Releasing Equity from Property

Unknown Speaker 0:00 London property homes super prime, where you can find informative educational and entertaining content, covering all aspects of property. Farnaz Fazaipour 0:11 Hello, and welcome to London property home of super prime. I’m your host Farnaz Fazaipour. And today we’re in conversation with Patrick Bullick, and Oliver Chessis of KWM Wealth. Well, by way of introduction, and I will pass it on to you to do it. But Patrick is actually a very experienced and qualified agent, the top end of the property market, dealing with generations of buyers and sellers. And Oliver has a lot of experience in helping people plan for older age. Welcome to the show. So Patrick, why don’t we hear first from you, in your own words, why you wanted to participate in this talk about equity release? Unknown Speaker 0:53 All right, thanks, man as well, yes, I’ve been feeling for some time that equity release is a really good way, these days for releasing capital in retirement for, particularly for those who haven’t got a lot of assets beyond their property. And I’ve seen many examples, particularly of elderly ladies getting to a certain age, not wanting to move, and rightly so because they’ve got their whole infrastructure of friends. And they know the hairdresser. And they know the grocer, and they know the postman, they’ve got all their infrastructure around them, they can probably walk their way around their flat blind. And actually, you know, as they come into old age, it’s better that they stay put for as long as possible, the last thing they want to do is to go into a nursing home. And they often don’t want to move house at all, their key asset is their property. And the modern form of equity release is one way one can draw the money down gradually, rather than taking a big lump sum and paying the compound interest from day one on the big lump sum. If you agree a notional figure with your equities lender, and then draw that down gradually, you only pay the compound interest on that which you’ve drawn down. And therefore the interest doesn’t accelerate in the same way towards the value of the asset. And actually you can make that lasts for some considerable period of time, whilst staying put in your own home. And I find that a very useful thing for elderly people. But it’s moved on from that too, because the money that you’re taking out of your property is, in fact, tax free. And what I’ve found is that wealthier people who have perhaps more than one property, perhaps two or three, are looking at this as another way of taking capital getting capital into their retirement in quite a tax efficient fashion, is very much a first world problem. And we should remember these people, we can’t feel sorry for them, they will, they’ve got assets, they might have stocks and shares. But if they sell their stocks and shares to pay for, they might not have enough dividend income to pay for the the income that they need. So they still sought shell sell their social shares and draw them down that way. But they will be paying capital gains on that. Whereas if they take it out of their property assets, they can maintain their lifestyle have their two or three properties move around, have a great time, whilst having enough money to live on. Farnaz Fazaipour 3:16 So like a good agent, you’re finding solutions, even if they mean that you’re cutting off your own contact. But it is very much something that you experienced as an agent. And you see, because people usually transact for for some set reasons, you know, retirement or moving or, you know, someone passing away divorce etc. Debt. So it’s it is definitely a topic that I think is going to be really interesting to a lot of our listeners. And Oliver, can you tell us your role in this conversation? And what’s your background and experience and how you’re going to be helping us? Answer some questions here for our listeners today? Unknown Speaker 3:55 Sure. Yeah. Well, I think it’s really interesting, actually, some of the points that Patrick raised, and really it just highlights the importance of financial planning, which is, which is what I do, and working with my clients, as you say, to help them throughout their working life really, but then also into retirement and making sure that they’re making the most of any financial planning they’ve done up to that point. There’s lots of options often for clients in retirement as to different ways they can raise capital, whether that be equity release, obviously, which we’re here to today to talk about. But also important for people to bear in mind other options that they might have. And I think really, just to highlight that the sooner one starts financial planning, actually, the more likely they are to have those options into retirement. Last thing people want to do, as you say, is downsize move out of a home that often has so many memories, it’s in an area that they like fringe near nearby their friends. So it’s about putting the plans in place early enough to actually they have other options potentially, to equity release. Farnaz Fazaipour 4:53 So really speaking broadly to to a wide range of our listeners, from where you’re coming from, you’re advising that people actually start to set up their pensions and their ISIS. Well, before they turned 50. Unknown Speaker 5:10 Yes, definitely. I mean that, you know, we see a lot of the time with our clients. The way that one invests money and with compound growth on investments, whether that be through tax efficient vehicles like ISIS or pensions, the sooner you start doing these things, the better chance you have of being in a, in a more comfortable position into retirement is not always an option. As Patrick says, sometimes people are left with just just their homes and maybe a pension, there’s not quite going to get them far enough, obviously, often state pension on top of that, as well. But yes, the sooner one starts doing these things, certainly before age 50 The benefits of compound growth over that time, really do you can really show the difference. Farnaz Fazaipour 5:51 So on the topic that we’re discussing today, there is what’s the difference? And I’m