With availability of overseas mortgages highly varied, many of you are considering equity release. Here Mark Rumney of Equity Release Supermarket explains how it works.
I’ve heard of equity release, but never really looked into it, could you explain, in layman’s terms, what exactly it is?
Equity release comes in two formats: lifetime mortgage or home reversion. Lifetime mortgages account for the majority of plans and enable homeowners over the age of 55 to release tax-free cash tied up in their property.
This money can be used to help improve quality of life for people approaching, or already in, retirement. It is also being widely used to help fund ‘a place in the sun’ for clients. There are no restrictions on how the money is spent, however advisers will ensure a duty of care to their clients.
Why is equity release becoming increasing popular?
A combination of factors has helped growth to its highest level of £1.61 billion in 2015. The reputation of the industry has improved with regulation and more flexible products such as drawdown, interest only, and voluntary repayment schemes.
We also have new lenders entering the market, such as Legal & General, who are starting to innovate with new products. Interest rates are now comparable with mainstream mortgages and being fixed for life offers a greater degree of security for the future.
How much can be released from a property via equity release, and is one’s age a factor?
Lenders base this on the age of the youngest applicant and the value of the property. Each lender has its own loan-to-value ratios governing their maximum percentages.
Essentially, the younger you are the lower the maximum release. For a male, age 65, with a property value of £250,000, the maximum available release is currently 35.5 per cent – equating to £88,750. Most brokers have equity release calculators on their site to help calculate these figures.
With equity release, what can you release the money for, are there any restrictions?
Basically anything! In its early years, equity release was mainly used for aspirational purposes such as holidays or new car and home improvements. However, with greater flexibility and lower interest rates, we are seeing a shift in usage.
Equity release is more commonly being used to buy holiday homes abroad, or clear debts, or repayment of interest-only mortgages at retirement. Moving house, helping the children onto the housing ladder and gifting are also becoming increasingly popular.
I’m currently considering equity release, but how does the ‘lifetime mortgage’ work in principle?
Effectively you are taking a secured loan (mortgage) against your property which is designed to run for the rest of your life.
Following the release of equity, the homeowner will then have the choice as to whether to make repayments or not. The plan continues for as long as the homeowner(s) lives in that property. Once the surviving person has died or gone into long-term care, the plan then needs repaying. This is usually following sale of the property, for which most lenders allow a 12-month window.
What are the qualifying criteria for equity release?
You simply need be a homeowner, living in your main residence which should mainly be of standard construction. Thereafter, qualification comes down to your age and the value of the property. For home reversion schemes, the minimum age is 65, however lifetime mortgages have a minimum age of 55. The lowest acceptable property value is £60,000.
Equity release is a viable alternative to getting a conventional mortgage, in the country that you intend to purchase your holiday home, as there is usually no affordability assessment and interest rates are normally fixed for life. Alternatively, it could be used in addition to taking out an overseas mortgage.
How expensive is equity release, what are the costs?
There are essentially two expenditures in taking equity release; set-up costs (around £2,000) and ongoing interest charges. Set-up costs include valuation fee, application fee, solicitors’ costs and any advice fee charged. Interest rates are mainly fixed for the life of the plan and therefore are a known quantity. 2015 has seen the lowest ever equity release interest rates – which is a positive sign for the industry.
What are the negative aspects of equity release schemes?
Taking a release of equity is a big decision and it is mandatory that you take professional advice. After all, equity release will potentially reduce the size of your inheritance.
Additionally, retirees on means-tested benefits must be aware that if you do take equity release, it can affect entitlement to such benefits. These plans are a lifetime commitment and therefore ALL aspects of these plans must be advised upon beforehand.