Lifetime mortgages – advice and information about releasing equity on your home
You’ve worked hard to pay for your home over the years, and now you’re reaching retirement age, you’re looking into releasing some of the equity you’ve accrued to make life a little easier, pay for some necessities or just to add a little luxury to those golden years.
However, is releasing equity the best option in the situation? Is it time you sought some lifetime mortgage advice to put your mind at rest?
Equity firms HAVE TO provide you with advice
The idea sounds perfect; you get to live out your days in your own home but with a pot of extra tax-free cash to do with as you wish. What’s not to like?
Sadly, you won’t get anywhere near the same money back as you invested. Any provider that offers a loan or mortgage will expect to make money out of the transaction by charging the borrower interest and a few other fees where they can.
Lifetime mortgages are no different.
However, with many financial institutions liable for fines and compensation for misselling (consider PPI, for example), every lifetime mortgage advisor has to provide specific financial advice so their customers understand exactly what they’re signing up for, including:
Alternative equity plan options
Schemes from the whole of market or a selection of providers
Deliver a Key Facts Illustration (KFI) that shows:
- All additional features
- The service you’ll receive
- How to terminate the agreement and what happens if you do
- The overall cost of the scheme, including fees
- The scheme description, the provider, the interest rate
- Your requests regarding amounts and the type of scheme you’re interested in
- Possible effects on the plan from changes in interest rates
An offer showing all fees, your name and address, the amount, and any special conditions
All equity release businesses have to be regulated by the FCA. Customers, therefore, have the backing of the Equity Release Council and Financial Conduct Authority, so if anything goes wrong or you’re unhappy with your provider, you have their protection when making a complaint or pursuing legal action.
How does a lifetime mortgage work?
The good stuff:
Instant cash release for whatever you want – You can take a lump sum or smaller regular (or irregular) payments (known as drawdown)—or both—without paying anything. If you would like to pay towards the interest charges, you can. Paying into the loan helps you retain more of the property’s value when the term ends.
When you die or move into long-term care, the lender sells your home and takes all the interest you owe them from the sale amount. If there’s money left, it’s added to your estate and given to your will’s beneficiaries.
If there isn’t enough money to pay for the interest after the sale, your beneficiaries could be left with a big bill. However, that rarely happens, as most lifetime mortgage providers offer a no-negative-equity guarantee, which means they’re responsible for losses, not you.
You can still leave an inheritance – You can also ensure that you retain ownership of a portion of your home to leave to family or other beneficiaries when you die. This is known as ringfencing. However, you won’t leave anywhere near the amount you would if you retained the full equity in your home.
You can live in your home rent-free – until you die or move into long-term care.
The not quite so good stuff:
You pay out a lot of money in interest – You won’t achieve anywhere near the same money back as you’ve invested. You’ll pay far more in interest charges releasing equity than you would have when buying your home. At the moment, interest rates to buy are roughly around 1.5%, whereas the interest rate on a lifetime mortgage, on average, is over 4%.
Fees – Like any other mortgage, you’ll need to spend between £1.5–£3k in surveys, fees, legal costs, and charges.
Is there a way to avoid paying the interest?
Yes, there is, but it’s not ideal for most.
The main way to avoid paying interest while releasing capital is by downsizing. If you buy a smaller property using the money you can sell your house for, the surplus is all yours, interest-free. However, moving house is a lot of work, and most homeowners would prefer to spend their retirement in the house they consider their home.
How much will your lender offer?
How do the lenders calculate how much equity you can take from your home? Their key considerations are how long you’ll be paying the loan back (in other words, how long it will be before you die or move into full-time care) and how long it will take for them to earn the interest they need before the total property value is all used up.
Given that the interest amount on an equity mortgage doubles around every 14 years, you can see that the loan amount will be higher the older you are before you apply.
A few example figures
Let’s consider your home is worth £200k. In the current market, you could achieve:
- At 60-years-old you could achieve £28k at 3.4% / £59k at 4% / £76k at 6.1%
- At 70-years-old you could achieve £52k at 3.4% / £80k at 4% / £96k at 6.1%
- At 80-years-old you could achieve £68k at 3.4% / £103k at 4.2% / £116k at 6.1%
- At 90-years-old you could achieve £79k at 3.4% / £113k at 4.8% / £114k at 5.6%
Who is eligible for equity release and a lifetime mortgage?
Most providers need applicants to be over 55-years-old with a property worth at least £70–£100k. The property must be in the UK and your primary residence. The amount you qualify for depends on the property’s value, your age, health, any outstanding debt on the property, and the property type. The minimum loan amount is usually £10k.
Are you ready to talk about a lifetime mortgage?
Here at CLS Money, we don’t just provide mortgages for people buying their first, second or third homes, buy-to-lets, lets-to-buy or offices and commercial properties, but also for those looking into releasing equity on the property where they live.
Our lifetime mortgage advisers provide expert advice and information on every kind of whole of market mortgages. We will happily talk you through how much you could achieve on your home and help you secure the best deals from the most appropriate providers.
Give us a call or drop us a line. We’re here to answer your questions and track down the deal you’ll be delighted to accept.