05 Apr EQUITY RELEASE – IS A LIFETIME MORTGAGE RIGHT FOR SOMEONE YOU KNOW?
EQUITY RELEASE – IS A LIFETIME MORTGAGE RIGHT FOR SOMEONE YOU KNOW?
Equity release seems to be the ‘the kid on the block’ – one of the UK’s fastest growing financial services with a 44% year on year increase in lending, but there are still many misconceptions out there. There are two main forms; a Lifetime Mortgage and Home Reversion Schemes, which have similar functions. The benefit of a Lifetime Mortgage is that you maintain ownership of your property, whereas with a Home Reservation Scheme you sell all (or part of ) your property to a third-party provider. Just Us Financial Solutions only advise on Lifetime Mortgages. In this article, we’ll discuss why it may be a good solution for you and your family, and bust a few myths about this growing financial service.
Why homeowners are releasing equity in record numbers
An Alternative to Downsizing – not wanting to sell, poor selling conditions and lack of supply of property to move to, together with the hassle factor and cost of moving can make this unappealing. Equity release can overcome these issues. However, if you chose (or need to) downsize later your options on suitable properties may be limited due to the loan and accrued interest.
The Bank of Mum & Dad: Gifting and Early Inheritance – It’s not news that getting the first step on the property ladder is challenging, nor that independent schooling remains popular yet expensive. A Lifetime Mortgage enables funds to be released either for a property deposit or school fees for children or grandchildren.
Funding a More Comfortable Lifestyle – Wealth can often be tied up in your home – generating a sense of being asset rich: cash poor. Releasing funds from your property can fund a more prosperous retirement.
Buying a Second Home or Holiday Home – Why not? Escape the UK winters, a city flat or countryside / seaside retreat, many release funds to expand their horizons in retirement.
Home Improvements – Enhance your current property and enjoy the benefits sooner rather than later.
Clearing Debt, Mortgages and Interest Only Mortgages – Replacing a residential mortgage with a Lifetime Mortgage can extend the term beyond the traditional 65 / 70 years, and can provide a solution to interest only mortgages, loans and other debts than cannot be repaid, whilst still enabling capacity for further funds to be released for other purposes.
1 – By having a Lifetime Mortgage, you no longer own your home:
You remain the sole owner for the duration of your (and your partner’s) lifetime, or until you both enter into long-term care. By releasing equity from your home you are borrowing money secured against the value of your property. Future interest is calculated on the original loan and the interest added to it, which means the amount you owe can quickly build up.
2 – You can end up owing more than the value of your home:
Many plans from lenders approved by the Equity Release Council can feature a ‘No Negative Equity Guarantee’. This can ensure that your estate will never owe more than the value of your property when it is sold at the conclusion of the plan. When the property is no longer the primary residence and is sold, the proceeds are used to pay off the Lifetime Mortgage together with accrued interest. Once the loan is repaid, any remaining funds form part of your estate. If the sale proceeds are less than the outstanding balance, the ‘No Negative Equity Guarantee’ means the estate won’t be asked to make up the difference.
3 – You can’t release equity from your home if you have an outstanding mortgage:
Not true – provided you pay off your existing mortgage balance, either with some of the equity released or other savings, you could still be eligible for a Lifetime Mortgage. Once the existing mortgage is repaid, the remainder of the tax-free cash is yours to use as you wish. Lifetime mortgages can be expensive however, in comparison with an ordinary mortgage, especially if the interest is ‘rolled-up’ into the loan. You need to think carefully about taking more than you need to pay the existing mortgage as additional capital can affect your eligibility for some benefits.
4 – You must make monthly repayments with a Lifetime Mortgage:
There is not usually an obligation to make monthly repayments. As with any other borrowing, interest is charged – which is usually fixed from the start of your plan – and any interest you choose not to pay is added to the original loan. Future interest is then calculated on the total of the original loan, plus the interest already added. This means that the amount of debt can rise more quickly than you might expect. However, some Lifetime Mortgages have an option to allow you to make voluntary repayments of up to 10% of the total balance per year, potentially mitigating the build-up of interest costs.
5 – Your family, children or beneficiaries will object
Beneficiaries often hope to inherit funds one day, but also wish their parents or family to live a full and enjoyable retirement. Helping beneficiaries understand the process and commitment you are making, often in a more formalised environment, with us on hand, can help avoid tricky conversations. Experience also tells us that a small windfall now can make this a much more rewarding process for all parties.
Equity release has changed. A Lifetime Mortgage could significantly, and securely, boost your later life finances, giving you peace and freedom to enjoy your retirement. We can help advise you on how much tax-free cash you could realistically release from your property. You must remember though that if you’ve taken out an interest roll-up plan, there will be less for you to pass onto your family as an inheritance. Also, consolidating debts into one plan may reduce your monthly outgoings, but it is likely to mean that you will be incurring interest on the loans for a longer term and are likely to pay a greater amount over the term of the debt. These schemes can be complicated to unravel and there could be expensive early repayment charges if you change your mind.
THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
EQUITY RELEASE WILL REDUCE THE VALUE OF YOUR ESTATE AND CAN AFFECT YOUR ELIGIBILITY FOR MEANS TESTED BENEFITS.