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Archive for February, 2010

Mortgage Broker Q&A – Why is a life insurance policy written into trust?

Thursday, February 25th, 2010

Question; I have been advised that my life insurance policy should be written into a trust, why is this?

There are several reasons why certain life insurance or assurance policies should be written into trust and generally they are to do with avoiding tax liabilities and or ensuring that the proceeds of a policy will reach the intended recipient.

About two thirds of people in the UK don’t have a valid will and testament and die “intestate” which is the term for an estate which does not have a valid will in place to determine where and how the estate proceeds will be divided up (sometimes there is a will in place which is no longer accurate and can be invalid for this reason too).

In this case there are rules which govern how the estate is split which can often leave the proceeds of a life policy being paid out to someone who is not the intended recipient.

A good example is a couple who are unmarried and have arranged a life policy on the life of the main breadwinner to repay the mortgage in the event of death, in this case if there were no valid will in place the proceeds of the policy would likely be passed on to the deceased’s family rather than the surviving partner which could include children from a previous marriage or the deceased’s parents for example.

In another scenario a life policy which was written to pay out to a couple’s children on the last survivors death in order to cover inheritance tax liabilities would itself become part of the deceased’s estate, and therefore liable to inheritance tax itself if it were not written into trust.

The rules around taxation and particularly the taxation of trusts change regularly and this is one of the reasons why mortgage advisors will recommend a regular review of your circumstances. A policy once written into trust may well one day be better off outside of it and therefore it’s important to regularly check that existing provisions are still arranged in the most tax efficient and sensible manner possible.

If you have a life insurance policy which you think may need to be placed into trust or to speak further to a mortgage advisor call 0845 4594490 for independent advice.

Tags: Estates, Inheritance tax, Intestate, Life Assurance, Life Insurance, Tax Efficient, Tax Mitigation, trusts, Wills
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Mortgage Broker Q&A – Is it safe to use small regional lenders or would I be better protected borrowing from a larger bank?

Monday, February 22nd, 2010

This is a really interesting question for me as it crops up quite a lot however it’s important to remember that borrowing from a bank is not the same as depositing money into it.

Firstly on the reasons you should use small regional lenders, they are currently leading the market in terms of mortgage and savings rates and you may well find their customer service slightly less like dealing with a brick wall! There really are some cracking products being delivered by small regional lenders at the moment and there is really very little reason to shy away from them.

If you were a mortgage borrower with an institution that failed then there would be very little likely-hood of the administrators coming round with repossession orders even if the law permitted them to do so (which I am pretty sure it doesn’t but I am not a solicitor), because selling an entire loan book would be ludicrously complex and probably produce a much lower return than simply selling the book of loans to another institution, something which is in fact very common trading by Banks anyway.

Even in the event that there was no one forthcoming to purchase the loan book, the administrators would simply let the book run and pass administration to an outsourcing firm – again quite common.

The government currently in power has made it clear that it will not allow any financial institution in the UK to fail regardless of its size. The FSCS or Financial Services Compensation Scheme currently does not discriminate between the size of institutions either so as long the provider is a part of this scheme and falls under UK regulation this is not affected.

Tags: building societies, Financial Services Compensation Scheme, FSCS, Loan Book, Mortgage Administration, regional lenders, small lenders
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Mortgage Broker Q&A – What is a higher lending charge?

Friday, February 19th, 2010

Question; What is a higher lending charge and how does it affect me as a borrower?

A higher lending charge is a fee lenders may apply to borrowing over a certain percentage of a property value.
For example a lender may choose to impose an extra charge on borrowers who borrow more than 80% of a property’s value, or perhaps more than 85% or 90% etc. Often the fee will be a percentage of the amount over this limit which you borrow.

A typical example would be a 5% charge on all lending over 80% of the property value. In this case if your home was worth £100,000 and you borrowed £90,000 you would pay 5% of the £10,000 over and above the 80% limit which would give a higher lending charge of £500.

Obviously it’s important to check how the fee is calculated as it could be based on the whole loan which would normally mean the fee could be considerably higher than the example above.

Another important consideration is what the lender does with the fee. Some lenders just charge a fee to increase their profit margin on these loans to cover potential losses if they have to sell properties undervalue at auction. However if the lender uses the fee to buy a Mortgage Indemnity Guarantee which would insure the lender against such losses, it’s important to be aware that in the event of you handing back the keys and the property being sold for less than the outstanding mortgage balance the insurer would then have the right to pursue you for their losses under the right of “subrogation”.

The FSA forced lenders to stop referring to these charges as Mortgage Indemnity Guarantee fee’s because it was worried that this gave the impression that such insurance policies would benefit the borrower as well as the lender, so be aware that if you pay this fee or have done in the past it will not protect you from the lender or insurer pursuing you for any outstanding balances should the property have to be sold at undervalue after repossession.

Tags: Charges, FSA, Higher Lending Charge, MIG, Mortgage Fee's, Mortgage Indemnity Guarantee
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