not sure whether we need your technical expertise in the financial world, or whatever. But obviously, Patrick’s done a lot of digging and homework himself as well. So what is the difference between retirement mortgage and equity release? Unknown Speaker 6:13 Yeah, so I mean, I think it’s just a turn of phrasing in my mind. So equity release is a type of mortgage that one uses in retirement. And it’s a formal product. As Patrick says, actually, there’s, there’s different ways to do it. Now, it’s not just necessarily a lump sum that one has to take upfront, you can have a notional figure that you’re able to take out of the property, and then slowly draw on that. You Some people like to still service the income on those loans as well, which which is an option. But others again, it’s it might be a position where actually they have no other income, and it’s just something that’s going to roll up over time. And then as and when they pass on, move into long term care and sell their property gets sold. equity, equity release more generally, is available to to, to anyone who who has a mortgage. I’m not sure that’s necessarily the topic we’re talking about today. I think, obviously, we’re focusing on on options in retirement. But it might be for people who have bought a new property spent a lot of money on that property, and are looking to, for example, replenish their cash reserves. That’s something that one can do just take out, you know, it’s just taking capital out on a mortgage, and he’s not necessarily restricted as a formal equity release mortgage loan is. Farnaz Fazaipour 7:26 And in your experience, Patrick going, you know, talking to clients who are coming of a certain age and replanning their lifestyles, what are you seeing as the sort of apart from maintaining your own life? But what do you what are you seeing as as a better way to plan and a better way to have income for your family? What are people using these equity releases for? Unknown Speaker 7:54 Well, there are a number of points and I want to just come back to one thing that Oliver was saying is that actually, even now you can get a form of equity release or, or a retirement mortgage on rental properties as well, it doesn’t even have to be on your own home. So that just opens up the field even further. So really, the whole topic is about maintaining debt and releasing capital out of your property assets into retirement, and quite far into retirement as well. So I get people coming to me, perhaps age 70, let’s say saying, Well, look, you know, we’re properly into retirement. Now, we’ve got two or three properties, I need to sell one to raise the capital in order to fund my retirement because my pension pot that pension income is not enough on its own. And so therefore, I need to supplement it with the capital, raising the capital. But the problem there is that if they sell a second home, they will be paying capital gains tax on that. So there’s a tax implication straightaway. So my question to them is, well, actually, are you still enjoying using that second property? Or are you renting it out? And is it getting you an income? So often? Yes. And you know, would you like to continue to use that? Yes. And then we’ll Why don’t you consider taking some form of debt into retirement in the form of equity release or reverse mortgage or whatever, there’s all sorts of different names for it, and either servicing the debt as you go along the interest as you go along, or simply allowing the interest to compound but as I said, with this sort of modern method of being able to agree a notional figure, not take it all just take it down in tranches, and only pay the interest on the tranches. It’s very, very manageable. And even though interest rates have ticked up in the last while it’s still relative speak, relatively speaking, quite a sort of manageable way of taking capital out or your assets and using those assets for as long as you want. Obviously, there comes a time when you sort of 85 and quite decrepid, that you might consider selling one off completely paying off the debt. And maybe then taking it gratuity on your own home and using that as the income. So there’s all sorts of different ways of managing it. It’s just, it’s just something that a lot of people I speak to have not considered, they’re all worried about, oh, my pension isn’t going to give me enough income? Well, this is a good way of doing it. It also allows you of course to, and this is an old fashioned thing, really, it’s been around for ages. And again, very much a first world issue. But you know, a grandmother, with grandchildren and her children are working really, really hard to make ends meet, they’ve got two or three kids, they’d love to send them to boarding school or send them to private school. And the grandmother can do that in her lifetime see the benefit of those children having that education. And because she’s doing it in a measured seven year rule way. The inheritance tax implications, you know, your kid gets around the inheritance tax issue as well. So rather than, you know, saving and saving and saving, and then dying, and then paying 40% tax on your Oh, the beneficiary pay 40% tax on your estate, and then having to pay off the debt that was incurred in order to potentially send them to private school, just front loaded and pay it to the kids now and see it happen in front of your eyes. Farnaz Fazaipour 11:07 I mean, we can assume why there is a gap in the market for retirees. But would you agree there is a gap in the market for retirees? Or are there lots of options you’ve got for us that we just don’t know, because we don’t know as much as you do about the financial world? Unknown Speaker 11:22 No, I think I think for retirees getting a mortgage actually is very difficult. And often the only option they have left if they’re looking to maintain some sort of debt or raise money on their property is isn’t equity release mortgage. Again, it’s perhaps a first world problem. But I see a lot of clients who have passive income into their retirement that actually would support you know, repayment of a standard mortgage, if you like, but actually getting a mortgage, certainly in your