You may have seen the all singing, all dancing equity release adverts, telling you how you could be sitting on a honeypot of cash in the form of your family home. So, what exactly is equity release and is it really all sunshine and daisies like the adverts make out?
What is equity release?
In the most basic terms, equity release is a way of releasing wealth tied up in your home. One of the main benefits can be that there is no need to make monthly repayments.
There are two types of equity release; lifetime mortgages and home reversion plans. They allow a homeowner to draw a lump sum or regular smaller amounts from the value of their home, whilst they can remain living there.
Equity release plans are regulated by the Financial Conduct Authority (FCA) and overseen by the Equity Release Council (ERC).
The ERC was set up to ensure total peace of mind through safety guarantees. The council has a set of standards put in place to make sure products on offer are fair and safe.
For total peace of mind, the ERC has a registered list of members who have signed up to their Statement of Principles.
The equity release market is quickly growing. There are a wide range of products on offer to those looking to benefit from owning their own home. With so many options, there is likely to be a plan which suits you and your needs. Today we are going to take a look at lifetime mortgages.
How do lifetime mortgages work?
Lifetime mortgages are the most popular choice of equity release plan. They are essentially a long-term loan which is secured against a percentage of your property. The loan is repaid from the sale of your house once you die or move into long-term care.
With a lifetime mortgage, there is no monthly repayment to be made. This doesn’t mean that there isn’t any interest added, however. Interest is accumulated continually over the length of the plan. It is rolled up and added to the loan at the end of the term.
This way of accumulating interest does mean that debt can build up quite quickly.
Generally, interest is charged on a fixed basis, although variable rates are available. Where variable rates are offered, in accordance with ERC standards, there should be a cap which remains the same throughout the life of your plan.
Can I pay my interest off if I wish?
Some providers do offer products known as ‘interest paying mortgages’. These allow you to make monthly or ad-hoc payments. Some plans may even allow you to pay off some capital.
If you want to make payments on other lifetime mortgage products, make sure you talk to the provider first. There could be hefty early-repayment charges for doing so. In some cases, lenders won’t allow early repayment at all as lifetime mortgages are based on interest building up over time.
Will I end up paying more than my home is worth?
No. As long as you have a plan with a no negative equity guarantee you will never pay back more than the value of your property.
This is another standard put in place by the ERC to ensure equity release products are fair to consumers.
If there isn’t enough money left after paying your solicitor and estate agent fees to pay off the outstanding loan, there’s no need to worry. You, or your estate, will not be liable to pay more than you have left from the sale of your house.
Who can take out a lifetime mortgage?
As a regulated industry, there is a set of lending criteria that need to be stuck to:
- You must be aged 55 years or older.
- The percentage of your home that you can borrow against is dependent on age. Typically, at 65 you can borrow 25% to 30%. If you are older, however, you could borrow as much as 50%.
- Minimum loan amounts apply, these can range from £10,000 to £45,000.
- Usually, your home will need to meet a minimum value requirement of £70,000.
How will I receive my money?
Lifetime mortgages fall into two camps; lump-sum and drawdown.
When taking out a lifetime mortgage as a lump-sum you are borrowing a chunk of money which builds interest over the life of the plan.
This could be a good option if you are looking to treat yourself or your family during your retirement.
If choosing a drawdown option, you can start with an initial lower amount with the option of taking further small amounts either regularly as and when you need it.
This income style scheme is more flexible and can work out considerable cheaper too. You will only pay interest on the money you drawdown and therefore are only paying for the money you actually need.
A handy choice of you are looking to just top up your retirement income.
What are the benefits of a lifetime mortgage?
There are a number of reasons why people choose to release the wealth stored up in their property. One of the main benefits is that equity release products allow homeowners to remain in, and own, their home until they die or move into long-term care. Joint plans mean that couples don’t have to worry about having somewhere to live should one of them pass away, or need care, first.
Unlike a regular mortgage, there are no monthly repayments to commit to, giving you the freedom to enjoy your money as you wish. Equity Release products can be a flexible way of topping up your pension income for a comfortable retirement, or to help tick a few things off your bucket list.
Lifetime mortgages are portable as long as your new home meets the terms of your loan contract. Exceptions such as moving to sheltered housing or a property of higher value may apply. So, if you take out a lifetime mortgage, this doesn’t mean you are destined to remain in the same property for the rest of your life, if you don’t want to.
What to consider before taking out a lifetime mortgage
A lifetime mortgage is by no means a risk-free product. Whilst it allows you to access the value of your home in cold, hard cash, there are drawbacks to consider.
Interest rates can be quite high and so drain most of the value from your home by the time it comes to sell. It is possible to ringfence some of the value of your home to pass on as inheritance to family.
Drawing equity from your home can mean that you lose any means tested benefits you may receive. These include pension credits and council tax benefits.
When you take out a lifetime mortgage you are agreeing that your property will be sold at the end. As part of your contract, a lender will expect you to keep your house in a good condition and may place restrictions on what you can do to it. It’s a good idea to make sure you have a sum of money put aside for any repairs that may be needed. You never know when you might need a new roof, to replace windows or fix some leaky plumbing.
Don’t forget to factor in other costs associated with taking out a lifetime mortgage. These could cost between £1,000 and £3,000 and, like a regular mortgage, may include:
- Building insurance
- Legal fees and valuation fees
- Arrangement fees for the lender of your product
- Adviser fees for setting up your scheme and any advice they provide
- A completion fee.
Do your research and speak to a financial adviser
Most importantly of all, it’s vital to make sure that a lifetime mortgage is an appropriate option for you and your circumstances.
Before you decide on releasing equity consider all other options. Maybe you would be willing to downsize and can benefit from unused equity that way?
Equity release isn’t going to suit everybody so speak to your financial adviser if you are considering going down this route.
Please note: This is a lifetime mortgage. To understand the features and risks, please ask for a personalised illustration. This article should not be taken as a recommendation and we always recommend you seek personalised financial advice.