Why is equity release so popular?
Given a surge in the number of baby boomers reaching retirement – Age UK research shows over 15.3 million British citizens are now aged 60 and above – it’s no surprise that equity release products are growing in popularity.
Does equity release make sense for me?
Equity release isn’t usually suitable for property owners that have lots of spare cash. Or home owners with other investments like shares and bonds. Those assets can generate adequate income in their own right, lessening the need for a loan.
People wondering if they have enough to fund a comfortable retirement should consult a financial adviser, who can help evaluate if equity release is the right route.
Always talk to a qualified financial adviser when making these decisions. A professional will be able to help you understand whether equity release is right for you. Depending on your product and plan, equity release can be an expensive way to borrow.
Is equity release safe?
You might be reassured to know that today’s equity release market is regulated by the Financial Conduct Authority.
We are also a member of the Equity Release Council. They are a trade body whose members must follow a strict code of conduct.
Their safeguards include:
- A ‘no negative equity’ guarantee, meaning you’ll never owe more than your house is worth – so you won’t leave your family in debt.
- The right to live in your home for life or until you move into permanent care.
There are steps you can take to protect how much you can pass on as an inheritance
Choose inheritance protection
A lifetime mortgage is a loan secured on your home. When you take out the loan you can choose to protect a percentage of the net sale proceeds of your property with many lenders. This will reduce the amount you can take as a loan.
For example, if your property is currently worth £200,000 and you want to protect 30%, then the maximum amount the loan will be calculated on 70% of the property value, £140,000 instead of £200,000.
The amount you’ve protected could increase in value if the value of your home increases, though it could be worth less if house prices fall.
Make repayments during your lifetime
You can choose to repay some or all of the interest on the loan. You can also pay off some of the capital. This way you reduce the amount you owe, which could leave more for your family to inherit on your death. It’s up to you. There are limits on how much you can repay and how often you can make repayments. If you prefer, you don’t have to repay anything until you die or move permanently out of your home and into long-term care.
Living inheritance is another option
You can use a lifetime mortgage to pass on money as a ‘gift’ while you’re still alive. For example, to help children with university fees, wedding costs or getting onto the property ladder. If you give the money this way, the recipient might need to pay inheritance tax in the future.
A lifetime mortgage isn’t right for everyone. Here are some of the pros and cons.
Pros
- Tax–free cash
You can take a lump sum in one go or a series of smaller lump sums when it suits you. You can also choose to take a monthly income if you prefer
- Spend it how you want
You can use it for home improvements, helping children buy their first property or to top up your monthly income. It’s up to you
- Nothing to repay
Unless you choose otherwise, there’s nothing to repay until you die or move permanently into long-term care
- Flexible repayments
If you prefer, there’s an option to repay some or all of the interest. You can also choose to repay part of the original loan
- Stay in your home
You don’t need to downsize and can stay in your home until you die or move permanently into long-term care
- You can still move house
So long as the new property is acceptable to us – we don’t lend against properties with thatched roofs, for example – you can still move house
- Inheritance protection
Part of the value of your home can be passed on if you choose our Inheritance Protection option
- No negative equity guarantee
Whatever happens you’ll never repay more than the value of your home when it is sold – even if that’s less than the amount owing. Subject to terms and conditions
Cons
- Reduced inheritance
Even with our Inheritance Protection option, taking a lifetime mortgage is likely to reduce how much you can leave as an inheritance
- The interest can build up quickly
If you choose not to repay anything until you die or move permanently into long-term care, the interest can rapidly build up over time
- Early Repayment Charge
If you choose to repay all or a significant part of the loan early, there may be an Early Repayment Charge
- Means tested benefits
If you’re receiving certain means tested benefits, taking a lifetime mortgage could impact your entitlement to these benefits
- Higher interest rates
Usually the interest rates for a lifetime mortgage are higher than the rates charged for a traditional mortgage
- Less freedom to move house
If you have no mortgage, you can move to any type of property. With a lifetime mortgage, the new home has to be acceptable to the lender