in your 70s as a sort of standard mortgage in your 70s. And anything that you’d like to take you beyond 80 is really difficult. And it’s, you know, I come from a banking background. And it was one of the questions that I would always ask internally all the time, actually, it’s a quite a difficult topic to raise when you have clients who are in a position to continue paying a mortgage, as I say, whether it be passive income or rental rental income that they have. Coming in, as to why banks are just unwilling, and I think it’s the landscape in general, isn’t it, it’s until one bank moves and says, Actually, we’re happy to allow our clients to do this, there’s always going to be very, very few banks willing to willing to, to operate in that way. Unknown Speaker 12:34 And likewise, I’ve been feeling exactly the same thing as Oliver, you know, the banks will standardly call in a mortgage from the borrower at the age of either 70, possibly pushed out to 80. But they’ll call it in, they want to pay it back. And rather than morphing it into some form of retirement mortgage or equities option, which he could literally just more fit into it. But it seems like there are two sets of industries, the banking regulations, and the banks have done it in a certain way and the equity release. Industry has come up another route. And at so far, the two have not actually met, it is slightly ridiculous that they haven’t got their heads around, just simply carrying on mortgages into retirement. I’m sure they’re getting there, we’ll get there. But then it’s not openly in the market yet. And it would be so easy to do. Sometimes Sometimes people can can afford to pay the continue to pay the interest. And other times you just changed the the debt into something that then you compound the interest on. Farnaz Fazaipour 13:38 I mean, I’m assuming the reason for that is that different banks have different products. So they focus on would that be right? Because I actually had this question asked of me from one of my retiring soon, I’m assuming doctors, and he said, Look, my I’m going to be 80 next year, and my mortgage is going to expire, what should I do? And I said, I don’t know, wait until I’ve done the podcast. And I will send it to you and you can listen to it. And maybe we can give you some help. But so what would somebody like that be able to do where one bank is pulled in the mortgage, and they want to shift themselves over to an equity release situation? So do the equity release products have a kind of maximum loan to value that they consider? How would that practically work? Unknown Speaker 14:24 Yeah, so it depends. I mean, most equity release mortgages will normally work offer certainly a lower starting loan to value on the basis that most of them do compound the interest. So you know, if you were going to start at an 80% loan to value for example, it just doesn’t. The numbers don’t work because you’d soon, you know, get too close to that 100% If not further, depending obviously on how old you were and how long you lived for. At the moment that a client would have to look for a separate equity release provider in order to refinance the full amount it may well be that they wouldn’t be able to do the full amount depending on loans, the the current loan that they had and the loan to value. For me, though, it should be that my issue isn’t necessarily that clients and people are able to move on to our equity release is that that shouldn’t be the only option equity release are normally more expensive than a sort of a standard mortgage, if you like. And my issue with that certainly the high street lenders is that they should actually just be able to roll these mortgages on, you know, based on affordability and credit checks, and sort of the usual but if someone has some sorts of passive income, which allows them to carry on paying that mortgage now, whether that be as a rental property, spare capacity just with within from their pensions, or their investments. At the moment, they’re not able to, whereas 1015 years earlier, they would be so it’s sort of a almost moves into without getting too controversial, it almost comes into a well, why is it that just at a certain age, you’re no longer able to use the same income sources to service your mortgage. Unknown Speaker 16:03 But it’s not even about us say about paying the mortgage down. I mean, at that point, genuinely speaking, someone who’s had a mortgage for probably that, by that point, 25 years, the value of the asset is considerably higher than the debt. So probably sub 50% of it is debt probably puts up 30% of its debt in many cases. So and the note the need, there isn’t a need, in my view, to pay down the debt at all, it would be about servicing the interest on it. Because frankly, dealing with debt is in my view, a good thing because it lessens the size of the estate. And I would actually be all for ramping up debt and shoving it towards the kids in the last few years and dying with the debt so as to minimise the IHT. So many times you see people who haven’t done the planning, and you know the amount the IHT bill is huge. So there are all sorts of ways of doing it. But the point is dying with debt is not a bad thing. In my view, I suppose that it could be the motto for the Farnaz Fazaipour 17:00 Bad thing in your view tool. But I would imagine the banks hate it. Unknown Speaker 17:05 Not really no. You don’t see why they should because the reality is the value of the asset is always going to be considerably more than the debt, that’s a very managed process, the the estate, then just sell the asset and pay back the debt that the bank will always have the first call on that, I suppose I’m not sure does the IH does HMRC have a prior call over the bank. Unknown Speaker 17:26 So you can’t you can’t start selling assets until you’ve paid your HD bill. Unknown Speaker 17:31 True. So there is that shenanigans to get through, which is a bit of a nuisance, but the reality is, you know, you’ve got a million pound property, you’ve got 300,000 pounds worth of debt. And that to the you’ve got to pay the IHT and then sell the asset and pay off the debt. And that’s how it happens. The banks