Guest contributor, Independent Equity Release Specialist Ray Pikelis gives an overview of this method of raising capital. Important note; the purpose of this article is to provide general information and opinion, it should not treated as a recommendation, that can only be done on a face to face basis taking the individuals circumstances into account.
According to the Daily Telegraph “Equity release continues to rise in older homeowners in 2018.” Latest figures from equity release specialists Responsible Life show that the total amount of equity released by homeowners was up 5.8% in May compared to April, although the average amount released fell by 4.1% to £72,877.
What is Equity Release?
In simple terms it is an arrangement that allows you to generate a tax free lump sum (or a series of smaller lump sums) from the value of your home, whilst allowing you to live there for the rest of your life or move into long term care. You may use the lump sum in any way you want without restriction including
- Home Improvements
- Repay Existing Mortgage
- Debt Consolidation
- Increasing Retirement Income
- Early Inheritance Gifts
- Helping Children onto the Property Ladder
- Inheritance Tax Planning
- Holidays and Holiday Homes
- New Car
- Long Term Care in your own home
The list is obviously not exhaustive and whilst the New Aston Martin is a very attractive option I personally would not recommend it, however the choice is still yours on what you do with your money.
There are only two ways of releasing equity from your home
The first and by far the most popular is a Lifetime Mortgage where you can raise between 15% and 55% of the value of your home, depending on your age.
- The loan is secured against your property
- You retain full ownership of your property
- Usually, no monthly repayments with interest roll up
- The longer you live the more you may owe (ties in with repayments below)
- Voluntary or contractual repayments are possible without penalty and may be paid by anyone.
- Early loan repayments are possible but may trigger Early Repayment Charges (ERC) in certain circumstances.
- Further advances may be available subject to lenders criteria and property value
- It is Possible to re mortgage
- Outstanding Loan and Interest payable only on Final Sale
- Mortgage is only repaid when property owner (and partner if applicable) dies or goes into long term care
Variations that can be added to Lifetime mortgages include
This is a portion of your maximum release that is agreed at outset and is held is reserve, without charge, until you need it. Interest charges only start to accrue at the point where the funds are drawn down by you. As a general rule you should not draw down or release more than you need in your immediate future.
It is possible to guarantee that a specified proportion of your property will be inherited by your beneficiaries.
There are some lenders that will increase the amount they will lend you if you have an adverse health history or life style. This could also translate into a lower interest rate in some circumstances.
The alternative method to release equity is called Home Reversion.
Nowhere near as popular as Lifetime Mortgages but has an interesting role to play in certain circumstances where a known fixed cost is required.
- Equity Release Provider buys all or part of Property
- Value is discounted so you do not get full market value
- Property owner gets a Lifetime Tenancy & Beneficial ownership
- Clearly defined ownership
- Owner gets property Growth only on % retained
- No monthly payments therefore it is a known cost
- Not designed to be repaid early but you can usually buy the property back at market value
- Your home will be sold when you die or go into long term care so the provider is able to take their share with the remainder being put back into your estate.
Equity Release Council
All arrangements that are approved by the Equity Release Council carry the following guarantees
No Negative Equity
The loan and outstanding interest will never be more that the value of your home no matter how long you live or whatever the housing market does.
You are able to move to another property without financial penalty but subject to the providers’ terms and conditions
Right to Remain
You can stay in your home for as long as you choose to
In order to be eligible for either equity release arrangement you must fulfil all the following criteria
- All applicants must be over the age of 55
- You must own your own home
- The value of your home value must be at least £60,000
By Far the most preferred interest type on Lifetime Mortgages is the fixed one. Variable rates are also available. Although the Bank of England raised its rate some time ago, overall interest rates remain at a historical low or very close to it.
Consequently there are some very competitive interest rates available at the moment.
The further you are away from your maximum borrowing the better the interest rate will be. The fixed rate lasts for the lifetime of the mortgage so the interest charged becomes a known quantity.
The interest charged on a monthly basis is added to the loan and if no payments are made they then have the effect of “compounding interest”.
From my experience this is by far the biggest concern and discussion point my clients have. It stems from the perception of it being difficult to calculate and therefore a scary thing which will erode all the value of their homes.
The Rule of 72
The erosion element is true BUT it is important to understand to what extent and over what period of time. As an example I discuss with my clients the “rule of 72” which will allow them to estimate the effect of compound interest at any given rate.
For example at a rate of 5%…divide 72 by 5 gives you 14 (and a bit) therefore any money you borrow at 5% with interest roll up will double every 14 years and at 4% will double every 18 years.
The question I then ask is how much do you think your property will be worth in that time and how old will you be? Perceptions begin to change with greater understanding.
Is it right for you?
Ultimately, Equity Release is not the right option for everybody and whilst it is no longer the last port of call, especially for those homeowners with Interest Only Mortgages where lenders are chasing them for repayment or conversion to capital repayment because of their age! All other options should be duly considered before proceeding with Equity Release.
However, anyone contemplating Equity Release should do so by seeking the service of an Independent Equity Release Specialist fully qualified and regulated to give advice on a whole of market basis.
Ray Pikelis is an Independent Equity Release Specialist regulated by the Financial Conduct Authority with 30 years of financial services experience in various guises and a financial understanding far beyond Equity Release.
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