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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.

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How to predict a recession and how to end one - the definitive guide

Monday, January 4th, 2010

Hello and happy new year! doesn’t it just feel great to be back in business? No? Perhaps the recession blues are getting you down then.

And on that note I thought I would begin the year with something completely unrelated to mortgages but connected to todays completion of the new world’s tallest building in Dubai.

You see there’s a lot of talk flying around about how can we ensure that this never happens again, that theres never another recession or credit crunch and that banks are never again allowed to overstretch themselves.

The answer to this question is in fact that you can’t. What goes up will in fact go down sooner or later, and growth is always followed by decline at some point down the road. Gamekeepers have known this longer than most and I first heard it put into terms by a comparison to the populations of foxes and rabits.

Fox and Rabbit populations have been recorded for centuries and it has long been observed that Rabbit populations mushroom until overcrowding causes disease to make them weaker and more vulnerable to predators like the Fox. And so Fox populations have also followed Rabbits peaks and troughs because the number of Fox’s inevitably goes up as Rabbit populations increase, but then when the Rabbits decline a lack of food for the Fox also inherantly leads to Fox populations going down too.

What’s the point of this? In the middle of the last boom I heard a theory that recessions can be predicted as they always appear to happen upon the construction completion of the world’s tallest building.

Now I had forgotten about this altogether until I heard on radio 4 this morning that the new world’s tallest building has just been completed in Dubai. The theory says that as building the world’s tallest building is a mark of prosperity then it is something that a country will only consider when the good times are rolling, and by the time its off the drawing board and into construction its pretty likely those good times are coming to an end.

So if you want to know when to sell everything, and go on an extended world tour keep an eye on those construction projects!

Now as for how to end a recession its pretty simple. Stop putting prices down and put them up instead, it’s just human nature that if prices are going down you wait to buy until their cheaper and if their going up you buy now before they get any higher - And that my friend is why you can gaurantee one thing,

It will, most definitely happen again.

Fin

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Mortgage Broker Q&A – Capital Gains Tax on Buy to Let or investment properties

Wednesday, November 18th, 2009

Capital gains tax is levied on gains made on certain non exempt sales of assets at a current rate of 18%. Your main residence is effectively exempt from Capital Gains Tax through tax relief, however any second home or investment property will become liable for Capital Gains Tax from the date at which it is no longer your main home.

So if you bought a property as a second home or buy to let then it is liable from the date of purchase, whereas if you bought a property as your main home and subsequently moved to a new property letting the old one, then the old property becomes liable to Capital Gains Tax from the date of transfer however there is a 36 Month leeway given so effectively you owe Capital Gains tax on the property from 36 Months after its transfer to a buy to let.

Losses and expenses can be set off against any gain, so keep a record of all your costs as a landlord including maintenance bills etc but not including your mortgage costs (mortgage interest is offset against income tax). This means it is also worth having some form of valuation on the property at or around its 36 month as a let property to establish the value of the asset at its date of becoming liable.

You also have a personal Capital Gains Tax threshold of £10,100 currently below which no tax is due, so if you are married or in a civil partnership having the property held on a joint tenancy or tenancy in common basis will allow you to use both your tax thresholds up to £20,200. To work out any tax owed take the sale value of the asset, less any costs and applicable tax threshold and the value at its date of becoming liable the multiply by 18%.

So if you let a property worth £120K in 2005 and sold it this year for £150K with costs in the four years of £3k then you would owe £30K less £3K, less £10,100 which = £16,900 taxable gain then multiply £16,9K by 18% giving tax due of £3,042. In the same situation for a married couple where the property was held in joint names you would instead take the gain of £30K less £3K costs, and £20,200 tax exemption giving £4,800 taxable and tax owed of £864.

Capital Gains Tax is a complex area and there are other factors which may affect your tax liability, and it should be remembered that taxation policy can change in each government budget. For more information or to speak to a mortgage broker call 08454594490. Seek independent taxation advice for an exact analysis of your tax liability and guidance on tax mitigation.

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When will big businesses learn and switch their brains on?

Monday, November 9th, 2009

It doesn’t surprise me in the least that our banks needed bailing out, not because of “casino trading floors” or “fat cat pay packets” but just simply because on a day to day basis I am confronted by the complete lunacy of big businesses and the categorical failure to look at the big picture.

Myself and colleagues once helped one of the UK’s largest Insurance companies sort out their customer service by explaining to them that it was probably a bad idea to send brokers all over the country individual notifications of a cancelled policy with no details of the reasons for cancellation and outstanding payments owed, because that meant they had to handle thousands of calls from brokers every day just to ask why the policy had cancelled and what it would cost to re-instate, information they could quite easily send on the same message. These calls were going into the same service team that dealt with their customers with an average hold time of twenty minutes.

