A GUIDE TO EQUITY RELEASE LIFETIME MORTGAGES BY DANIEL MCLARDY (Edinburgh)
Conventionally wealth has been thought of as assets a person owns aside from their home, whether this be cash, pension investments, buy-to-let properties, an income generating business, and so on. But in reality, and however unintuitive it may seem, the equity in your home is a form of wealth, and equity release is a way to convert this wealth in to readily available cash.
In simple terms, equity release allows homeowners over the age of 55 to release money from their property while remaining in their home, often without having to make monthly repayments. The cash raised is usually on a tax-free basis.
In this rough guide (and I really mean rough guide), I aim to give you some key points to give a useful overview of equity release lifetime mortgages, and I also make the case for seeking professional Equity Release Advice:
1 – THERE ARE 2 TYPES OF EQUITY RELEASE METHODS (BUT WE CAN ONLY HELP WITH LIFETIME MORTGAGES)
HOME REVERSION SCHEMES (AGE 60 +)
With a home reversion plan, some or all of the property is bought by the Home Reversion Provider, with the homeowner generally receiving a cash lump sum. The homeowner retains the right to live in the property until they die or move in to long-term residential care. When either of these events occurs, the property is sold and the reversion provider receives the proceeds of their share of the property. Please note, we do not offer a service on Home Reversion Equity Release Schemes, and I explain this below.
LIFETIME MORTGAGES (AGE 55+)
With a lifetime mortgage, the homeowner typically takes out a loan where the interest rolls up (on a compound basis), which generates a cash lump sum. There is no need to pay anything back until they move home, die, or transfer in to long-term residential care. When any one of these events occur, the amount borrowed together with the rolled-up interest is repaid, usually from sale proceeds of the property.
The key difference between the two equity release methods is ownership. With a lifetime mortgage you retain 100% home ownership with a mortgage secured against it. With home reversion you sell all or part of your home to the reversion provider. This leads me to my next point.
2 – LIFETIME MORTGAGES ARE THE MOST POPULAR FORM OF EQUITY RELEASE
Lifetime mortgages are the most popular form of equity release (around 90% of the equity release market), with home reversion becoming relatively less significant in recent years. This is likely because homeowners are psychologically more accepting of a situation where they retain full ownership of their home, also retaining the benefit of any future uplift in the value of their property. This is also the primary reason why we only give equity release advice on lifetime mortgages, and not home reversion schemes.
3 – LENDING IS USUALLY RESTRICTED TO BETWEEN 25% AND 55% OF THE PROPERTY VALUE
The amount of cash that can be raised from your property will be in the region of 25% to 55%, depending on your age. The reason for this restriction is because the lender requires a “margin of safety” to (hopefully) avoid a negative equity situation when the property is sold and the loan repaid. This leads me to the next point on “No Negative Equity Guarantees”.
4 – LENDERS REGISTERED WITH THE EQUITY RELEASE COUNCIL PROVIDE A “NO NEGATIVE EQUITY GAURANTEE”
It is important to note that all lifetime mortgages approved by the ERC (Equity Release Council) come with a “No Negative Equity Guarantee”. This means that you, or your estate on death, will never be liable for a loan amount higher than the value of the property. If such a situation does occur, the lender must “take the hit” and accept the loss. This is completely fair, and for this reason, alongside the admirable influence of the Equity Release Council, the greater majority of lifetime mortgages come with this guarantee. As part of our equity release advice process, we always advise our clients of the mortgage products that meet with ERC approval, and the accompanying protections.
5 - THE EXPANSION OF LIFETIME MORTGAGE PRODUCT TYPES AND FEATURES MAKES EQUITY RELEASE ADVICE ESSENTIAL TO YOUR DECISION MAKING
In recent years competitive forces among lifetime mortgage lenders has encouraged a number of innovative product features and versions, providing more flexible solutions for borrowers. The following isn’t exhaustive, as the market is continually evolving, but examples include:
DRAWDOWN LIFETIME MORTGAGES
With a Drawdown Lifetime Mortgage, the borrower isn’t limited to receiving a single, large lump sum, but a smaller initial lump sum with the option to “drawdown” further amounts in the future. The main benefit of this type of lifetime mortgage is the borrower doesn’t pay interest on any undrawn funds, thus reducing the impact of rolled-up interest.
INTEREST ONLY LIFETIME MORTGAGES
With an Interest Only Lifetime Mortgage the borrower pays the interest on the lump sum loan, so it doesn’t roll up. This is particularly useful for those who want the certainty of knowing exactly what the outstanding debt will be when they die or move in to long term care. This can be advantageous for estate planning purposes, or simply having the psychological reassurance of knowing the outstanding debt won’t increase. However, some products offer flexibility, allowing the interest-only element to be cancelled and the mortgage converted to an interest roll-up mortgage.
