Is Equity Release a good idea?
May 18, 2018
Now there’s a question; ‘is equity release a good idea’? Unfortunately the answer is not a straightforward one. For some equity release can be a good idea, for others it is not; you see it all really depends on your own personal situation. (updated 01/08/18)
Equity release mortgages, or Lifetime Mortgages as they are also known are becoming more popular as people look for ways to increase their income or provide a cash lump sum to make life more enjoyable.
Given that you are dealing with what is probably your biggest asset, your home; equity release is not a decision that should be taken likely, so the following blog should help you decide whether you want to take the next step and speak to a fully qualified adviser.
Use the equity release calculator to see if its right for you
With something so important, you should of course always seek advice before making any decisions, but the good thing is that you can in fact only buy an equity release mortgage with advice which should give you confidence in the path you finally choose to go down.
What is Equity Release?
Firstly, it’s important to fully understand what exactly is meant by the term equity release.
Equity release allows you to release money secured on your home, giving you a cash sum you can borrow to do anything you choose with; pay for that luxury holiday you’ve always dreamed of; home improvements such as an extension or alterations that will make life easier, or perhaps to provide additional retirement income.
The most popular scheme is known as a Lifetime Mortgage.
Interest charged by the lender is accumulated and added to the original equity you have released, the sum of which is only repaid once your home is sold.
Who are they for?
As I have previously mentioned, equity release is not suitable for everyone, but it does have a place as a valuable way of raising money, perhaps once you have explored all other avenues and only when you have fully understood the possible impact to your family.
When you get advice, your adviser will explore with you why you want the money and look at all the options available to you. For example, they will want to understand whether you are looking for a one-off lump sum or if you seeking a regular income; whether you could access money from savings, down size your property, use investments or even get help from the family.
To be eligible for equity release you need to be at least 55 years old, own your own home and have sufficient equity in your property, which is the difference between the value of your property and any outstanding loan or mortgage you may have secured against it.
If you live in a “retirement home or village” such as the ones supplied by McCarthy and Stone, lenders may be more cautious due to their restricted saleability, so there may be restrictions on how much you can borrow.
It’s worth noting that you don’t necessarily have to have a mortgage free property, as any existing mortgages or loans can be repaid with your new mortgage, provided that you have sufficient equity.
Important Facts about Equity Release
Will I still own my property?
Yes, with a Lifetime Mortgage you continue to own the property until you sell it or you die. (There is another form of equity release known as a Home Reversionary Scheme, but this involves selling all or part of your home to a company and only a small number are sold in the UK).
Are they for people with large properties?
No; you just need to have sufficient equity and property worth at least £150,000.
What is the smallest amount I can borrow?
You can borrow from £10,000 with some lenders but different providers do have their own limits
Will my children inherit my debt?
Your children won’t inherit the debt exactly but they will need to repay the debt once you have died from the sale of the property. Additional equity over and above the loan would then be paid to your children.
All lifetime mortgages now come with a “no negative equity guarantee”, which means that you will never owe more than the value of your home.
Are Equity Release Interest Rates much higher than others?
Lenders will charge more than the standard mortgage rates as they are having to wait a long time to get their money back and are also taking a risk that your property will always be worth more than the mortgage.
Currently rates for Lifetime Mortgages are around 5% compared to normal residential rates of around 2% to 3%.
Can I repay the loan if my circumstances change?
Yes, you can repay these loans at anytime, although there could be admin fees or an early interest charge included. I suggest you explore this with your adviser.
You can also move house if you wish, subject to the size of your outstanding loan and the value of the new property.
Are there any restrictions on what I can do with the money?
Absolutely not. You can use the money for any purpose; to buy a particular item; to purchase a number of things; to increase your income or a combination of the three.
Is it complicated to take a Lifetime Mortgage out?
The main thing is to find a good adviser. They will explain everything to you and being regulated by the Financial Conduct Authority (FCA), their advice should be fair, clear and not misleading. Having said that, don’t be afraid to ask questions as at the end of the day, they are being paid a fee by the lender for you placing your mortgage with them.
As you would expect there will be an application form to complete and some legal paperwork from your solicitor. Your property will also need to be valued by the lender to assess its suitability as security for your mortgage.
Will taking out a Lifetime Mortgage reduce my children’s Inheritance?
Yes, it will. The amount you borrow at the outset plus the accumulated interest will need to be repaid when you die, which will therefore reduce the sum of money left.
Your adviser will discuss this with you and encourage you to talk to your family before taking any loan out. Most advisers will also be happy to speak to your family about the implications.
Will this affect my Benefits?
Potentially yes, your benefits could be affected depending on your own individual circumstances. Your adviser can help you with this and you can also go to the Benefits Agency or Citizens Advice for more information.
How will I know if I am being ripped off?
You should make sure that your Financial Adviser is fully qualified (visit Unbiased.co.uk for your nearest adviser. All Lifetime Mortgage companies in the UK are regulated the Financial Conduct Authority and members of the Equity Release Council so you are protected by their rules and guidance.
At Over50choices we use independent specialists Age Partnership for all equity release enquiries & you can get a free no obligation quote here.
Your solicitor can also act as a good independent point of advice.
Ongoing changes to the way pensions are being calculated, concerns over endowment mortgage repayments, our changing values and the longer lives we are living all mean that sales of equity release are growing.
If you are clear on all the facts, have explored all your options and want to enjoy your hard earned income comfortable in the knowledge that it will reduce your family’s inheritance, then equity release may just be your key to a more comfortable life.
Whatever your decision though, do make sure you talk to the professionals and more importantly your family first as this is something that will affect everyone