The same insurer had an online broker quote system that allowed you put in a postcode on the first page and on the last page twenty minutes later it would dutifully inform you that it was a decline due to flood risk or area! We helped them re-develop their system but with a little logical thought from their IT team in the first place there would have been no need.

One big bank is proud to inform all brokers that they have moved to a paperless office! Hoorah! However because they insist on you faxing every document to them brokers all over the country probably aren’t enjoying a similar lack of paper of in their offices. Have they heard of the wonders of email? You can actually send a message electronically with documents attached to them, and unlike faxes the output at the other end is actually legible? You might argue you can email to a fax number, but not without an email to fax account and what’s the point anyway? It reminds me of the operation Good Guys episode where blank paper is just being faxed over from another station!

But the icing on the cake was the credit card company who after taking about seventeen security questions and proof of ID over the phone just to let me speak to them, informed me that to change my account address I would have to write them a letter. Yes because as we all know the royal mail is the most secure system of passing information available anywhere, and anyone who has my credit card can probably fake my signature but wouldn’t normally be able to guess my date of birth, place of birth, mother’s maiden name etc.

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Time to end black-boxing

Monday, November 2nd, 2009

While everyone is up in arms about bankers bonuses and the lending practices that led to the credit crunch the bigger picture of fair and open practices within the financial services industry seems to have fallen by the wayside to a culture of pandering to politically driven objectives.

One thing that most definitely flies in the face of the FSA’s treating customers fairly objective is the practice of credit scoring and what is referred to as black boxing. Black boxing is one of the terms used to describe the elements of a lenders credit scoring criteria that are kept secret and undisclosed.

While I don’t think that using a system of credit scoring is unfair or bad practice I do believe that it is unfair to keep any part of the methodology behind a scoring system secret. Firstly there have been a lot of issues with lenders accepting a decision in principle from an applicant which obviously incurs no cost, and then declining a mortgage application based on the secondary scoring of the application.

There is an obvious issue with this practice particularly where funds are limited in supply in that it leaves the lender open to accept many more applications than they can possibly fund while accepting application fees and booking fees (many of which are now charged up front) and declining an application post valuation. Interestingly many lenders also now include administration fees within their basic valuation fee, or have moved free valuation incentives to the back end of the deal asking you to pay for a valuation then refunding the costs upon completion. Several newspapers have also reported that many lenders are now removing the right for mortgage brokers and consumers to contest valuation figures on deals with free valuation incentives as a way of forcing borrowers into a higher loan to value product.

It’s also well known that while the idea of a credit blacklisting is a bit of a myth it is true that lenders may apply a weighting to their credit scoring systems that is based on geographic location for example. Some streets or postcodes may be dragged down on score based on the lenders experience in the area which may make it more difficult for people residing there to get credit. Now take this concept and how do we know that ethnic groups for example are not being penalised, which would naturally be illegal under racial discrimination laws? The simple answer is we don’t because we can’t see how these decisions are being made. Which means it’s bad for public faith in the industry and consequently the industry as a whole.

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Mortgage Broker Q & A - Letting a mortgaged property

Thursday, October 29th, 2009

Question – I am intending to let my property which has a residential mortgage on it, what should I do and is this ok?

Firstly it is a typical condition of almost all residential mortgage contracts that the property should not be let without the consent of the lender. So you should always speak to your lender first and see what they say.

Most lenders will be relatively helpful with this as there are numerous reasons people choose to let what was once their home and it’s a very common occurrence. They may want to change the mortgage contract to a buy to let type or in some circumstances change nothing until the current mortgage is out of its initial term.

A lender is unlikely to give you a positive response though if you only entered into your mortgage contract very recently. If they did then very few people would bother paying the higher interest on a buy to let mortgage and would simply take a residential mortgage and switch it a week later.

You will also need to look at your buildings and contents insurance as it will very likely invalidate this policy if you are not the main occupant. Tenants are more likely to ruin a property than the owner so your home insurance may be a little more expensive, and last but not least you need to make sure you comply with all the regulations around being a landlord as regards gas inspections and using a secure tenant’s deposit scheme to avoid any litigation in the future.

As usual if your need further information about this call 0845 4594490 to a speak to a mortgage advisor about your own circumstances.

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Fool’s Gold?

Tuesday, October 27th, 2009

In January this year I made some market predictions to my friends, I said I thought Oil would hit $75 a barrel again before the end of the year, that the Euro would fall back against the pound (which it did but not quite as far as I expected I said about 1.3 to the pound which it seems was way too optimistic) and that the value of Gold would plummet like a stone before Christmas.

Gold did drop early in the year from a trading price of about $980 an Oz to about $800 certainly a big fall but not enough. There’s an old saying about investments called Dumb Money, which is when everyone on the street is talking about it then it’s time to get your money out of it.

Everywhere I go now someone is advertising cash for gold, or new gold treasury pieces or the like. Which makes me confident the end is nigh. You just have to consider that Gold is primarily used for decoration, only about 15% is used industrially and both consumer spending and industry are down massively so Gold can only be priced on speculation.

