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Legal Advice Has Become Mandatory for All Equity Release Customers

This month, the Equity Release council made it mandatory for all UK citizens looking to release equity to have at least one face to face visit with a solicitor before committing to any plan.

This marks a return to pre-pandemic criteria following a temporary change in rules by the Equity Release Council back in April 2020. The changes were made so that customers could still access equity release products when lockdowns were the norm and face to face meeting were not possible due to social distancing rules.

New equity release customers have been required to take out independent legal advice since the first industry standards were formulated back in 1991, with legal requirement of a face to face meeting added later in 2013.

With many companies across all industries forced to rethink their working environment during the pandemic, the temporary change to the face to face requirement was made with the application process being a mix of telephone calls, documented video and written advice.

This resulted in there being an increase in the amount of interaction between the client and the solicitor so that extra checks establishing the customers identity and whether they are of sound mind and have the mental capacity to enter into a legal contract, as well as the agreement to proceed by all parties with no coercion or duress.

Cases that were already in progress prior to the recent reversal of requirements,            must now reach completion by the end of July this year. All new cases as of the 19th April will now have the legal requirement for a face-to-face meeting with a legal advisor in order to be accepted for equity finance. Despite the changes only coming in this month, the first quarter of 2022 shows that most equity release customers did seek face to face legal advice.

Chair of the Equity Release Council, David Burrowes, commented: “The temporary amendment to our requirement for face-to-face legal advice served its purpose well by protecting customers and maintaining their access to vital funds in trying circumstances.

“The Council’s unique ability to bring together firms from across the market helped to identify a practical solution whereby customers were not cut off from money tied up in their homes, which in some cases was key to accessing care services when they most needed them.

“While restrictions have ebbed and flowed during the pandemic, we are hopeful the worst is now behind us. The time is right to return to the default of in-person legal advice while learning lessons about how technology can best support the overall process and customer experience.”

CEO of Equilaw and non-executive director of the Council, Claire Barker, added: “Independent legal advice is one of the unique distinguishing factors that sets equity release apart from other retail financial services when it comes to customer safeguards and protections.

“Legal firms were able to preserve this important link in the chain throughout the pandemic, despite the adverse operating conditions. Industry collaboration on risk management and sharing of best practice meant we could uphold standards of consumer protection and demonstrate this to lenders and funding partners.

“While face-to-face legal advice remains the gold standard, many uses of technology during the pandemic can continue to benefit customers in the long run. A good example of this is financial advisers using video conferencing to bring family members into conversations about releasing equity or solicitors using online case trackers to liaise with clients.”

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Searches for Rental Properties up 76%, Zoopla Reports

Slowly but surely, some semblance of normality is creeping back into everyday life. Home working and hybrid working models look set to remain the norm for some, but millions are nonetheless finding themselves being summoned back to the office.

The mass exodus from major towns and cities has ended, and is beginning to show signs of a gradual reversal. According to Zoopla, this return to conventional office life is one of the key drivers behind a huge spike in the number of people currently searching for rental properties. Coupled with skyrocketing property prices effectively pricing millions out of the market, more people are setting their sights on private rents.

Specifically, private rental property searches were 76% higher in 2022 to date than during the same period of the last three years, Zoopla reports. More homes are being placed on the private lettings market than at this time last year, but not nearly at a pace sufficient to meet the demands of prospective tenants.

It has become the norm for landlords to have multiple parties effectively ‘bidding’ on their private rental properties at the same time, driving average monthly rents to record highs in many areas of the country.

Younger Tenants Leaving Parents’ Homes

Throughout the pandemic, millions of younger tenancy holders made the decision to terminate their agreements and move back in with their parents. As home working negated the need to continue paying elevated monthly rents in major towns and cities, the sensible option was to make huge savings by relocating.

Today, with almost all coronavirus restrictions having been removed, workers from across the country are once again being beckoned back to their original workplaces. Those who moved back in with their parents are frantically looking to secure affordable lets in major towns and cities, as are those who gained employment remotely during the pandemic.

For the overwhelming majority of these individuals, purchasing a property outright is not a realistic option.

In addition, those who are able to secure quality rental homes at affordable prices are in some cases signing longer agreements, in order to mitigate the risk of being forced to vacate their homes in the near future.

“We’re hearing from agents and landlords that tenants are signing longer leases, which has prevented some of the stock that would normally come back onto the market,” Tim Bannister, Rightmove’s director of property data said in a statement.

