Equity Release is a term that comes up very often when talking about property ownership and retirement. Equity Release describes a type of financial product that’s available to people over the age of 55. The aim behind it is to use a property to provide people with a lump sum or income – often to boost their retirement funds – while allowing them to remain in their own home. For many people, this is more appealing than downsizing to a smaller home.
What Are My Equity Release Options?
There are a few ways that Equity Release can work, but the most common product is a Lifetime Mortgage. For a Lifetime Mortgage, you don’t necessarily need to have fully paid off your mortgage, and some products can be used for a purchase. These products use the value of the house as the basis to secure a loan. The debt becomes repayable when the homeowner dies or moves into long-term care.
With a Lifetime Mortgage, you borrow an amount against your home, usually with a fixed or capped interest rate. It works a little like a mortgage in reverse – you receive a lump sum, and the interest increases every month, making the debt bigger all the time. If you don’t want the debt to increase with interest, if you can afford to, then some Lifetime Mortgages allow you to pay off some or all of this interest, on a monthly basis, if you choose to. The debt, including any interest that has been added to the loan, is repaid when you die or move into long-term care – either from your estate or from the sale of your home. You can often protect an amount of the value to leave to your children or dependents.
A Home Reversion plan is another financial solution to provide older homeowners with tax-free cash. Here, you actually sell your home – or a portion of it – to a Home Reversion provider. In return, they either pay you a lump sum or regular payments and you can live in the home rent-free until the end of your life. When you die, the plan provider arranges to sell the home and shares the proceeds in line with any agreement. These are only a small part of the Equity Release market, as many people prefer to retain ownership on their property, but if this would be a preferred option, then you will be referred to a suitable third party for this advice, or any other Equity Release advice outside of Lifetime Mortgages.
Things You Need To Know About Lifetime Mortgages
Equity Release schemes can seem very persuasive – but as with any financial product you should research all the details and the alternatives before making a decision. An adviser is key to ensure you have the right Equity Release advice, but also a view of other options that may make more sense to you. Whilst these products can be a good source of income, there are sometimes other solutions available that are potentially less risky, so we will ensure we have discussed alternatives as part of our discussions.
With Lifetime Mortgages the key thing to remember is that if you choose to add the interest to the debt, then the longer you live, the greater your debt becomes. If you are not adding the interest on to the mortgage, you need to make sure that the interest payments are affordable for the long term, or the lender will let you convert to adding the interest to the debt at some point in your lifetime. Interest rates are typically higher than with other mortgage products, so the amount owed can grow relatively quickly. You can make overpayments up to 10% of the loan at any time if you want to reduce the impact of the interest roll up.
Interest is, of course, how the lenders make their profits. They might give you a £25,000 lump sum, but after a decade or two that debt could easily double, and depending on the rate, potentially more. This can affect the size of the estate you leave to your dependents.
Providers offer a no negative equity guarantee. This means that you will never owe more than the market value of your home. If you do decide Equity Release is the right choice for you, then we can ensure to offer you a lender that is a member of the Equity Release Council, alongside your adviser being a member. This trade body requires the providers and advisers to abide by several important rules. The Equity Release Council is a very important trade body, so alongside Clara’s qualifications, she is also a member of the Equity Release Council: Clara Downton | Equity Release Council
Is Releasing Equity The Right Option For You?
It is worth exploring the types of Equity Release, but there are other ways to access the money tied up in your property, so we will discuss all options through, as you might find that the best way to release equity from your home is to sell it and downsize. This way you’re not exposed to property market fluctuations, and you have complete control of your money.
Everyone’s situation is different and unique, so the best way to plan for your retirement is to talk to a financial expert. We will explore your unique financial situation, your property options, and the risks and benefits of each approach. It is important to explore everything in detail so that you can make an informed decision.
Later Life Mortgage
Equity Release isn’t the only option available to borrowers over 55. You can potentially still get a “regular” mortgage into retirement. There is Retirement Interest Only which have no term end date like an Equity Release mortgage, or ones where you can have a term, just like the ones that you have had before. These are done on your affordability though, so it will depend on your income (which can be just pensions), these can be interest only or capital repayment and some lenders will take you into your 70’s, 80’s, 90’s or beyond. Buy to Let has less restrictions on age, than residential, but if you want to understand what options might be possible for you in this, or equity release – a conversation is definitely the first step.
A Lifetime Mortgage will reduce the value of your estate and may affect your entitlement to means-tested benefits and tax status. The impact of not servicing monthly interest payments on a Lifetime Mortgage is that the outstanding debt can grow rapidly, thus reducing the value of your estate.
For example, if the interest rate was 7% a year, a £50,000 loan would double to £100,000 after 10 years assuming no repayments are made. This is an example for illustrative purposes only and personalised advice and recommendations should be sought from a qualified professional. You are strongly advised to register a lasting power of attorney. This will allow your affairs to be managed by somebody else if your mental abilities significantly decline.
A fee for Equity Release advice will be charged upon completion. This fee will typically be £499 but the exact amount will be dependent upon your circumstances.