How to get the lowdown on equity release
Inquiries about equity release are on the rise. Here’s the lowdown on lifetime mortgages and home reversion schemes.
A recent report by Yorkshirebased Key Group, the UK’s largest equity release broker, revealed that the number of homeowners over 55 accessing money tied up in their property rose by six per cent year-on-year in the first quarter of 2020, though the amount released fell by 3.8 per cent.
While 63 per cent of would-be borrowers say they want to use equity release to improve their home, less than a quarter use the money for this reason. Instead, it is allocated for paying off or servicing debts, including an outstanding mortgage.
Almost a third of people use the cash to gift money, with an average 21 per cent of the proceeds used to support family or friends. Of those who gave money to their families, help with house deposits, pre-inheritance cash and debt repayment were popular uses.
The average age for those releasing equity is 71 and the average amount they take is £67,769.
The pandemic has increased the appetite for this form of borrowing, according to Steve Humphries, Proposition Director at Mortgage Advice Bureau Wealth Management.
He says: “During the pandemic, we have definitely seen an increase in equity release enquiries and also a slight shift in the reasons behind the decisionmaking.
“During these uncertain times, customers want to help their families financially and using the equity built up in property is one way of doing it.”
He adds that those considering equity release should always seek specialist advice from a firm authorised by the Financial Conduct Authority.
Money Saving Expert founder Martin Lewis says that while equity release rates are now cheaper than they have been in previous years, it is still an expensive option.
He suggests that homeowners first look at downsizing to release property equity.
Here are some facts on equity release. For more information,
Age UK has a guide at www.Ageuk. org.uk and Martin Lewis’s guide is at moneysavingexpert.com. Wakefield-based Key Group is a specialist broker and adviser at www.keyadvice.co.uk
■ Any outstanding mortgages or loans secured against your home will have to be cleared at the same time as taking equity release, either by using some of the money to be released or savings.
■ There is usually an arrangement fee. These generally range from £1,500-£3,000 and include application fees, legal costs and surveyor fees.
■ There are various types of equity release. A lifetime mortgage is the most common and is available to those 55 and over. It allows you to borrow a lump sum of money secured against your home. This mortgage is usually repaid from the sale of your home when you die or move permanently into residential care. The loan can quickly grow in size if the interest is rolled up, though average interest rates for lifetime mortgages at the moment are relatively low, between three and five per cent. Martin Lewis calculates: “If you borrow £20,000 aged 60 at 5.1 per cent on a £120,000 home, the amount you owe doubles roughly every 14 years. So live until 74 and you owe around £40,000. Live until 88 and you owe £80,000.”
■ You could also opt for a drawdown mortgage, which allows you to take money out of your property a little at a time up to an agreed amount. Interest is charged on the amount you take, rather than the whole amount available.
■ A home reversion plan allows you to raise money by selling all or part of your home to the equity release provider at below market value. You can then live in it rent free until you die or move into permanent residential care. You must be age 60 or over to qualify for this. When the property is sold, the proceeds are split based on the percentage you own and the lender owns. Martin Lewis says:
“If you sell a 40 per cent share in a £200,000 property in return for a lump sum of £40,000, this cash may be half the £80,000 this share is actually worth because the provider will have to wait many years to get its money back. When you die, if your home is eventually sold for £300,000, the provider would then be entitled to £120,000, which is 40 per cent of the proceeds.”
■ With any equity release plan, you continue to pay for home maintenance, running costs and insurance. You must also consider how releasing equity will affect means-tested benefits.
■ You are able to move house and may be able to transfer your equity release product, as long as your new property can act as acceptable security to the provider.
■ If you have dependents living with you, they usually need to sign a waiver confirming that they don’t have the right to live in the property if you die or move into residential care.
■ Products that meet the Equity Release Council’s standards assure that you or your estate will not repay more than the sale proceeds of your home.
We have definitely seen an increase in equity release enquiries.