“When it comes to demand, we’re still seeing the effects of the pandemic, whereby tenants are balancing what they need from a home and how close they need to live to work with where they can afford.”

Along with rising rent costs, private tenants are also feeling the squeeze of skyrocketing energy bills and record-high inflation.

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Mortgages

High Earners at Risk of Becoming Mortgage Prisoners

Many high earners, with big mortgage obligations, are finding themselves unable to refinance, as lenders tighten lending criteria following the recent tax increases. Many homeowners who bought during the pandemic when the market was booming, may find themselves trapped and unable to move if they have gone beyond their means to buy the property.

With lenders taking the recent cost of living increases into account when considering refinancing loans, the likelihood of being approved has massively decreased. Lenders are looking at high earners, especially those who are paid by dividends and are considering the increased tax on dividends when looking at affordability.

This month, Santander announced that they will be adjusting their lending criteria to include the recent energy, fuel, inflation and tax hikes.

Lewis Shaw, of Shaw Financial Services, explained: ‘With lenders now really starting to tighten their belts, we could easily see a scenario where over-leveraged borrowers with big mortgages may struggle to remortgage as lenders’ affordability models are adjusted in line with tax rises and the cost of living crisis.’

He added: ‘Business owners who pay themselves in dividends will be at particular risk, being squeezed from every direction.’

‘Not only do they have to cope with the employer’s National Insurance increase, corporation tax hikes, and higher dividend tax rates, hitting their own disposable income, they also have to face down calls from staff for wage increases. It’s a brutal balancing act.’

Graham Cox, of the Self Employed Mortgage Hub, said: ‘Many company directors have paid top dollar for large, overpriced properties during the past two years.

‘The Stamp Duty holiday, exceptionally low mortgage rates, housing stock shortages and the ‘race for space’ have driven up house prices to absurd heights. 

‘But, with an additional 1.25 per cent on dividend tax in the 2022/23 tax year, the National Insurance hike, huge cost of living increases, and steadily increasing mortgage rates, lenders’ affordability criteria are already tightening.

‘When the time comes to remortgage, it’s possible overstretched business owners could be left stranded on unaffordable Standard Variable Rates. It depends on whether their existing lender is willing to provide a new deal.

‘Nonetheless, if house prices go into sharp reverse, which is a distinct possibility, we’re looking at negative equity, repossessions, and a whole world of pain.’

Santander stated that the new increase in National Insurance, increased household outgoings and dividend tax will be factored into the affordability test.

Graham Sellar, of Santander, said: ‘We adjust our mortgage affordability calculation on an annual basis, using updated household spending data from the ONS and taking account of other factors including the Bank of England base rate alongside national insurance/tax threshold changes. 

‘We have adjusted affordability on this basis every year for the last ten years.’ 

This comes following the Chancellor of the Exchequer’s announcement of a 1.25% increase in dividend tax and national insurance contributions (12% to 13.25%). Tax on dividends has increased by 1.25%, so for basic, higher and additional tax earners it becomes 8.75%, 33.75% and 39.35% respectively.

Adding to the misery, energy price caps have risen from £693 to £1971 at the start of the month.

Imran Hussain, of Harmony Financial Services. Said: ‘With living costs spiralling out of control and NI and dividend income tax rates rising, it should not come as a surprise that lenders will have to adjust how much they will allow people to borrow. 

‘They have a responsibility to ensure all borrowing is affordable. Some have done so already, while others are doing so.’

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Cost of Living Crisis: Homeowners Stretch Mortgages to 35 Years

During the pandemic the governments incentive to remove stamp duty levy for all properties up to £500,000, sparked a rush for buyers to purchase larger and more expensive properties by taking out home loans for extended periods. There is a prediction from experts that the cost of living increases we are currently experiencing could have the result of a surge in 35 year plus mortgages.

The stamp duty tax relief meant that buyers could save up to £15,000 when buying a new home, before it was tapered down in June 2021 and finally stopped in September 2021. Data reveals that the number of 35 year plus mortgages increased significantly towards the end of both these periods.

A typical mortgage term is 25 years, which is the time period over which a home loan is paid. Figures released by Quilter, a wealth management firm, shows that in June 2021, there were 35,046 mortgages sold with payment terms of 35 years or more. This equates to an increase of 209% when compared to the previous June.

September 2021 showed a growth of 73% in longer term mortgages, rising from 16,066 in September 2020 to 28,112 the following year.

Data shows that buyers have been stretching themselves financially in order to buy at a time when house price hikes were at a high, with the average home cost increasing by 13.2% in the year to June 2021.

