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Finance in Spain
ASSET RICH BUT CASH POOR? RELEASING FUNDS FROM YOUR PROPERTY IN SPAIN – A GUIDE. There has been much discussion in the UK in recent years about a very, very simple issue that confronts many home owners, and how to do right by them in providing a solution that is both ethical and financially viable. The UK financial market is the most diverse in the world, the most dynamic and the most heavily regulated. In simple terms it is that there is a massive and common problem for many home owners in the UK and in Spain; that is they are often ‘asset rich and income poor’. That is to say they have an awful lot of money tied up in the home, which goes up year after year fairly consistently, but very little savings or income to live off. The effect is that their property really is now being used to their benefit than it is more for their eventual benefactors; their children and grandchildren. But with the increasing value comes a hidden monster via Inheritance Tax. (see other postings) And, in Spain, this issue is highlighted by the simple fact that many retirees here, insist on buying their new home in cash, sometimes leaving themselves short in savings, and expecting to live on limited pension income. They come with an overly optimistic expectation of the low cost of living, believing they are able to live on a relative shoestring. It is a wonderful objective in life to leave an inheritance to your children free of encumbrance i.e. no mortgage. But, that should never mean that the parents live the remaining retirement years of their life out in abject poverty which is close to what some people do. Most children or would-be beneficiaries of an estate would far prefer their parents to enjoy those latter years, and if that then means that they get less of the end inheritance, then so be it. Most readers and even their own beneficiaries would agree with this belief, and from numerous conversations with clients of simplespanishmortgages.com, that is the majority view also. As an example and an explanation as to the strange mentality of many home owners this explains what a ‘Lifetime Mortgage’ actually is and, more to the point’ why the product has been developed. Firstly, to introduce the concept of ‘Equity Release’ because that is what the Lifetime Mortgage is; It is releasing back to you some of the capital (equity) you have locked in your home. There are now is whole barrage of products that achieve the same goals which are commonly a) giving you a cash lump sum to do with what you want and/or
b) an income, often to supplement retirement lifestyle. So what are these products? 1) An ordinary Mortgage.
We all now what these are and they are often deemed necessary but not wanted. Home owners can now release up to 60% of the value of their property without stringent underwriting. With this product the mortgage interest has to be paid every month To some that is not a problem, especially where perhaps they have sufficient pension income and even savings and the object of the mortgage is release a lump of money for a bigger item, often home improvements. But to many the monthly repayment could hurt or even be impossible to consider. But there are ways around that for example by borrowing more than is needed and investing the to beat the underlying mortgage rate, thus effectively contributing if not totally meeting the cost of the whole mortgage.
So the ‘cash out’ bit can come at zero cost. 2) Equity Release schemes.
These products are often used to assist in the mitigation of Spanish Inheritance Tax, and combine a mortgage, ‘cash out’ and an investment, the latter’s target being to cover the overall mortgage cost. In other words there are no monthly repayments made by the client. The ‘cash out’ element comes at zero cost. These can be useful products to consider, but they are more complex to understand so need careful consideration. The risks attached are limited and controllable providing you are sensible in the size of the total mortgage being considered and where the net investment is being placed. The golden rule is to allow an element of cash to be released and then for the investment to ‘wash the face’ of the mortgage interest payable. That’s it. Do not be overly aggressive in your requirements (large cash release and/or a substantial income) this requires the investment to work that much harder. That means that you cannot invest cautiously, and that implies taking on a higher risk. 3) Home Reversion schemes
These are even more complex in their make up, but in simple terms effectively mean that your home is sold for a cash sum to the reversion company, but you retain the right to live in the property until your demise. At that time, the home then passes to the reversion company, sometimes with a payment made to your estate. These products have their uses but newer ideas, such as the ‘Lifetime Mortgage’, have surpassed Reversions because they offer the same end gaol (cash now), are more flexible (you can exit easily and more economically) and you retain the ‘upside’ with rising property values. Some Reversions offer the latter; most do not, and that could mean forfeiting an awful lot of your beneficiaries inheritance. They should be investigated thoroughly in your search if you believe that this is the right scheme for you. 4) Lifetime Mortgages
So the newest addition to the products generally referred to as ‘Equity Release’.
This is actually little different from an ordinary mortgage except that you do not have to pay the lender interest. It is simply added to your borrowing and ‘rolls up’. Now there is simple element of risk that has to be understood with this product and it is this. The interest rate is often more expensive than an ordinary mortgage and the compounded effect of that means that over time the interest on the interest on the interest will be a significant sum. And the risk is therefore that, if the underlying property value does not keep pace, the percentage of the end debt versus the percentage taken at the outset will obviously be higher. A good scheme will have “No Negative Equity” guarantees.
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This intel was contributed by chico
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May, 2012
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