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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.

Do we really understand our borrowing?

Do we really understand our borrowing?

Our financial situation can be a bit like a spider’s web.  Decisions taken in one area of our financial lives can have implications for other areas of our financial life.  In some cases this is obvious (if you spend money, you can’t also save it), in other cases, however, it can be much less obvious.  For example, any decisions around equity release could have subsequent implication for anything from estate planning to access to means-tested benefits. With some people considering this as a way to help their families through coronavirus, here is some useful information.

The basics of equity-release

In principle, equity-release simply means tapping into the value of your home.  In practice, it can mean different things to different people.  In fact, it can mean different things to the same person at different stages of their life.

For younger people, equity release may mean increasing the loan-to-value ratio on their home.  Essentially, they are swapping some of the equity they already own for cash in hand, but do intend to make monthly repayments of the loan principal until it is ultimately cleared.

For older people, equity release may mean swapping some or all of the equity in their home for a lump sum or income, without committing to making any repayments during their lifetime.  The repayments are made out of their estate after their death, or when they move into permanent care and the house is sold.

Both forms of equity release can have significant implications and so it is strongly recommended to get professional advice before entering into either.  Here are some ways they could impact your finances.

Inheritance

This is perhaps the most obvious way in which equity release could impact your finances and/or the finances of your estate.  On the one hand, reducing the amount of equity you have in your home could lower the value of your estate and hence the amount of inheritance tax which is ultimately payable on it.  On the other hand, if your heirs wish to keep the property, then it may result in them having to pay more to do so.

Tax

Tax laws can and do change and so it’s always advisable to check the rules in place at the time of taking out a financial product or service and to familiarise yourself with any changes which are likely to be in the pipeline.  As a rule of thumb, however, if you have any income or assets there’s a good chance that HMRC is going to want to claim a share of them somewhere along the line.  For example, even if a lump sum is tax-free, if you put it in a bank, then you may end up paying tax on the interest.

Investments

If you are planning on releasing equity from your home via a standard, repayment mortgage in order to fund the purchase of investments, then you have to be aware that the performance of an investment is not guaranteed whereas your mortgage repayments are an unbreakable commitment assuming you want to keep your home.

If, however, you are planning on releasing equity from your home via a lifetime mortgage, in other words, one in which repayments are only made after your death, then the situation is a little different.  You are not at risk of losing your home, but you may be at risk of making a sub-optimal financial decision, which could leave you or your heirs worse off.  This is definitely a situation in which professional advice is to be recommended in the strongest possible terms.

Pensions and benefits

Pensions are not currently means-tested, but should they become so then any funds received through equity release could impact your ability to claim them.  As it currently stands, they may impact your ability to claim means-tested benefits.  If you are considering the possibility of releasing equity from your home to build up your pension pot then, again, getting professional financial advice is strongly recommended.

 

For Equity Release we act as introducer only

Equity release refers to home reversion plans and lifetime mortgages. To understand the features and risks ask for a personalised illustration 

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

For inheritance tax planning (IHT), estate planning, tax planning, investments and pensions we act as introducer only 

The FCA does not regulate some forms of tax planning, inheritance tax planning and estate planning

A beginner’s guide to property investment

A beginner’s guide to property investment

If you’ve been paying attention to the financial news, you’ll probably have noticed that there have been numerous articles highlighting the increasing challenges faced by property investors in general and buy-to-let property investors in particular.  The fact still remains, however, that the UK has a high demand for property and especially for high-quality rental property.  This means that there are still very respectable profits available to astute property investors who operate in the right way.  If that sounds like something which would interest you, then here is a beginner’s guide to property investment.

It’s not just an old joke, location really does matter

If you’re planning on managing a property yourself, then you’re probably going to want to look for properties which are within practical travelling distance of where you live.  These days, however, property investors, especially beginners, might want to give serious consideration to using a lettings agent to ensure that every aspect of their buy-to-let business is managed in total compliance with the law.  This does add to costs, but it also means that investors can look at a far greater range of locations since they will not need to travel to them personally (or at least not often).

Teamwork makes the dream work

For “hands-on” investors, having an address book full of useful contacts (such as reliable and proficient tradespeople) can make life go so much more smoothly.  For “hands-off” investors, a good lettings agent can be more than worth their fee.  In either case, having an accountant on board is not just a convenience from the point of view of managing your tax returns with minimal hassle, but an investment from the point of view of minimizing the amount of tax you have to pay.  You may also want to have a lawyer on your side, particularly if you are a “hands-on” investor.  As previously mentioned, the UK buy-to-let market is becoming increasingly regulated and penalties for non-compliance, even inadvertent non-compliance, can be very severe.  You might also want to consider becoming a member of relevant associations and other networks as a handy way of keeping on top of developments in the property market and of benefitting from other people’s experience.

Make sure your portfolio is built on solid foundations

A rising tide floats all boats and a rising property market effectively gives property investors some leeway to make mistakes and escape unscathed (or with very little damage done to them).  When the property market is stagnant or falling, property investors need to tread more warily.  This has always been the case but recent developments have made it even more important that investors get their sums absolutely correct right from the off.  In this context, there are two changes which are of particular note.  The first is that Mortgage Tax Relief is in the process of being abolished, which could have significant implications for investors on higher incomes.  One way to deal with this is to hold property within a limited company, however, this carries a number of implications which need to be clearly understood before a property investor can make an informed decision as to whether or not this is the right approach for them.  It’s also worth noting that if you are a new property investor and choose to go down this road, you almost certainly want to buy your property through the company right from the start to avoid the costs of transferring it into the company further down the line.  Secondly, the government has now finally banned landlords charging additional fees to tenants, which means that it is now utterly vital that property investors have a clear view of all the expenses they can reasonably be expected to incur (and ideally a margin of safety) so that these can be incorporated into the rent tenants pay.

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

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

The FCA does not regulate tax planning and we act as an introducer for it.

 

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