13 min Read
17 Aug 2015

Written by Darren

I’m an Independent Financial Adviser and I’ve been in the industry since the 90’s

I have always had a particular interest in Investment, including Pensions.

FPC qualified since 1999 I have now been qualified at the new Diploma level since July 2011.

I totally support the FSA initiative of raising standards in general and building a code of ethics for advisers.

My only regret is that the move to fee based advice in 2013 may put off those who don’t usually seek the services of advisers, and sometimes these are the people that need us most.

That’s why I’m happy to offer my services to Money To The Masses!

More about Darren

How to release equity in your home – Equity release mortgages explained

equity release mortgage adviceHow to release money from your house - Equity release explained

With property prices increasing year on year there are many older homeowners, living on restricted incomes, who have large amounts of equity tied up in their homes. There are schemes available, known as Equity Release schemes or home equity loans, that can release equity from your home to improve their standard of living.

What is equity release & how does equity release work?

There are two types of Equity Release schemes:

  • Home Reversion Mortgage
  • Lifetime Mortgage

What is a Home Reversion Mortgage?

A Home Reversion Mortgage is a type of equity release scheme where the homeowner effectively sells part or all of their home in exchange for cash but keep the right to remain in their home until they die. So enabling them to release equity in their house. On death the property is sold and the percentage of the property that is mortgaged is applied to the sale price and this sum is paid to the mortgage company. This type of equity release scheme has come under a lot of criticism as families realise that the sum owed to the mortgage company has increased well beyond the original sum borrowed due to the increase in the value of the mortgaged property.

What is a Lifetime Mortgage?

A Lifetime Mortgage is an equity release scheme that acts like a normal mortgage in as much as you borrow money, with your property as security, but only pay back the capital in the event of death.

There are two types of Lifetime Mortgage:

  • Roll-up mortgage - here no interest is paid on a regular basis but 'rolled up' and added to the original mortgage amount increasing the total amount owed over time.
  • Retirement mortgage - this is more like a regular mortgage where you pay regular monthly payments but unlike a regular mortgage there is no redemption date. If you are unable to keep up the payments on a Retirement mortgage you do have the option to switch to a Roll-up mortgage.

The amount of equity you can release from your home varies depending on your age, current health & the specific product that you take, which vary between providers.

How much money can you release from your home?

The table below shows the maximum lifetime equity release mortgage you can get. Simply use a calculator to apply the relevant percentage against the value of your property to see how much equity you can release from your house. Alternatively here is an equity release calculator which will do the calculation for you. However the calculator only provides the size of the lifetime equity release mortgage available from the equity release lender who designed the calculator. The table below is based on the whole of the market.

So for example at age 70, if you have a £200,000 property you could release between £52,000 (26%) and £68,000 (34%).

Age Loan to Value Minimum Loan to Value Maximum
55 11% 19%
60 16% 24%
65 21% 29%
70 26% 34%
75 31% 39%

When should I consider an Equity Release scheme?

There are no restrictions on what you can do with equity released from a property so any of the following may be a reason to consider an equity release mortgage:

  • Provide some additional Income, although beware of losing any State Benefits if doing so.
  • Buy a new car
  • Put in a new Kitchen or bathroom, or perhaps alter your home to make it more suited to your health and lifestyle.
  • Pay off your Interest only mortgage when you retire, so that you don't have to sell your home (see the Case study Below)
  • Buy a second home, for holidays perhaps
  • Give funds to their children as “pre-death” inheritance, perhaps to help them buy a house

What do I need to consider before using Equity Release?

  • Talk to your family as they may be able to give you advice on the best option for your circumstances and help you through the process if you decide to proceed
  • Raising capital may Impact on your state and welfare benefits.
  • Raising capital may impact on your tax position as any investment made with the released equity could be liable to tax
  • Any realised capital that you spend will reduce any inheritance you want to leave.
  • You must be prepared to commit to this for life as potential early repayment charges on an equity release mortgage could be expensive.
  •  If you are a couple, you must be sure (as must your adviser & your solicitor) that both parties understand the commitment and costs involved (legal fees, adviser fees & mortgage fees)
  • Understand how the build up of interest throughout the life of the mortgage will impact on the value of your property when you die

Are there alternatives to Equity Release?

