Equity Release – ER: (Later Life Lending) and the interest-only mortgage timebomb.
It is estimated that around 3m people in the UK have interest-only mortgages and a great many of these people either have a shortfall on their mortgage repayment vehicles (mainly endowments not performing) or have no repayment vehicle in place – with an ever-faster approaching mortgage repayment date.
For those with a shortfall, if over a certain age, they’ll have to either find the money to repay the lender or downsize – the chances for many over 55s getting an affordable remortgage are slim, if in fact they can get a mortgage at all. An answer could be Equity Release.
Most people have built up equity in their properties over the years and, for those with a mortgage to repay but who want to stay in their home, releasing some of the cash tied up in their property could be the perfect answer.
Other uses for ER
Of course using ER to repay a mortgage is just one of the uses it can be put to. Some other uses are:
A tax-free lump sum for private medical care, to avoid a lengthy waiting list.
Help a family member to buy their first home.
Help finance a move to a new property.
Replacement of family car/home improvements/similar uses.
Supplement retirement income.
Reduce the value of your estate and save on Inheritance Tax.
Enjoy your money while you’re alive.
Actually go on that adventure that you’ve always dreamed of.
Purely to have the money to spend as you want, when you want.
Modern Equity Release plans are very flexible and, because ER advisers are now regulated by the Financial Conduct Authority (FCA), very transparent.
Before settling on the services of an ER adviser you should ensure that the firm you are considering offer the following:
*An initial meeting/discussion either by telephone or face to face without obligation and without charge.
*Ensure that equity release is a suitable route for you now or possibly later.
*They’ll explain in full how equity release works and its impact on you & others.
*They’ll discuss all alternatives and provide access to these options if needed.
*Their recommendation will be based solely on your needs.
*If the recommended route is to proceed with an arrangement, then they will provide you with a Key Facts Illustration (a client specific illustration).
*If you are fully happy to proceed, they will help you with the application process.
When an application is completed, you will receive a suitability letter from them, that will fully explain why the Equity Release product has been chosen.
Equity release: types of scheme
There are two main types of equity release: lifetime mortgages, which allow you to borrow money against your house; and home reversion, whereby you sell a share in your property.
Lifetime mortgages (can be taken out from the age of 55) – repaid when you die or go into long-term care.
With a lifetime mortgage, you borrow a proportion of your home’s value. Interest is charged on the amount borrowed, but nothing usually has to be paid back until you die or sell your home. The interest is compounded or ‘rolled up’ over the period of the loan, meaning your debt could double in 11 years at current rates.
Home reversion schemes (only available to people 65 or older) – you effectively sell a portion of your property to the lender but can remain in the property until you die.
With a home reversion scheme, you usually sell a share of your property to the loan provider for less than the market value. You have the right to stay in your home for the rest of your life if you wish. When you die or move into long-term care and the property is sold, the provider gets the same share of whatever your home sells for as repayment. For example, if you sold 50% of your property to the provider, it would get 50% of the sale price.