How equity release can help to pay off interest-only loans
OLDER homeowners with interest-only mortgages they cannot pay off at the end of the term are being offered more ways to stay in their homes. By releasing equity from a property, it is possible to clear the debt, meaning a homeowner can live there until they die or go into long-term care. In the past, those whose homes were not mortgage-free had limited options for equity release.
Although they are now rare, interest-only mortgages were widely sold in the late 1980s and early 1990s by commission-hungry salesmen who assured borrowers that if they invested in the stock market, rather than repay the loan, they would have extra cash at the end of the term.
This is a promise many borrowers are finding has been broken as their mortgages mature after 25 years.
Yorkshire Building Society has just teamed up with equity release specialist Age Partnership to give such borrowers access to the full range of equity release options.
Andrew Clare, Yorkshire’s senior risk and customer operations manager, says: ‘The equity release sector grew last year at a record level. Those using it to repay interest-only mortgages fuelled a significant part and that is likely to continue.’
But equity release is not to be rushed into. Family members need to be involved because it affects the size of inheritance left to children. With many types of plan available, independent advice is vital.
Lifetime mortgages are the most popular form of equity release. Here a loan is secured against the home with interest payments added to the outstanding balance.
How much can be borrowed depends on age. A 55-year-old may be offered a fifth of their home’s value, but older homeowners can borrow up to half. The loan is repaid from the sale of the home when the surviving owner dies or goes into care.
In the past, this left homeowners with few possibilities, if they found they needed more – or less – money.
But Dean Mirfin, technical director at equity release specialist Key Retirement, says many lifetime mortgages now provide borrowers with payment flexibility. This includes the right to make monthly interest payments before switching without penalty to a roll-up loan.
Borrowers can also ring-fence some of their home’s value as a future inheritance for children. Other plans allow ad hoc repay- ments. Mirfin says: ‘There are schemes that allow voluntary repayments of up to 10 per cent per year without penalty.’
Some schemes allow equity to be drawn down in stages, again slowing the build-up of interest. Tom Moloney, at Age Partnership, says this is sensible, adding: ‘Many plans offer a pre-approved further borrowing facility should you need more funds.’
Planholders are given a ‘no negative equity’ guarantee, which means that on the death of a homeowner their beneficiaries are not chased for any shortfall on the sale of the family home from other assets.
The best variable rates on a lifetime mortgage are about 3 per cent, while the lowest fixed rate is 3.92 per cent. On an £80,000 lifetime mortgage, the set up costs will be about £2,500. Specialist providers offer bigger loans to those with certain medical conditions or ‘lifestyle’ issues, such as a history of smoking.
AN ALTERNATIVE to a lifetime mortgage is a home reversion plan. Here, a homeowner sells part or all of their property at the outset in return for a lump sum. They can still live there until death, when the company takes its slice of the proceeds.
The lump sum will typically represent between 30 and 50 per cent of your home’s market value.
Moloney urges consumers not to borrow more than they need, and says they should consider flexible mortgages. He says: ‘Many offer a pre-approved further borrowing facility should more funds be needed in the future.’
Equity release can fund a variety of retirement plans. Valerie Woodward, 77, and her husband Peter, 83, released equity from their property in Perranporth, Cornwall, four years ago to buy a second home in Spain.
The couple, who ran a restaurant before retiring, now winter in Mar Menor, on Spain’s east coast. They released a third of the value of their British home and were able to give some money to their granddaughter to buy her first property.
Valerie says: ‘We discussed what we were doing with our two children and they were happy. After taking advice, we went for a fixed-rate lifetime mortgage with Just Retirement. We love our place in Spain and all the family use it as a holiday home.’