Heard terms banded around recently such as ‘an over 55 mortgage’ and ‘later life lending’ or even 'lifetime mortgages' and wondering what exactly they mean?
Well, all are a form of equity release. And now you’re going to ask ‘what is equity release?’ Well, read this article which will tell you all you need to know about this increasingly common method of releasing equity from your home as you approach or enter pensionable age.
In fact, lifetime mortgages are becoming so popular that more than 20,352 people used them in Q2 2021, according to recent research by an equity release lender. Those who applied released an average of around £86,349.
Do I have to be of pensionable age for a lifetime mortgage?
You can be as young as 55 years of age to take advantage of the principle of equity release. That’s why it’s often referred to as ‘an over 55 mortgage’.
In a nutshell equity release is a means of benefitting from the cash paid into your mortgage over your lifetime. It is, in fact, a way of acquiring the equity in your home you have built up over decades.
Wouldn’t it be financially simpler to downsize rather than take a lifetime mortgage?
Some people say that rather than use equity release they prefer to sell their home and downsize. That can make sense if you’re the type of person who doesn’t mind moving into a different area and acquiring new friends.
But, understandably, many people – especially those who have lived most of their life in the one community – would prefer to stay amongst friends and neighbours they’ve known for years. And these are the type of homeowners who can benefit most from later life lending schemes.
And, anyway, buying a new house can prove wearisome and difficult, especially if the property market is particularly frenetic as it is right now, with properties selling within one week of going on the market. Then there are the agent and conveyancer fees, as well as stamp duty to pay for.
Isn't it easier to just take out a traditional mortgage instead of a lifetime mortgage?
If you have the pension income to support it, you may also be able to remortgage your home, of course, but you will still have big mortgage payments to pay off every month. In this sense, it doesn’t really feel like much has changed, except you will have benefitted from a lump sum with which you can use for renovations, holidays etc.
So, what is equity release?
Equity release – as its name implies - allows you to turn the equity you have accumulated in your property into a cash lump sum. This is the case even if you still have some of your mortgages to pay off.
Actually, you don’t have to take all the equity at once, but can also ‘withdraw’ it in smaller instalments as you need to (although you will pay interest on this).
What are the different types of equity release products?
There are two main forms of equity release product, which are the Lifetime Mortgage and Home Reversion. We will explain both in this section:
This ‘over 55 mortgage’ is best for those who aren’t interested in leaving an inheritance. And with fewer people opting to have children these days and/or living alone, there are increasingly more people in this category. Instead of leaving their property’s wealth to charity, they are using it to enjoy their senior years instead.
Withdrawing money this way means ‘borrowing’ money against the value of your home. It’s a loan that you don’t have to pay back until you pass on or move into care. That means no mortgage or rental payments for the rest of your life.
The loan is accessed via a fixed, or a capped, rate of interest. Depending on the equity release deal you choose you can pay back interest and even the capital if you prefer where you are only charged interest on what you withdraw (rather than the entire sum). This is known as a ‘drawdown’ scheme.
Only homeowners aged 65 years or over are eligible for the Home Reversion plan. That’s because this form of lending involves receiving a tax-free lump sum for a proportion of your home (eg 40%) that you sell to the lender at below market value. You continue to live rent-free (or with a nominal rent) in your home until you pass. The lender then makes money when the home is eventually sold at current market rates (property tends to increase in value).
How much equity could you release?
How much you can borrow will vary depending on your age and if you jointly own your home your partner's age, the value of your property and your current health. You can use our equity release calculator to get an estimate.
Your equity release adviser will be able to calculate exactly how much you can borrow from your home and explain how payments can be accessed, and what any interest will look like. They will also find the equity release lender and type of equity release loan that would fit your circumstances.
What are the interest rates for equity release?
The rate of interest charged on equity release products varies based on your equity release provider and the type of equity release scheme you select.
If you choose a lifetime mortgage product where you don't have to make monthly interest payments then you need to remember that the loan will be paid back through the sale of your home when you and your partner die or moving into care.
You can also choose a product where you can make monthly payments to repay the interest however you will need to be aware of early repayment charges which can be in place for an extended period of time depending on your equity release lender.
What about other costs and fees for a lifetime mortgage?
Just like any mortgage application, there will be fees and costs associated with applying for and setting up lifetime mortgages, these include:
- equity release product provider arrangement fees
- valuation fees so equity release providers can assess the value of your home
- given the complexities of arranging an equity release most qualified advisers charge an advice fee for their service
- you will need to get independent legal advice
You will also have to continue to insure your property and there will obviously also be ongoing maintenance costs to keep the property habitable and in good order.
Will a lifetime mortgage affect your pension or benefits?
There may also be a change to your benefits, such as Pension Relief or Universal Credit if you suddenly come into possession of a large sum of money. You should get financial advice to understand how this may affect you.
Who are the Equity Release Council?
As there are many equity release providers, the Equity Release Council (ERC) was set up to ensure that each of these companies follows a code of practice.
The ERC is a not-for-profit organisation that has been created by lenders and regulated by the Financial Conduct Authority (FCA). It exists to ensure that lenders make clear information available about their products, and provide fair deals for consumers.
Equity release lenders who work within the ERC framework have to work by a strict code of practice, whereby the products they offer a negative equity guarantee so you and your family won't lose out if your home is worth less than you owe on it at the time of your death.
Speak to a qualified equity release adviser
Regardless of how enthusiastic you feel about either the ‘over 55 mortgage’ or ‘drawdown scheme,’ it’s always best to speak to get financial advice from an expert, in particular, make sure its someone who is qualified to provide equity release advice and particularly someone who is a member of the ERC.
That way your home will never end up in negative equity (a big concern for many considering going down the equity release route). That’s because members advising on later life lending have pledged this.
Make your family or close friend a part of the conversation
A good equity release adviser or financial adviser will also insist you bring along a friend or relative to your face to face discussion with her or him, for support and because it can be a lot for one person to take in initially.
Get in touch
Rest assured we do all this, and more, at The Mortgage Stop. You can call us for a face to face meeting – or even just an initial chat, tel: 01794 379 379. You can also drop us a discreet line via email: firstname.lastname@example.org.
A lifetime mortgage is a long term commitment which could accumulate interest and is secured against your home. Equity release is not right for everyone and may reduce the value of your estate