The reason most will have opted for a 35 year plus mortgage was to meet their monthly repayments on properties that would be too expensive over a shorter term. By spreading the loan monthly payments are reduced.

David Hollingworth, associate director at broker L&C Mortgages, says that the longer-term mortgage has been a growing trend in recent years. 

‘We do know that there has been an increase in borrowers structuring their mortgage over longer terms for a number of years now, often driven by high house prices,’ he says. 

‘Taking a longer term will help give buyers a bit more flexibility in their monthly budgeting by reducing the monthly payments on a repayment mortgage.

‘That helps with affordability and can be a comfort to first time buyers taking their first step on the ladder who may want some breathing space in the early stages.’

But will the ever increasing cost of living make longer term mortgages more common than not? With increased monthly outgoings and house price increases (11% increase to the end of March), it is expected that more buyers will take this option.

Mortgage interest rates are also on the increase leading to many homeowners looking for ways to decrease their monthly mortgage burden by remortgaging their property using a longer term mortgage. Longer term home loans generally allow the buyer to lend more money so that they can also buy a bigger or better property.

Martijn van der Heijden, chief financial officer at mortgage broker and lender, Habito said: ‘For some people, the impact of inflation will take a big toll on their monthly outgoings. 

‘We’ve had enquiries from customers wanting to remortgage to change their term from 20-years remaining to 30-years remaining, to reduce their monthly repayment amount.

‘With some incurring national insurance tax rises, alongside frozen income tax thresholds and frozen student loan repayment thresholds, we could see more customers looking to extend their mortgage terms, to make their monthly repayments lower.’ 

There are some risks associated with taking out a long term loan. You will need to carefully consider the interest rates being offered.

‘Other than the obvious appeal of lower monthly payments there’s not much to back the case for longer mortgage terms,’ stated Hollingworth.

‘It will come with a cost in the longer run in terms of the total interest payable over the life of the mortgage.

‘Paying the mortgage back more slowly means that more interest will be charged and that can amount to tens of thousands of pounds.’

The fact that the extension of the loan term could take some people right into retirement is something which should be given consideration.

Hollingworth says: ‘A long term won’t always be an option as lenders will consider your age at the end of the mortgage term and won’t simply allow a 40 year term to be taken time after time.’ 

Another disadvantage is that it will slow down the pace at which a homeowner can gain equity in the property.

‘It’s also worth bearing in mind that paying off the mortgage more slowly will mean that the mortgage represents a higher proportion of the property value for longer, so might not allow a drop into lower loan to value bands as soon,’ says Hollingworth. 

‘If prices are climbing that may not be a problem, but if the market is flatter or falls back then it could limit options.’

At the end of the day, opting for a 35 year plus mortgage will help to alleviate the current escalation of household bills and cost of living, but may in the long run result in thousands of extra pounds being spent.

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Cost of Materials and Labour Spells Disaster for Self-Build Boom in the UK

It’s everyone’s dream to have a home built specifically for them. Designed with lifestyle and taste in mind, home builds have proved to be very popular over recent years.

More recently, spiralling inflation and shortages in materials and labour, alongside the war in Ukraine, have caused costs of building a new home to sky rocket. With most of the most commonly used materials used for construction rapidly increasing in price, developing and building properties is set to take a downturn across Britain.

Neil Rogers of Honeywood Joinery, a carpentry business in Newcastle-under-Lyme, says: ‘I was told by my local merchants that if you’re pricing up a job and it’s longer than a month away, add another 15 to 20 per cent for more timber inflation.’

With the announcement from British Steel of a 25% hike in prices on some of their products it isn’t surprising that developers and individuals are being more cautious when costing up development projects. Cement companies have reported an eleven per cent reduction in the production of cement signifying a lowering in demand.

According to data from the National Federation of Roofing Contractors, around 60% of roofing firms have increased their charges.

Figures provided by the Department for Business, Energy and Industry Strategy, shows that there has been a massive 21% increase on general materials in the last year. This data was calculated before the onset of the Ukraine war and the energy crisis, meaning prices can be expected to continue on an upward trajectory for some time to come.

So, whether you are doing a self build or just a modest extension, price rises are sure to make your eyes water.

According to price comparison site Quotationcheck, roof tiles have risen by a whopping 24%, underfloor heating by 15% and loft conversions by 20% over the last 12 months. Plywood is 44% more expensive and UPVC has soured by 42%.

