Ever since a disastrous period for early unregulated schemes in the late 1980s and early 1990s, equity release has continually suffered from suspicion and distrust among homeowners. Many have been scared away as a result of publicity surrounding losses and anguish suffered by equity release customers.
Things have undoubtedly improved significantly since then and now the most common types of equity release scheme - lifetime mortgages are regulated by the Financial Services Authority and overseen by the Equity Release Council.
So where are we today, what can be achieved and what are the risks.
What is a lifetime mortgage?
If you are over 55, a lifetime mortgage allows you to release some of your property’s equity as cash to spend as you please, while continuing to own and live in your home.
Releasing equity with a lifetime mortgage isn’t complicated. How much you can borrow depends primarily on your age, the value of your property and the equity available.
How do lifetime mortgages work?
With a lifetime mortgage you will always retain ownership of your home (as long as you abide by the terms and conditions of the loan).
There are many different lifetime mortgages available for different individual circumstances. Depending on the product, you can choose to make monthly interest payments, a more flexible arrangement of one-off voluntary payments, or no payments at all. Interest rates can be fixed at the outset
The outstanding mortgage and any interest will usually be repaid when you die or move into long-term care, using the cash generated from the sale of your home. The no negative equity guarantee ensures that your estate will never have to pay back more than the amount that is received from the eventual sale of your home.
You can also move home and your lifetime mortgage can move with you, providing your new property is acceptable to the lender and meets their requirements at that time.
Why release equity?
Enjoy retirement to the full
After years of paying off mortgages, putting children through university and supporting family members, some homeowners want to celebrate their retirement. Be it a big purchase or the trip of a lifetime, many of those taking out lifetime mortgages do so to release the equity from their home and enjoy retirement to the full.
A better quality of life in retirement
An increasing number of people are using lifetime mortgages as a way of adding to their pension to secure a better quality of living in retirement. Lifetime mortgages are often used as an alternative to downsizing too – allowing homeowners to continue the lifestyle they’ve become accustomed to, without the hassle of needing to relocate.
Help out loved ones
Many people use the money released by a lifetime mortgage to help out their family financially at the times when they need it the most. Sometimes to help children buy their first property, pay for a wedding, grand children’s education or just help them through an expensive time in their life.
For some people releasing money from their property allows them to upgrade their home, perhaps to make more room for when the family comes to visit by adding a conservatory, or landscape their garden. Retirement is a great time to tackle those long-overdue home improvement plans, and a cash lump-sum from a lifetime mortgage can make those plans a reality.
Are there any risks involved?
Whilst there are many reasons why people use a lifetime mortgage, it is important to state that there are some risks you may face.
A lifetime mortgage will reduce the value of your estate (as the lifetime mortgage needs to be repaid) and it may affect your current or future entitlement to means tested state benefits, as well as the amount of tax that you have to pay.
If you decide to repay more than you are allowed under Optional Partial Repayments, or decide to repay all of your lifetime mortgage off early, you may have to pay an Early Repayment Charge, which could be substantial.
Interest is charged both on the original loan amount and the interest that has already been added. This means that the amount you owe will increase over time, reducing the equity left in your home and the value of any inheritance.
Releasing equity from your property needs very careful consideration. The regulations around lifetime mortgages mean that you cannot buy this product directly. You can only get a lifetime mortgage through a specialist regulated lifetime mortgage adviser who will check your eligibility and help you to consider all your options. You will also need to have Independent Legal advice from a solicitor before committing to any mortgage.