A helpful guide to releasing equity from your home

If you are a homeowner over the age of 55, you may be looking at ways you can substantially boost your bank balance, to give you more financial freedom with which to enjoy your later years.

One way to do this could be to free some capital by downsizing your property, pocketing the difference as a nice lump sum. 

However, if this isn’t an option for you, and you would like to stay where you are, then there is another way you can benefit from the asset you have built up, in other words the value of your property.

An equity release mortgage product unlocks your capital, enabling you to borrow money against the value of your house for you to use and enjoy now.

It can be useful for people who want to raise funds but are either retired, or approaching retirement, and might not have enough income to secure a standard repayment mortgage.

There is a range of equity release options available for you to consider.

In this article, our expert team of mortgage advisers at PIL, a leading firm of mortgage advisers in Southampton, guides you through the equity release products available, highlighting the features of each.

Lifetime Mortgage

With this later life type of mortgage, that you have to be at least 55 to be eligible for, you can borrow a percentage of the value of the property that you already own and have equity in. This is then repaid after the property is sold, on death, or when you move into long-term care with no prospect of returning to your home.

The older you are, the more you can borrow.

You don’t have to make any payments on your debt but, if you don’t, the overall debt will rise dramatically, due to the ‘interest roll-up’ compound interest structure of the loan.

A few lenders offer variable interest rates but most are fixed rate, and fixed for life which is why they tend to be a little higher than standard mortgage interest rates. 

Most lifetime mortgages now allow you to make payments of up to 10% per year without incurring early repayment charges. Any payments you can make to reduce the overall loan will reduce the amount of interest that would be building up.

You can ring-fence some of the value of your property as an inheritance for your family, but the lender will reduce the total amount you can borrow and/or increase your interest rate to account for the ring-fenced portion.

There is a no negative equity guarantee, which means that you or your beneficiaries will not have to repay more than the amount the property is sold for.

The fact that there is no affordability assessment can be helpful for retired homeowners who are either on a low income or would find their income difficult to prove to a lender.

Retirement interest only (RIO) mortgage

This mortgage is available for over 50s. 

It is an interest-only mortgage with no set term. As with standard mortgages, you have to prove that you can afford the monthly repayments. 

This is a key difference between RIOs and equity release mortgages as, with equity release mortgages, you don’t need to go through an affordability assessment because you don’t have to make any monthly payments.

Unlike a standard interest only mortgage, there is no end date to your mortgage term. You don’t have to pay back the capital sum until you sell the property, die, or move into a care home with no prospect of returning to your property.

In contrast to an equity release mortgage, where the interest roll-up means that the overall debt can increase almost exponentially, with a RIO the loan amount stays the same – the fact that you are paying the interest every month means that your debt never increases.

Although you can choose a lifetime term, RIOs can also be taken out for various terms, starting at two years. This can be useful if you have plans to move and don’t want the hassle and expense of extricating yourself from an equity release mortgage.

You can take out a RIO to buy a new property and, if you are remortgaging an existing property, you will not need to come up with a deposit. Lenders will have an eligibility criteria for you to satisfy.

Home Reversion Scheme

This isn’t a mortgage, it’s a scheme that enables you to sell all or part of your property, whilst keeping the right to live in it rent free. The minimum age you can apply for this scheme is 65.

You are selling to an investor, who is buying a percentage of your property rather than giving you a loan. They will be hoping that, when the property is sold, the value of the property will have risen and their percentage share of the sale will be higher than their initial investment.

Even if the investor buys 100% of your property’s equity, and becomes its sole owner, you still have the right to live in it until you die or move into long-term care with no prospect of returning to the property.

With this scheme, the investor is repaid if the property is sold, or when you die or move into long-term care.

Home reversion is an inflexible scheme and extremely rare these days. Their main drawback is that the money you receive for a share of your equity is generally well below its market value.

Remortgaging or taking out a second charge

The equity release mortgage, RIO mortgage and home reversion scheme are all tailored to older borrowers who can’t get a standard mortgage due to their income and earning potential.

However, there are other ways to release equity from your home.

If you can meet the lending criteria and sufficient income to pay the monthly repayment, you may find that remortgaging for an amount that is larger than the current mortgage on your property, or a second charge (also referred to as a ‘secured loan’ or ‘second mortgage’) on the property, could be a more suitable option for you to release equity, particularly if you are looking at a shorter-term method of releasing equity.

Note: interest rates on second mortgages tend to be higher than those on standard mortgages as the lender is taking on more of a risk – if you can’t keep your payments up and your property is repossessed, the first charge lender is paid before the second charge lender.

How PIL Southampton can help you 

Hopefully, this article has given you some useful food for thought. It can be difficult to navigate your way through your options and to decide what’s best for you and your circumstances.

That is where we come in! Our friendly team has a wealth of knowledge and experience in this specialist area of equity release and would welcome the opportunity to help you.

How you can contact PIL Southampton

Our expert mortgage advisers are here to guide you through the mortgage process, every step of the way. You can email us, fill out the contact form on our website or call us on 02380 668407. We look forward to hearing from you.