You may live in your property but be short of cash and your income and pension might not cover your costs. With a small mortgage or no mortgage, you don’t know where to get extra money from. This is a fairly common problem, and there is a potential solution. Equity release.
What is equity release?
Equity release has been around for over fifty years in various forms. Skipping the history lesson, let’s look at the main features of modern equity release.
Firstly, it’s usually a special type of loan called a lifetime mortgage. This has some important legal safeguards compared to a normal high street mortgage.
You have the right to reside until you have either moved into long-term care or died. This is because there are no compulsory repayments.
The interest rate is usually fixed for life, providing you with certainty.
The lifetime mortgage is portable to another property so long as that’s acceptable to the lender.
All lifetime mortgages have a no negative equity guarantee meaning that the mortgage cannot exceed the sale price of your property.
All lenders and advisers must be qualified and regulated by the Financial Conduct Authority. The sector has its own trade body, the Equity Release Council, members of which provide these important safeguards.
What happens to the interest?
In our experience most clients don’t want to make repayments, but a significant minority do. You can choose what happens to the interest; it can negatively compound or you can make optional repayments, typically of up to 10% each year.
This means a lifetime mortgage can be a roll-up mortgage, interest-only or even a repayment mortgage, whatever suits your financial circumstances.
How can I take the money?
The most obvious way is a lump sum but that’s not necessarily the best way, and it’s not usually a good idea to borrow more than you need. A drawdown plan provides the ability to access money in stages, thus deferring the interest cost. Alternatively, a monthly income provides simplicity and discipline.
Why is the equity release marketplace growing?
In recent years the market has grown from £1bn in 2013 to nearly £4bn in 2018. There are several reasons behind this. The UK population is getting older by proportion and, as the baby boomers are well into their retirement years, there are more people over 60 than ever before.
According to research by telegraph.co.uk over £1bn of housing wealth was unlocked between June and September 2018. The daily rate is about £11m.
Lower interest rates and greater choice have also helped to make this a buoyant sector. At the time of writing (June 2019) interest rates start from 3.32% fixed for life. The effect of this is significant; it used to be a rule of thumb that compound interest would double the loan every ten years. At 3.32%, it’s twenty years.
As the market has grown so has the number and type of products; from 86 product options in January 2013 to 221 in January 2019. There is greater choice and flexibility than ever before.
Why do people release equity from their home?
The most popular reasons for taking equity release include the following:
Asset rich, cash poor
The notion of working for one employer for 40 years with a final salary pension has been and gone. Many people now have fragmented and inadequate pensions and equity release can be a valuable nest egg. Whether for home improvements, paying off debts or just topping up your income for a better quality of life.
With low interest rates, bank savings generate little interest. Equity release could be ideal to supplement your regular income each month.
Not long ago it was common for people to only pay the interest on the mortgage meaning the balance wasn’t reducing. In times of strong house price inflation, the mortgage became a smaller percentage of the property’s value. Nowadays banks want to be repaid and limits on age and affordability mean they often won’t extend the mortgage term.
As lifetime mortgages have no age or affordability limit, you are able to remortgage to a safe option.
The bank of mum & dad
Gifting to the family is a popular option. With high house prices, the challenge of saving for a deposit has seen the age of first-time buyers rise over the years. Equity release enables you to make a ‘living inheritance’ and, as well as house deposits, it is sometimes used to fund grandchildren’s education.
As you enter your older years, you may need to pay for care. This doesn’t have to mean selling the family home and moving into a residential care home. Equity release can fund care to come to you, known as domiciliary care. A drawdown plan as mentioned above is a likely way of achieving this as it allows the necessary funds to be released as and when required.
No need to downsize/rightsize
Many people have chosen to downsize to release value in the family home. This involves a lot of upheaval, change and expense. With equity release, you can stay put.
Keeping your home in a good state of repair is very important. You may also want to make age-related changes such as a downstairs bathroom, handrails and the like. Garden and fence repairs, central heating and an adaptive car may all be necessary.
Releasing money from your home is a big and important decision. If you feel vulnerable you also need to take professional advice and ensure that you have a competent family member or friend to accompany you. It’s also important to take care if you have dependents living with you.
If you would like to speak to your financial planner about your finances, contact Capital today.
This blog has been written by David Wright, Managing Director and Equity Release Specialist, Sixty Plus. Opinions are his own. This is a lifetime mortgage. To understand the features and risks, ask for a personalised illustration.
Remember that equity release could affect any entitlement you have to receive means-tested benefits.
Please note that Capital Asset Management is not authorised to provide advice or arrange equity-release products, so we partner with a leading equity-release specialist to provide this service to you.