The most shocking of all price increases has to be for rolled sheet joists which have risen by an unbelievable 82%.

Mike Fairman, the chief executive of Checkatrade, said: ‘The current global raw materials shortage has had a profound impact on the UK trade and construction industry. 

Soaring demand, the impact of Brexit, continued pandemic recovery and shock factors like forest fires in North America are all reasons behind the shortages,’

These massive increases are leading to a rapid decline in the growth of the self-build market. Analysis by estate agency, Savills, reveals that between 7 and 10% of all home built in the UK are self-builds, equating to around 130,000 per year. The government has plans to increase this to between 30,000 and 40,000 annually and has requested that councils keep a register of self-builders who are looking to purchase plots to develop. The aim is to use spare land that can be developed be offered to those on the register, however, the uptake has been somewhat patchy.

But dreams of your perfect self-build do not need to be forgotten necessarily. Instead it is worth considering options to keep costs down to a minimum for new builds and extensions.

Getting quotes for labour and materials before the build starts will help to realistically cost the project.  Also bear in mind that the design may cause additional costs, for example an open-plan design will most likely need load bearing steel which is one of the materials which has seen the largest price increase.

Purchasing an ‘off-the-shelf’ home will likely save you some money, in other words, considering a kit built house is an option to keep costs down. The advantages of this is that buyers are paying a one off payment for the design including all the materials and fixtures and fittings.

One bit of positive news is that the government have scrapped VAT for all materials intended to make homes and properties more environmentally friendly and energy efficient.

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Average House Prices in Scotland Hit a New All-Time Record High

First-time buyers looking to get on the Scottish property ladder could be facing an uphill struggle this year, as average property prices reach new record-highs.  For the seventh time within the past 12 months, the average market value of a home in Scotland has broken all previous records.

New data from the Walker Fraser Steele Acadata House Price Index indicates that the average price of a home in Scotland hit £218,702 in February 2022 – an increase of £16,600 compared to February 2021.

On a monthly basis, Scottish house prices were up 1.5% in February compared to the month before, amounting to a one-month increase of £3,200 on average.  This is the largest monthly increase recorded since August last year, with average house prices increasing in 30 of Scotland’s 32 local authority areas over the past year.

Only two areas recorded slight reductions in price over the past 12 months – Clackmannanshire and Aberdeen City. Meanwhile, the Orkney Islands saw the biggest gains of all, where average house prices increased by a huge 28.6% since the same time last year.

Competition Remains Ferocious

Senior housing analyst at Acadata, John Tindale, highlighted similarities in the real estate sectors of England and Wales. Last month, all nine English and Welsh GOR regions recorded all-time high average property prices – Wales achieving the strongest annual growth rate of 8.9%.

“As we reported last month, in general terms, we are still living with the effects of the pandemic, and the lifestyle changes this has brought about – in particular the ‘Work from Home’ edict has encouraged many to move to larger premises with outdoor facilities,” Tindale said.

“There is still high demand for such homes, but supply is limited, so there continues to be strong competition for the properties that do come on to the market, with resultant price increases.”

Elsewhere, regional development director at Walker Fraser Steele, Scott Jack, said that the way Scotland’s real estate sector has returned to strength was highly impressive.

“As a piece of context, in February this year, all the regions in England and Wales established new record average house price levels, but it is fair to say that the Scottish property market has robustly withstood one of the most seismic events in living memory in the past couple of years,” he said.

Shifting Priorities and Changing Lifestyles

Analysts continue to cite the ongoing home working trend as the biggest single contributor to explosive competition on the UK’s housing market. 

Meanwhile, record-high rent yields across the country are motivating landlords and investors to expand their portfolios, putting even greater strain on the sector’s limited available inventory.

Even as the gradual return to the office accelerates, lifestyle changes brought about by the pandemic are likely to continue altering the public’s priorities long term. All of which is likely to sustain the housing market’s blistering performance indefinitely, as demand continues to outpace supply by a clear margin.

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Landlords and Homeowners to Get Tax Relief to Improve Energy Efficiency

Following the Spring Statement this month, by the Chancellor of the Exchequer, Rishi Sunak, landlords and homeowners were given the good news that all materials used for improving energy efficiency in their properties would now be VAT free for the next 5 years, down from the previous figure of 5%.

This reduction in tax represents an estimated saving of £1,000 upfront and will further result in lower energy bills, saving around £300 per year per household. The announcement comes at a perfect time, particularly for landlords who are required to meet new EPC regulations to upgrade their properties and make them more environmentally friendly.

