In all the excitement of a new home together, it’s easy for individuals to forget to take steps to formalise their legal position or more…
Why choose equity release?
Equity release is a way that homeowners can tap into their property wealth, but a great deal of consideration needs to be taken first.
Decades of home ownership and rising house prices mean that lots of older people in particular have built up significant property wealth. But they can’t use it to pay the bills.
All of this explains the growing popularity of equity release, a type of mortgage which lets older homeowners turn the value of their property into cash. In 2017, they withdrew an estimated £3 billion equity from their properties, the largest annual borrowing ever recorded and a 40 per cent jump on 2016.
What is equity release?
Equity release is a loan secured on your home (a mortgage, in other words), which lets you take the cash as a lump sum or in instalments. Known as a ‘lifetime mortgage’, you can make repayments but most people simply let the interest roll up. You only repay the amount borrowed and any accrued interest when you die or move into long-term care.
There are lots of reasons why people choose a lifetime mortgage, says conveyancing solicitor Stephen Parker. “One of the most common motivations is to release some capital to help adult children use it as a deposit on their own home. Another might be to continue living in your home while being able to tap into some of that equity. But it can also be for building improvements, to pay off debts, fund school or university fees for grandchildren or simply to supplement pension income and ensure a decent standard of living.”
How much can I borrow using equity release?
Individual lenders have their own criteria, but you can normally borrow up to 60 per cent of the value of your property. How much depends on your age and the value of your property. The minimum age for a lifetime mortgage is usually 55 but the younger you are, the more it is likely to cost you in the long run. Increased competition is pushing interest rates down and average lifetime mortgage rates are currently at a low of 5.3 per cent. Although if you don’t make any interest payments during the term of the mortgage, the lender will usually apply a higher interest rate.
Do I need to repay a lifetime mortgage?
With a lifetime mortgage, you have the right to live in your home for the rest of your life, or until you need to move into long-term care. If you are a couple, no repayment is required until the surviving partner living in the home either dies or goes into permanent long-term care. You may be able to transfer the mortgage to a new property if you decide to move. And there’s no risk of negative equity: at the end of the contract, when the property is sold, even if there is not enough left to repay the lender in full, your estate will not be asked for more money.
Are there alternatives to equity release?
While equity release may seem like the answer to several financial puzzles, Stephen Parker warns that it should not be undertaken without a great deal of thought and consideration.
“It is an expensive choice, with high penalties for early redemption. It will reduce the value of your estate and could even leave nothing for your family to inherit.”
Stephen says people should consider alternatives before deciding on a lifetime mortgage. Perhaps your grown up children would be happy to help you out financially now, in the knowledge they will inherit a debt-free property on your death? Can you draw on other savings or investments? Downsize to a smaller house? Or even find new sources of income – perhaps let out a room in your big house?
How do I apply for equity release?
Equity release is a highly regulated financial product, provided by a handful of specialist companies. In addition to arrangement fees of £1,500-£3,000, you should also budget for expert financial and legal advice. Unlike general mortgages, it is compulsory for potential equity release borrowers to take advice, and all advisers recommending equity release schemes must have a specialist qualification.
From the legal point of view, the equity release process is actually fairly simple, but for Stephen Parker the focus is always firmly on making sure that the client and their next of kin clearly understand exactly what they are doing and its implications.
“It’s a big commitment and hard to undo if you change your mind,” he says.
This article is from the latest Barcan+Kirby magazine – to read the full publication, click here.