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This week&#39s problem case

Mr and Mrs Fairfax, both retired teachers aged 65 and 66, own a home in the UK valued at £400,000 with no mortgage. Mrs Fairfax has relatives in France so they have bought a property there for £35,000. They plan to refurbish it for £30,000 and use it as a holiday home. The property has out-buildings which they want to renovate for £15,000 and rent out, but they won&#39t have enough income to cover mortgage payments and sustain their current lifestyle.

Intermediary response

Sally Laker, managing director of Mortgage Intelligence, says the couple should consider Northern Rock&#39s equity release mortgage scheme which takes lifestyles into consideration Mr and Mrs Fairfax are a good example of the new attitude to retirement lifestyle. At this stage in their life, they are cash poor and asset rich and still want to maintain a similar lifestyle and enjoy the next 10 to 20 years. Property in France can be purchased at a reasonable price, but often it is basic and without all the usual mod cons so they are wise to allow for refurbishment costs. Northern Rock would be able to assist with its Home Equity Release Mortgage Scheme, which is designed to take lifestyles in to consideration. To ascertain the maximum amount that the couple can borrow, they will take the lowest age and apply the appropriate LTV – in this case 20%.

On a £400,000 property, that would release £80,000 and would provide them with a cash lump sum to purchase the property, refurbish it and convert the out-buildings. They will need to allow for legal costs within the total sum and ensure the conversion costings are allowable within their budget.

Depending on their attitude to risk, Northern Rock offers either a fixed rate for life at 7.49% or a base rate tracker of 1.99% over base (5.99%) but capped at 8.49% for the life of the loan. On this scheme no repayments are necessary, the loan interest will accrue and both the capital and interest repaid on death to the lender.

As part of SHIP, Northern Rock provide a &#39no negative equity guarantee&#39 so that even if the total loan including interest exceeds the value of the property the maximum that they can take is the value of the property. There is an arrangement fee of £595 which can be added on completion and the product is portable. If Mr and Mrs Fairfax decide to repay the loan early, possibly downsizing their house, there is an early redemption fee during the first five years. But if they sell to move to long-term care, or the property is sold following the death of the survivor, there would be no redemption charge.

We do not know if they have any children but if they do these should be included in the discussions and understand the implications. A separate solicitor must be used on this transaction, so the clients know he is acting in their interest only. If they do have children, they will automatically inherit the property in France and therefore, still be party to an inheritance, as the security for the equity release mortgage will be the UK property. If Mr and Mrs Fairfax die prematurely, only the loan plus interest accrued will be payable and any surplus will go to their dependents. As their income will have substantially reduced this will free up their cash, but with no monthly mortgage payments to worry about. The most important part of the transaction is making sure that everyone in the family as well as Mr and Mrs Fairfax fully understand the implications of equity release. The procedure adhered to by Northern Rock does ensure that there is a clear understanding of the mechanics of the scheme.

Lender response

Anthony Mooney, assistant director of marketing, Northern Rock, says that the couple could release more equity from their English home when Mrs Fairfax turns 67 There are two product options available to the Fairfaxes and as they own their £400,000 property outright, a considerable amount of equity can be released.

Northern Rock offers two solutions – the Standard Home Equity Release Mortgage, whereby a lump sum is taken, and the Cash Plus Home Equity Release Mortgage. Under the Cash Plus option, borrowers can take a monthly cash release from the equity contained in their property in addition to a lump sum. The minimum release for the standard lump sum product is £5,000. The minimum release under the Cash Plus scheme is £50 per month and, if required, a £1,000 lump sum.

With both products the customers can choose to fix the interest rate for the life of the loan – this is currently 7.49% – or they can opt for a variable rate equivalent to the Bank of England base rate plus 1.99%. The latter option is capped for the life of the loan at 8.49% and its current rate is 5.99%. Unlike a conventional mortgage, there is no set repayment date and no monthly loan payments. Instead, the loan and any monthly cash release, plus the accrued interest will become repayable when the property on which the mortgage is secured is sold, due to the customer moving into long-term care or upon death. In the couple&#39s case this will be the last surviving borrower as they would take a joint mortgage. Any equity remaining after the loan is repaid would go to the Fairfaxes&#39 estate. If the sale of the property does not cover the balance owed, Northern Rock&#39s &#39no negative equity guarantee&#39 means the estate will not have to make up the shortfall.

When calculating how much equity can be released for a couple, the age of the youngest borrower is used. As Mrs Fairfax is 65, under the Standard Home Equity Release Mortgage the maximum release is 20% of the property&#39s value, which amounts to £80,000. The release can be used for any legal purpose and is the amount required to purchase and refurbish the property in France, as well as to convert the out-buildings. This would overcome the problem of having to finance a mortgage on the holiday home, while still providing an income from letting the out-buildings, thus enhancing the lifestyle they have enjoyed so far.

If the Fairfaxes wish to release more equity from their home in England they would be able to when Mrs Fairfax turns 67. They would then be able to release up to 25% of the property&#39s value, provided enough equity remains after the initial loan and its accrued interest is taken into account.

Due to the nature of this product we insist all customers take independent legal and financial advice. The Fairfaxes should also consider the implications for any state benefits they are entitled to and the implications for individuals who stand to benefit from any inheritance.

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