An increasing number of people are worrying how they will maintain their standard of living in old age, especially if they are still laden down with mortgage debt.
Household bills and day to day costs continue to rise while savings rates remain poor and pensions less generous.
For those with equity in their home, unlocking some of the wealth tied up in their bricks and mortar can be an attractive option.
According to leading equity release provider Key Retirement those over 65 living in the South East have made more than £1,000 per month through property price rises in the past year.
An increasing number of people are worrying how they will maintain their standard of living in old age, especially if they are still laden down with mortgage debt
In total, housing wealth among the retired stands at more than £1.1trillion. Some of this wealth, says Key, could be used to provide an all-important boost to household finances.
There are two ways to release equity – either by downsizing or taking out an equity release mortgage on the family home with interest charges rolling up.
Equity release plans – or lifetime mortgages as they are sometimes known – are more flexible and better value than ever before.
Here are eight key facts you may not know about these plans.
1. EXISTING DEBT IS NOT A PROBLEM
Most equity release providers will allow you to take out a plan if you have an existing mortgage, provided you use the plan’s proceeds or any other savings to pay it off. A big proportion of equity release plans are arranged for this very purpose.
Tom Moloney, equity release adviser at Age Partnership, says a quarter of all equity release plans he arranges are to pay off existing mortgage debt. This is typically where the borrower has had an interest-only loan but has no savings to pay off the capital at the end of its term.
He says: ‘Releasing equity can be a lifeline where there is mortgage debt to clear and the homeowner has no desire to up sticks and downsize.’
Options: There are two ways to release equity – either by downsizing or taking out an equity release mortgage on the family home with interest charges rolling up
2. YOU CAN RELEASE CASH IN STAGES
Often with equity release, the borrower has an immediate need for funds – to pay off debts or to fund much-needed home improvements. But they may also want a ‘reserve of funds’ to call upon in future. A lifetime mortgage with a drawdown facility can provide this flexibility, enabling the homeowner to access money in chunks rather than all in one go.
By doing this, the impact of interest charges is reduced. This is because you only pay interest on the cash you draw down, not the total amount the provider has agreed to lend.
3. PAY INTEREST CHARGES AS YOU GO
Traditionally, equity release plans rolled up all interest charges into the outstanding loan.
But now you can often choose to pay all or part of the monthly interest charges on your lifetime mortgage.
Some homeowners opt to do this as it stops the outstanding debt growing too quickly.
It means the amount owed will be less when the property is finally sold and the equity release plan comes to an end. Plans are typically flexible, enabling borrowers to stop interest payments at any time and convert to a standard lifetime mortgage – with interest rolling up and paid at the plan’s term.
4. POOR HEALTH IS NO BARRIER
Existing medical conditions, poor health or lifestyle factors – such as a history of smoking – usually mean higher costs for many financial products, particularly insurance.
But with an equity release plan it works the opposite way. The poorer your health, the bigger the lump sum you will be able to extract from your loan. This is because your life expectancy will be considered lower than someone in robust good health.
Serious medical conditions including cancer, stroke, diabetes, heart disease and even high blood pressure could mean you are able to release more equity from your home.
The poorer your health, the bigger the lump sum you will be able to extract from your loan
5. YOU CAN SWITCH BUT WATCH FOR CHARGES
Depending on the type of equity release plan you have, it is not usually difficult to switch providers, for example to get a lower interest rate on your loan.
But most plans will carry early repayment charges so seek advice and weigh up the costs versus savings before going ahead.
Most plans today are more flexible and early repayment charges lower than with older lifetime mortgages.
You can redeem and repay in full your lifetime mortgage at any time, but there will usually be penalties.
Always read the small print and be aware of all charges before you sign up to a specific plan.
6. GUARANTEE OF NO NEGATIVE EQUITY
All equity release plans offered by members of trade body the Equity Release Council have a ‘no negative equity’ guarantee. This means that even if the value of your property falls you will never owe (in capital loan and interest) more than its final sale value.
This guarantee ensures borrowers have peace of mind that they have the right to remain in their home as long as they choose. There will also be no unexpected debt for family to deal with when their parents die.
7. RINGFENCE SOME OF THE VALUE FOR INHERITANCE
Some homeowners shun equity release because they want to be able to pass on a legacy to children and grandchildren. But it is possible to protect a proportion of a property’s value even when you take out a plan.
With a lifetime mortgage the loan is secured against your home. Interest then rolls up and the loan and interest are repaid when the home is finally sold – usually upon the death of the homeowner or if they go into full-time care.
Inheritance: It is possible to protect a proportion of a property’s value when you take out a plan
But around one in three of these schemes now offers a ‘protected equity’ element – allowing the borrower to ring-fence a proportion of their home’s value which is unaffected by the lifetime mortgage.
This can then be earmarked as an inheritance for a child or grandchild. An independent equity release adviser can talk you through the options.
Andrea Rozario, chief corporate officer at equity release adviser Bower Retirement, says: ‘If passing on an inheritance is a priority it is important to look at protected equity products.
‘This should not typically affect the interest rate you pay on your lifetime mortgage.’
8. PLANS ARE PORTABLE WHEN YOU MOVE
Equity release plans are portable and can be moved to a new property as long as it provides suitable security to the lender. A park home, for example, may not be acceptable.
Dean Mirfin is chief product officer at equity release adviser Key Retirement. He says: ‘Many plans now offer downsizing protection. This allows the borrower after five years of having the plan to use the proceeds of their house sale to clear the loan without paying early repayment charges.
‘If this is something you think you may need in the future it is important to discuss it with your adviser and get this protection at the outset.’