will not lose out. Farnaz Fazaipour 17:50 So now we’re going to go to slight, slightly pre retirement age and say, okay, Oliver, we’ve come to you, and we want to use our property assets as efficiently as possible. What would you tell us to do? Unknown Speaker 18:07 Well, I mean, every every day, you know, it sounds like fall off the question a little bit, but every situation is different. What I would say is that my job is about giving clients options, rather than making the matrixes. So the more diverse, sort of the more diversification they have in their assets, whether that be property investments, watches, wine, any, any any or anything like that, the more options they have, the earlier they start that process of building their wider wealth outside of any sort of earned income from from employment, the easier it is for them to make decisions and the more options they have, whether it be during retirement or for retirement, and that obviously makes my job easier as well. Because I can actually then present them, present them with options. I think for clients who have property where they have property that’s not there. You know, obviously they have that prime residence if they have buy to let properties and typically I’ve worked in the past a lot of clients who do have whether it be buy to let or commercial property, they’re always throwing off an income. And it’s I suppose using that most tax efficiently whether that be to be reinvested, how much of that is being used to for their sort of day to day living supplementing their lifestyle. So genuinely does depend on on the client situation. But as I say it’s about it’s the sooner one starts having these conversations with a financial planner, financial advisor, actually, the easier it is for them to plan. Farnaz Fazaipour 19:36 That people always think over and over to another financial planner, but actually, you can get richer by having a financial planner. Unknown Speaker 19:43 Yeah, I mean, definitely, I think I think for one of the things that I sort of really realising the role over the last year is that particularly actually when when times are as they are very tough and inflationary environment and basic cost of living going up you know, this is not about it. Holiday prices going up and things like that you have to heat your home and you have to buy food and put petrol in the car, these are things that we can’t avoid, actually any sort of financial planning that someone does, whether that just be simple cash flow, keeping on top of their cash flow a little bit, some sort of investing using different options available to them, whether it be putting money in their pension, self employed individuals, making sure they’re taking advantage of using their business in the right way. Whether that, again, be for investments, pensions, the protection that they have in place, it’s all key, it’s all really, really, really key. At the moment, I think, actually, the environment that we’re in, in some respects makes my job easier, because when you go to talk to people about it, it’s more it’s close to the front of their mind. Unknown Speaker 20:45 Yeah, and for me, on this one, it’s, again, selfishly dealing in central London, you’re dealing with people with high value assets, it’s about helping people to plan to continue to enjoy their lifestyle, as best they can. And in the most tax efficient way, and I’m not qualified in any way to give tax advice. However, I do find myself giving people, many occasions giving people a good steer, they then go on to talk to their financial advisor, because that’s not such a bad idea. You know, so we, I do find myself sort of involved in basically, helping a load of people to plan for their retirement and an equity release or into into retirement mortgages, is one of the key things that can really keep a lifestyle going. And also, the ability to pass on to the next generation, or actually better still the generation beyond that. Because that’s, that’s a really good way of passing down assets. Farnaz Fazaipour 21:40 Lot of food for thought, thank you very much to both of you, I think that our listeners know exactly the type of agent to go to here, Patrick, if they want really to have their best interests, you know, look, Unknown Speaker 21:55 I’m really, I’m always shooting myself in the foot. So often don’t put tell people or a doctor, tell him don’t tell people to do anything. But in discussion in the course of the discussion. me most of the time, I find myself managing to persuade by accident people to hang on to their asset for longer, which in itself is a completely new topic, which we need to do another time, holding on to assets in appropriately because I could argue completely the opposite way and say that it’s quite inappropriate for us all to be investing in property and to our retirement, we ought to be putting money into startup businesses, and not keeping it in property. But that’s just another tangent. Farnaz Fazaipour 22:35 That’s another tangent, which I’ll talk to you about. And we’ll see where we go with that one. And Oliver, thank you very much. And again, you know, if our listeners need to have some advice on where to go with their financial planning, then there’ll be sure to get in touch with you through our platform. Unknown Speaker 22:51 Yeah, I would just add to that, I think, as I sort of said, right at the beginning, the earlier one starts having these conversations, the better and as Patrick says, you know, often actually sort of ended up shooting himself in the foot to help people, you know, conversation certainly doesn’t cause the doesn’t cost someone anything. So it’s sometimes it’s just about getting people thinking. Farnaz Fazaipour 23:14 Brilliant well, you’re both exactly the type of people we like to having on our platform. Client First, money Second. Thank you. Thank you for talking to us and to find experts like Oliver and Patrick, you can always email us at ask at London property.co.uk And we can try and find you your solutions. Unknown Speaker 23:34 Thanks for listening to the London property podcast, head over to London property.co.uk And subscribe to our newsletter to receive latest updates.