You should consider these options before making your final decision

  • Sell or use other assets, including other Investments or savings.
  • Consider a standard secured or unsecured loan, if you can afford repayments.
  • Sell your home and downsize, so that you end up with some capital.
  • Consider adjusting your standard of living. For example, you might be spending £10,000 each year on holidays. As you are getting older will you still do this? If not then perhaps you needn't raise the capital.
  • Consider moving in with your children. You could perhaps sell your home and use some of the capital to build a “granny flat” extension to their home. Or rent out your home to provide extra income.
  • You might be able to borrow money from family.
  • If you are looking to modify your property you might find that grants are available from the Local authority

Where can I get the best equity release advice?

  • Ensure you are dealing with a qualified Adviser who is registered with the Equity Release Council (ERC) to gain the full protection that this offers
  • Seek independent legal advice from a lawyer who is qualified in this area before you proceed
  • All lenders under the ERC guarantee there is never a negative equity, so that if the interest rolled up leads to the mortgage being more than the house is worth when you die they write off the rest.
  • You are guaranteed the right to live in the property for life rent-free, or until you go into care
  • The mortgage is portable if you need to move (within specific Loan to Value criteria) to another property

Summary

  • Equity release is not suitable for everyone, but it can be an important part of planning your retirement income & capital needs if used correctly
  • Speak to a qualified adviser, and ask to see their Equity Release Council membership card Most Advisers will offer a Free consultation to start with, and will help you decide whether its right for you

Case Study – Using Equity Release to clear your existing mortgage in retirement

John & Jane Smith are both 74.

In 1995, 20 years ago, they re-mortgaged their property and increased their borrowing to to build an extension. This brought the loan up to £140,000. As was common at the time, they took on an Interest only mortgage in order to make it easier to afford the payments.

They are currently paying the Interest payments of £350 approximately per month, which they can just about manage.

However, they have two major financial concerns:

If one of them passes away then their pension income will not be enough to be able to continue paying the mortgage.

The original mortgage is due to be repaid at age 75, the maximum age the lender allows for its mortgage redemption dates. They do not have £140,000 available so are beginning to feel like they are being forced to sell their home. Worse still the funds they will have left will probably not be sufficient to buy a decent home for them to live in for the rest of their lives
Not a happy state of affairs, and one I would not want my own parents to have to face. The stress and worry this is causing them is unthinkable.

We therefore discussed options, and we actively involved their son Josh in the conversations.

My equity release advice:

Eventually I decided that the best solution was to arrange an Equity Release mortgage, to pay off the existing mortgage. This means they haven't got to worry about a redemption date, with the added bonus of no regular payments in future.

This gives John & Jane some extra cash every month, and when one of them passes away the other won't have to worry about the mortgage payments. So it fixes both of their concerns!

John, Jane and, possibly most importantly, Josh, all agreed this would be just right for them. So once I'd looked through all of the equity release mortgage products and equity release interest rates available on the market we completed the necessary applications etc.

In this case things were a little tight though, as the Loan to Value (LTV) they were offered at age 75 was only 39%. The house is worth about £350/360,000 so we were looking at £140,400 maximum at the £360,000 valuation. If the property valuer had decided on a lower figure there wouldn't have been enough capital to pay off the mortgage!

The good news is that the client does have a little savings so if this had happened they could have covered it. Fortunately everything was agreed and the valuer agreed the higher figure, so everyone is happy and we were able to release the equity in their property.

John & Jane have already told me that they feel like a great weight has been lifted off of their shoulders, and their son Josh is delighted with whole process as well.

 

(image by by Ambro via freedigitalphotos.net)

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