Equity Release Mortgages and Lifetime Mortgages refer to the same mortgage and are available to anyone who is age 55 or above. Equity Release Schemes allow you to release capital from your home either as a one-off lump sum or a combination of a lump sum and further drawdowns. In some cases, you may be able to release equity on a monthly basis. For those that are asset rich and cash poor, Equity Release Schemes are fast becoming one of the main considerations in retirement planning.
Equity Release Schemes are a serious decision and not necessarily the right course of action for everyone. Other considerations such as the use of existing savings and investments or downsizing to a smaller property could be more suitable, and because Equity Release Schemes can affect eligibility to means-tested benefits such as Council Tax Benefit, Pensions Credit and/or Pensions Savings Credit, it is always recommended that you seek advice from an independent adviser who specializes in Equity Release Schemes. An independent Equity Release adviser will assess your exact requirements and if appropriate will help you select the most suitable scheme for your circumstances from the full range of providers.
Equity Release Schemes are designed to run for the whole of your life with the equity released attracting interest that rolls up against the amount borrowed. Typically interest rates are fixed so that it is easy to calculate how the debt increases over time, but the movement in house prices both up and down is always a consideration that requires particular consideration, especially if leaving an inheritance to your beneficiaries is important to you. With the growing flexibility in Equity Release Schemes it is now possible to protect and guarantee a specific value in your property for your beneficiaries.
The amount you can borrow with Equity Release Schemes depends on how much your home is worth and on your age. The older you are, the greater the percentage of your home’s value you can borrow. Nothing is repaid until the last survivor dies, moves into long term care or the property is sold, but interest is added to the amount you have borrowed each year and is ‘rolled up’ over the life of the loan.
Lifetime Mortgage Considerations
Whilst there are a lot of positive reasons for releasing some of the money tied up in the value of your property through Equity Release Schemes, there are also other aspects that require careful consideration such as:
If you can afford to meet a monthly payment an interest-only mortgage could be considered. With interest-only Equity Release Schemes, you borrow a lump sum secured against the value of your home. You pay interest on the loan each month, and the lump sum you originally borrowed is repaid when your home is eventually sold. You need to be able to afford the interest payments out of your pension or other income, but this option does mean that less interest is paid than would otherwise roll up against the loan.
Also within the same marketplace as Equity Release Schemes are Reversion Schemes. With a Reversion Scheme, you sell your home, or a part of it, to a reversion company that allows you to continue to live there for the rest of your lives. After you die, (or move out for whatever reason) the proportion of your home that you sold becomes the property of the reversion company. Anything left overpasses to your estate. When considering Equity Release Reversion Schemes and a drawdown of the maximum lump sum available to you, you will generally get a higher amount than through another equity release option, but you lose any future increase in the property value should values rise.
Other Equity Release considerations
Would move to a less expensive property be a better way of releasing money tied up in your home?
Have you got other nest eggs, such as premium bonds or savings, which you could use?
Have you considered your ability to move home in the future? The value of the loan outstanding reduces the amount you can spend on a new property and could remove the ability to move home at all.
The value of your property can increase or decrease which will affect the amount of equity remaining in your property for you or your heirs after repayment of the lender’s loan.
The equity stake that you currently have in your home could reduce to nothing due to the effect of rolled-up interest and charges exceeding the future value of the property.
There are costs associated with taking out the loan such as a valuation fee and a lenders arrangement fee.
You will be committing to keeping the property in good condition and to keeping it insured.
You will not be able to use the property as security for any other borrowing.
If you are living with a partner and one partner dies, entitlement to means-tested benefits will alter. Any occupational pension entitlement derived from the partner can continue, stop altogether, or continue but at a reduced rate.
Debt Consolidation: – Taking out a lifetime mortgage to pay off other debts that are not secured on your home should only be undertaken after careful consideration, and probably as a last resort. As interest rolls up on a lifetime mortgage, the initial amount taken to consolidate the debt will grow and may become many times larger than the debt it paid off.
In addition, if you are having financial difficulties and are struggling to maintain payments on unsecured debts, you should speak to the Citizens Advice Bureau or National Debt line. It may be possible to come to an arrangement with your unsecured creditors which may include freezing the interest charged and making payments at a reduced level. If this is possible, it is likely to be a better and cheaper alternative in the long run to Equity Release Schemes.