Now canny investors with enough money muscle know that there is so little Gold produced annually that big investments can have a gold finger effect, starving the market to drive prices up and flooding it to drive them down. Such investors can then buy short dated futures or options which will actually make them a profit when prices fall, initially to hedge a position but also in full knowledge that when they drop their holding it’s going to hit the price and make a double profit.

So while stock markets around the world are rising the question has to be starting to build in these investors mind that the time to pull out is sooner rather than later with Gold currently running at $1050 an Oz up almost 50% on two years ago! So I am going to make a Charity pledge – If gold is still above $700 an Oz on the 25th of December I will literally eat a hat for the British Heart Foundation.

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The end of self cert mortgages?

Monday, October 19th, 2009

I wrote an article some time ago about the FSA’s proposed changes to end self certification and fast track mortgage lending in which I made a big point about how this could leave a lot of people struggling to refinance and cause trouble for the recovery of the housing market.

The FSA last week confirmed that action would be taken, and the press have been making similar observations to my own today about the impact that this could have on our recovery and those borrowers with an existing loan of this type.

But over the weekend I had a realisation and did a u turn on the subject. In reality there are few if any legitimate borrowers who cannot “prove” their income. The point being that “proof” and it’s interpretation is the key point here, because almost all people can show evidence that the income they declare is broadly accurate however they may not be able to prove income in the manner that a normal full status mortgage would require.

For example if you have a business from which you could take far more income than you currently do without running the business into decline that is your prerogative, and if you can show that you can still afford a large mortgage then fine, but you can also evidence that your business has the potential for you to take further income. It may not be satisfactory at your local building society now, but lenders with good product development teams will soon see how to create a new type of product to cater for this market once their appetite comes back.

So if the FSA get this legislation right and don’t dictate or define what proof consists of then there will still be the opportunity for lenders to market products for those with non standard income, priced above full status products as before but simply requiring some evidence to back up that the income declared isn’t total fabrication. This is what’s needed in the market and the FSA just need to be careful not to try and make this legislation so watertight that it chokes the housing market to death.

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Rates continue to drop at lower loan to values

Thursday, October 15th, 2009

There have actually been so many new rates announced over the last two weeks it hasn’t been possible for me to talk about them all. Suffice to say if you are remortgaging or buying your first or second property rates across the board have dropped by as much as 0.3%. Arrangement fee’s also seem to be reducing slightly as well with several of our broker best buy products now having arrangement fee’s below £600 against an average fee of £999 for most headline rates a few weeks ago.

Swap rates have dropped significantly since the massive drop in BBA LIBOR over the past two months and this has helped to fuel cuts in fixed rates, however there still seems to be a general lack of movement on rates at higher loan to values for borrowers looking to remortgage. Fixed rates at 85% loan to value for example continue to sit around the 5.99% mark with little movement.

It will be interesting to see who makes the first move on this market of higher loan to value remortgage borrowers if indeed there is any drop at all, it seems almost as if the pot is so big that banks are scared to dip their toe in the water in case they get swamped. It certainly can’t be claimed that a remortgage at 85% is a greater lending risk than a purchase at the same loan to value yet you could get a much better rate if you were buying at this ltv.

Mortgage Advisors will be keeping their eyes peeled for changes on these higher LTV products and hopefully the news that interest rates are likely to remain low in the long term will help to drive swap rates down further and one of the big banks into releasing some decent remortgage rates for those with little equity. And if you’re listening a 95% purchase product wouldn’t go amiss either!

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Woolwich respond to criticism with revised rates

Tuesday, October 6th, 2009

The Woolwich have responded to criticism around their stepped tracker rate which with a current headline rate of 1.98% is one of the lowest rates available in the market. I commented on the fact that the product was restricted to mortgages between 200K and 500K severely limiting its market when I announced the new rate here a couple of weeks ago, theses restrictions have now been removed and the rate is available for loans between 5K and 1 Million now from today.

They have not chosen to address however the lengthy tie in for five years with a 2% early repayment charge which could make the product very costly in the long term.

Instead they have released a new lifetime tracker at bank base rate +2.29% with a £999 application fee available up to 70% loan to value or at +2.69% with no fee again to 70% loan to value. The new products have early repayment charges of 1% for 2 Years making them much more favourable but crucially both allow you to switch to a later fix without penalty too.

Both products would have a valuation fee of £295 for a purchase at 70% loan to value with a mortgage of 100K and lender Conveyancing fee of £126 giving an APR of 2.9% and 3.3% respectively.

As usual always read the separate Key Facts Illustration prior to making a decision on a mortgage product and to speak to a mortgage advisor call 0845 4594490.

Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it. We do not usually charge a fee for mortgage advice although you do have the option to pay up to 1.5% of the loan amount. Some buy to let and commercial loans are not regulated by the Financial Services Authority.

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