HYBRID LIFETIME MORTGAGES
Hybrid Lifetime Mortgages offer numerous variations on the conventional rolled-up mortgage. This can include a facility to pay as much of the monthly interest as the borrower chooses, or to make penalty-free lump sum payments to reduce the loan balance (usually with an annual limit to any such overpayments). There are numerous configurations, and I believe the breadth of choice will only increase further as the market matures
The above highlights how the lifetime mortgage market has matured in recent years, offering much more than just conventional lump sum products. In fact, product variations and features are continually evolving, making equity release advice essential to your decision-making process. As a whole-of-market, Lifetime Mortgage Advisor with unrestricted lender access, we can assist you in choosing the right lender and mortgage for your circumstances, needs and goals.
6 - THERE ARE NO RESTRICTIONS ON WHAT THE MONEY IS USED FOR
Lifetime Mortgage lenders do not place restrictions on what you use the mortgage funds for, although here are some common examples:
(1) To pay off an outstanding conventional mortgage or interest only mortgage
(2) To pay off other debts
(3) Home Improvements
(4) Holidays
(5) Assisting Grandchildren with a home deposit or wedding costs
(6) Buying an income through an annuity or other income-producing investments
(7) Making “living inheritance” gifts of money to family members as part of a wider estate planning strategy
The list goes on, but it’s extremely important that an equity release borrower thinks carefully and deliberately about what the funds will be used for, and whether unlocking the value in their home is justifiable. The possibility of regret must be reduced to the absolute minimum, and we will make sure we explore this with you to ensure your decision is fully considered. This leads me to my next point.
7 - A LIFETIME MORTGAGE IS ONE OF THE MOST SERIOUS FINANCIAL COMMITMENTS YOU WILL EVER MAKE
In my opinion there aren’t many other financial decisions more serious than equity release, and never should it be taken lightly. The impact of rolled-up and compounding interest over the long term can be significant, introducing considerable uncertainty as to the equity value of a property that can be passed to the borrower’s heirs. This is why professional equity release advice is so important, and the involvement of the borrower’s immediate family encouraged. When I meet with clients I often use the quite hard-hitting phrase “When It’s Gone, It’s Gone”. This is because in many cases, once the wealth from your home has been utilised, it is extremely difficult (or impossible) to replace it.
8 – A LIFETIME MORTGAGE ISN’T ALWAYS THE ANSWER – SALESMANSHIP SHOULD BE TREATED WITH CAUTION
In many cases equity release may seem the answer to a need or problem, when in truth it is not. Is it right to use equity release to buy an income when there’s a spare room for a lodger? Should you pay interest on a lifetime mortgage versus receiving a tax-free pension lump sum? Is it necessary to take out an equity release mortgage if you are eligible for a standard repayment mortgage? Should you consider debt counselling before using equity release to pay off an unsecured loan?
In most cases alternative solutions to equity release can be considered in reaching the end-goal, and we will take the role in bringing the possibilities to your attention. All equity release advisors should follow this remit, and I would encourage anyone to be cautious of an advisor who appears to single-mindedly hard sell the idea of equity release. The avoidance of regret is paramount, and our impartial equity release advice process will ensure your decisions are based on objective information, delivered without the hard-sell.
9 – EQUITY RELEASE IS REGLATED BY THE FCA (FINANCIAL CONDUCT AUTHORITY)
Sadly, Equity Release has a chequered past, with too many cases of consumer harm occurring before the industry became regulated by the FCA (lifetime mortgages have been regulated since 31 October 2004, and home reversion plans since 6 April 2007). Since regulatory protections were introduced, the equity release ecosystem has evolved in to a significantly more mainstream, valid market, with reputable participants. As a regulated Equity Release Advice firm for Lifetime Mortgages, we count ourselves as one of those reputable participants!
WHY MIGHT EQUITY RELEASE ADVICE APPEAL TO EDINBURGH RESIDENTS?
Edinburgh is a region of significant property wealth. Historically Edinburgh has experienced a relatively stable and rising property market over time, owing to it being a centre of high quality employment and high quality-of-life rankings. In turn this means Edinburgh residents, over the decades, have accumulated significant (and often quite unexpected) property wealth, which can be utilised to address financial needs and problems. Pension provision is one area where I believe equity release will be popular here. I meet a significant number of people who have limited pension provision aside from the state pension, and they would prefer not to downsize to give their retirement pot a much-needed boost. I can also see equity release as a possible solution, unfortunately, to the past misselling of interest-only mortgages. I often speak with Edinburgh residents concerned about how they will fund repayment of their interest only mortgage approaching the end of its term. Whatever the reason might be, it has become clear there is a need in the city for high quality Equity Release Advice, which is why we entered the burgeoning market.
TO CONCLUDE
The wealth tied-up in your home can be released through equity release. The most popular route for doing this is through the Lifetime Mortgage market, which is regulated by the Financial Conduct Authority. Because Lifetime Mortgages come in various “shapes and sizes”, Equity Release Advice is essential, and an advisor firm with unrestricted Whole-of-Market lender access is positioned to assist you in finding the best deal for your needs and circumstances. But let’s not forget that Equity Release is not a financial panacea, and a Lifetime Mortgage Advisor has an important role to play in making sure it’s the right path for you.
CAN I HELP YOU?
If you are considering equity release and would like to make an appointment for a zero-obligation consultation, I would be delighted to assist you. There’s no obligation or pressure, and never a hard-sell. Call us and ask for Daniel McLardy (Dan).
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