Equity Release... Let's Get This Straight!

Hey! Steve here!

Even with all the economic turmoil out there, which area of Property Finance do you think is massively on the rise?

Answer – Equity Release

I know what you're thinking... Absolutely not... Equity Release has had a lot of bad press.

Although Equity Release has been tarnished in the past due to the way it was calculated and compounded over time, it has recently rebranded as Lifetime Mortgages and changed considerably.

It was unregulated for a time and so there was some mis-selling practices. Nowadays it is highly regulated.

So... What is a Lifetime Mortgage?

Lifetime Mortgages let you access the money tied up in your home, without having to (although you can) make monthly repayments. Instead, the money you owe plus interest continues to grow and is only repaid from the sale of your property once you have died or go into long term care. The money you release is completely tax free. You must be aged 55 years and above to qualify.

There are different types of Lifetime Mortgages:

1. Roll Up Lifetime Mortgage: you make no monthly repayments and interest is charged on the total amount of the loan, which includes all the interest that has already built up. The amount you originally borrowed plus all the rolled-up interest is repaid when you die or move into long term care.
2. Repayment Lifetime Mortgage: you make voluntary monthly or ad-hoc payments to reduce the impact of interest roll-up. Some lenders allow you to pay off some of the capital, but there are usually limits to how much you can repay without penalty and how often you can make repayments. The remaining balance is repaid when you die or move into long term care.
3. Interest Only Lifetime Mortgage: you repay the interest each month so the amount you borrow never goes up. You can stop making repayments if you wish, in which case the interest will be added to the loan. The remaining balance is repaid when you die or move into long term care.
4. Drawdown Lifetime Mortgage: this is a lifetime mortgage with a cash reserve. This facility gives you the flexibility to access your cash when you need it rather than taking it all in a lump sum at the start. You only pay interest on the cash you withdraw, not the cash in reserve. The amount you have withdrawn plus interest is repaid when you die or move into long term care.
5. Enhanced Lifetime Mortgage: if you or your partner are living with certain medical conditions, you may be able to release a larger amount from your home and could be eligible for a reduced interest rate.

Why do people typically take a Lifetime Mortgage out?

Lifetime Mortgages can help reduce a person’s inheritance tax bill. They can also be worth considering if someone is struggling financially, wants to help out family members whilst still alive or wants a better standard of living in retirement, to name a few.

However, there are alternatives to Lifetime Mortgages, including downsizing. Moving to a smaller property, perhaps with fewer stairs and therefore more suitable to later life could give you the money you need too. If downsizing is an option, it’s something you should do sooner rather than later as typically the older you are, the less likely you are to move.

Also, if downsizing means a change in location that could leave you feeling isolated, or extortionate moving costs that negate the benefit of moving, a Lifetime Mortgage may be a more suitable option.

Here are some top tips for Lifetime Mortgages:

1. Don’t borrow the full amount - only borrow what you need. A Drawdown Lifetime Mortgage gives you flexibility to access your money as and when you need it. You only pay interest on the money you borrow, not on the funds held in reserve, which reduces the size of the loan.
2. Ensure your lender is a member of the Equity Release Council (ERC) – this is so you are protected by their safeguards. Importantly all members of the ERC guarantee you will never owe more than the value of your property. The Equity Release Council represents the equity release sector and exists to promote high standards of conduct and practice in the provision of an advice on equity release. Find out more about the Equity Release Council.
3. Get independent professional advice – to ensure you make the right decision. Use the services of either an independent mortgage advisor or financial advisor with an equity release qualification. We can help you with this at Express Mortgages.
4. Check it won’t impact any benefits you currently receive – such as pension or universal credits. Your advisor should be able to help you with this.

During 2020 (a pandemic year as well) there were nearly 73,000 new Lifetime Mortgage plans taken out, which released a total of £3.89 billion for people to enjoy how they please. This can be a complex area of Mortgages, which we can’t cover in one simple email.

For further questions such as the below, reach out to the team here and see how we can help.

• How much equity can I release?
• Is it safe and what are the pros and the cons?
• How many different providers are there out there?
• How much does it cost to set up a Lifetime Mortgage?
• What are the basic lending criteria such as minimum house value, minimum age etc?
• Can I ring fence some of the value to make sure there is an agreed amount of inheritance for my family?

All the best,

Steve

Express Mortgages is a trade name of Express Mortgage Services Ltd. Express Mortgage Services Ltd is authorised and regulated by the Financial Conduct Authority. [Reg No: 474427] Company registered in England & Wales no. 05167662

Your home may be repossessed if you do not keep up repayments on your mortgage.