New EPC (Energy Performance Certificate) regulations stipulate that landlords must increase their rating in their properties, to the minimum of a C rating by 2025. This applies to all new tenancies and will be followed by all tenancies by 2028. This could add up to a large bill for landlords, who will be required to make any changes needed to reach the required rate, so the zero vat on materials will help to keep costs down.

The 5% saving on materials will give landlords an opportunity to reduce their outgoings during periods when their properties are vacant and will in turn help tenants by reducing their energy costs, which will be gratefully received, considering the recent increases in rental prices.

Rental rates have increased at their highest annual rate for more than five years, hitting the highest growth seen within the last year. The ONS (Office of National Statistics) has released data showing a 2.3% increase in prices in the private rental sector, the highest seen since December 2016.

The largest rental growth was recorded in the East Midlands with an increase of 3.8%. London showed the lowest rental price hike, increasing only 0.2%, primarily due to the change in working habits, with many people opting to continue to work from home post pandemic, according to the ONS. Excluding London, the rest of the UK saw rental prices increase by 3.2% in the last 12 months, up slightly from 3% in the year to January 2022. Looking at each individual country, Scotland lead the way with a rise of 2.6%, followed by England at 2.1% and Wales at 1.4%

Research conducted by Rentd, revealed that the average earnings for tenants fell far below the affordability level for rental prices across all regions of all five nations. This is calculated by looking at the average earnings of a typical renter and using a benchmark of two and a times the average rental rates. The report found that the average annual wage for those who rent in the private sector was 12% lower than the wider average, with an average income of £28,116.

Across the UK the average rental price is £968 per calendar month (£11,616 per annum). A tenant would need to have a salary of at least £29,041 to comfortably be able to afford this rental rate. This is a short fall of £925 when calculating using the 2.5 times wages affordability formula.

With inflation spiralling and the cost of living rapidly increasing, any homeowner dreams for many renters are becoming unreachable, putting even more pressure on the private rental sector to find more housing stock. The demand for quality, affordable rental properties is on the increase with both landlords and tenants needing support through these turbulent times.

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Mortgages

Reducing Borrowing Costs with New Equity Release Rule

Homeowners, who have taken advantage of equity release finance, are now able to make additional partial payments without any charges or penalisations, in a bid to reduce borrowing costs.

Although this is a feature already offered with some later life lending products, as of the 28th March, the Equity Release Council have announced that it will be mandatory for lenders to include this feature with all equity release finance products.

The ability to make extra payments will result in homeowners reducing the impact of compound interest later down the line and decrease the overall cost of equity release.

Equity Release finance is way of releasing the tied up cash in your home. It allows for borrowing against the equity in your house without being required to make any repayments. The loan is repaid when the borrower either moves into residential care or passes away. To be eligible for equity release you must be over 55 years old.

This new rule will allow the homeowner to make payments as and when they wish, thereby reducing the amount that the lender will be repaid when the time comes.

The Equity Release Council, who announced the news regarding the new product safeguard on Monday, stated that over the next decade, a total of £39 million in combined savings can be achieved, with further figures predicted to be a whopping £99 million in expected savings over the next twenty years.

Data shows that, in 2021, more than 125K part payments towards equity release plans were made, without penalty.

Jim Boyd, CEO of the Equity Release Council, said: “The right to remain in your home for life, with no requirement to make ongoing repayments and no threat of repossession, has been central to the appeal of equity release since 1991 and remains a core pillar of the modern market.

“Our new product standard adds to this by ensuring people have the freedom to reduce their borrowing if circumstances change.

“It enables equity release customers to mitigate the effects of compound interest and reduce their borrowing costs in later life, which we know is often one of their main concerns.”

This latest product standard, released and enforced by the Equity Release Council, sets out the following parameters:

  • It gives the homeowner the right to live in the property for the rest of their lives – they will also have no obligation to make any payments until they go into full time care or pass away
  • Interest rate is capped or fixed for life – the rate of interest will never change even when base rates change
  • No negative equity guarantee – the debt will never be more that the home is valued at, meaning that relatives will not be burdened with any funds owing to the lender
  • The right to move the loan – providing it meets the criteria, the loan can be moved to a different property

Jim Boyd added: “Equity release today is a flexible financial planning tool for a range of scenarios, from gifting to family to supporting better living standards over longer lives in retirement.

“Consumers should always use a Council member to explore their options and alternatives to equity release, to benefit from product protections and expert advice to decide if it is right for them.”

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