We wanted to send all our clients an update on the expanding ‘Equity Release’ market for those over the age of fifty-five: this note is also relevant for those younger clients who have parents/friends that may have already reached that age and who are in need of financial advice.
The use of equity release for clients is a booming market, allowing home-owners to access value in properties where it is potentially creating an inheritance tax headache for children or, indeed, just where extra money is needed to enjoy and spend now and in the future: these are just two of the key reasons it has become so popular.
We now have four of our advisers that are fully qualified to provide customers with help and financial guidance in this area. Historically, the sector had highly costed products with few borrower benefits but, recently, there have been dramatic reductions in the interest rates on offer with great ‘flexibility’ for customers and much reduced initial lender fees.
1. Lifetime Mortgages – These allow an owner to borrow a sum of money secured against the home. The borrower can either pay some, or all, of the interest, or they can choose to add it to the loan. The loan and any interest is simply repaid when the property is sold, or the owner(s) move into care or die.
2. Home Reversion schemes – Here a chosen percentage of the home is sold at below market value for a cash lump sum and occupation continues on a rent free basis (maybe a peppercorn £1.0 per month) until the house/flat is sold and the reversion company gets its share of the proceeds. This type of plan is not very popular accounting for only about 1.0% of the market.
3. Retirement Interest Only Mortgages – These allow an owner to borrow a lump sum secured against the home, pay monthly interest on the loan as it falls due and repay the debt when the property is sold.
The first two are classed as ‘equity release’ schemes. The third is a relatively new product aimed at providing mortgages to older borrowers who are in receipt of regular pension and other income. All three arrangements allow an owner to release money from the equity built up in the home without having to move out.
House prices have risen significantly over the past fifty years and a large part of family wealth may be tied up in the home for no immediate benefit. Therefore, if anyone is looking to boost retirement income or provide a significant amount of ‘cash’, then equity release may be the right option. Here’s a brief rundown on ‘Lifetime Mortgages’, how to obtain the money, and what can be done with it. Different products may offer the choice of:
1) A cash lump sum or a regular income.
2) The opportunity to take money when it is needed or on a regular basis, often called a draw down or flexible facility.
3) A combination of these options, for example, a lump sum can be taken at the start and then additional cash can be ‘drawndown’ later.
What reasons can money be borrowed for?
1) To carry out modernisation or extend the home.
2) To clear a mortgage, credit cards or other debts.
3) To help children get on the property ladder.
4) To gift money to charities.
5) To help pay for ‘care at home’ costs.
6) To take fabulous holidays.
7) Certain types of investment.
The ‘equity’ is the value of a property minus any mortgage or other debt held against it. For those concerned about an Inheritance Tax Liability, taking ‘equity release’ may help to reduce this.
Lifetime mortgages usually have a fixed rate of interest and this is typically slightly higher than the interest on a regular mortgage. If a borrower chooses to not pay any of the interest, the amount owed increases quickly because interest is being added, or rolled-up, into the original loan.
For example, if a home is worth £250,000 and a Lifetime Mortgage of £80,000 is taken at an annual interest rate of 5%, the amount owed will grow like this:
|End of year||Annual interest at 5%||Total interest||Loan + interest|
N.B. Interest rates will normally be well below the 5.0% illustrated. Don’t forget, the value of your home is also likely to increase over the years to counteract the increasing loan.
Equity release products have changed greatly recently and are now an attractive option, so we wanted to send all our clients an update on the market as we are now very active in this field and are able to provide clients with help and guidance to ensure that a ‘dead weight asset’ can be utilised to provide both immediate and future benefits.
Options can include:
1. Taking the money as needed – Drawdown facility. With drawdown, the money is taken in stages rather than as one big lump sum. Regular payments can be chosen or smaller lump sums as and when required. The big advantage of this option is that it reduces the overall cost because interest is charged only on the money taken out.
2. Bigger lump sums for people with ill health – Enhanced Lifetime mortgages. If an owner is suffering from ill health, has a medical condition (such as diabetes), smokes or is overweight, then they may qualify for what’s known as an ‘enhanced’ lifetime mortgage. These pay out bigger lump sums than would be paid to someone who is expected to live longer.
3. Ring-fencing an amount for the family – Guaranteed Inheritance. Some schemes allow the guarantee of an inheritance to beneficiaries when the plan comes to an end by protecting a percentage of the value of the property. For example, if the house/flat is worth £300,000, a protection of 25% could be taken, leaving a guaranteed inheritance of £75,000.
A common question we are asked often is “Can the property be sold if there is a lifetime mortgage on it”? The answer is ‘yes’: however, there may be early repayment charges to pay if the loan is not transferred to a new home.
Another frequently asked question is “Are equity release plans safe”? Just like taking out any other mortgage or loan, there are risks attached to a lifetime mortgage but, as ‘equity release’ is regulated by the Financial Conduct Authority and as we are members of the Equity Release Council (ERC), we ensure that only the best products on the market are offered to our clients, so please contact us at any time for advice.
This message was written by our Senior Mortgage Adviser and Lifetime Specialist Simon Leak.