banks 325-year history, so borrowing money against your property value can be a cost-effective option now.

Our homes are precious to us, and an in-depth financial review needs to be undertaken to understand your own personal circumstances, the options, the risks and the benefits.

Please contact us today for “Free Financial Recovery Review”. We can talk you through these and other ways we can help you navigate the options and choices in the post-COVID 19 world we are all adapting too.

 

How much is stamp duty?

How much is stamp duty?

Stamp duty may not be the most exciting topic in the housing market, but it can make quite a difference to how much you end up paying for your home.  Here’s a brief guide to what it is, how it works, what that means in practice and what the future might bring.

Stamp duty is actually a shorthand for different taxes

In England and Northern Ireland, Stamp Duty means Stamp Duty Land Tax and there is an online calculator here.  In Wales, it means Land Transaction Tax and there is an online calculator here.  In Scotland, it means Land and Buildings Transaction Tax and while this in no official calculator, you can find the current rates listed here.

Stamp duty works along essentially the same lines in all parts of the UK, but the bands are different (plus they are subject to change), hence you always need to check the rates in force at the time of your intended purchase and in the location of your intended purchase.

You should also be aware that different rates of tax may apply depending on what kind of purchase you are making, e.g. a first home, a main home (but not your first home) or an additional home.

How and when you pay stamp duty

From a buyer’s perspective, the process itself is actually quite easy.  You just send the money to your solicitor and they send it on to HMRC when the property completes.

What stamp duty means in practice

In simple terms, you need to work out if you are due to pay stamp duty (if you are a first-time buyer you may not be) and if you are then you need to work out how you are going to pay it.

Basically, the two approaches are either to add it to your mortgage or to pay it out of your cash savings.  In either case, you would need to meet the appropriate lending criteria regarding Loan To Value ratio (LTV) and affordability.  You would also have to accept the fact that either way you are going to impact your LTV ratio and this may impact your ability to get the very best deals.

Having said that, while mortgages are sold as long-term products, there is absolutely nothing to stop you re-mortgaging at a later date when you have built up equity in your home and this fact may be enough to prevent you from needing to as it may encourage your lender to agree to negotiate an improved rate in acknowledgement of your improved situation (re the LTV ratio and possibly increased income as well).

For the sake of completeness, the example of stamp duty is a good reminder to think about all the possible transaction costs involved in buying a home and the importance of making sure that you have funds to pay them.

The future of stamp duty

Interestingly, there are proposals to switch stamp duty to a tax paid by the seller.

The argument behind this change is that people who are moving from smaller homes to larger ones would pay stamp duty on the smaller home (they are selling) rather than the larger one they are buying, while people moving into smaller homes will be paying less for the property they are buying.

This may sound good in theory, however, it’s hard to see what would deter sellers of any description from simply incorporating the cost of the stamp duty into the sales price of the property.  If they did so, then, rather ironically, the buyer (who is the person ultimately paying for the property) might end up paying more as the property could be pushed into a higher stamp duty band, so you’d effectively be paying stamp duty on the stamp duty.

Your property may be repossessed if you do not keep up repayments on your mortgage.

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