A spotlight on equity release mortgages

For most people, your home is by far the largest asset you own and, the older you get, the more likely you are to have paid off most, or all, of your mortgage, which leaves you sitting comfortably in a property that is probably worth hundreds of thousands of pounds.

There are many reasons why you may wish to enjoy using some of the money you are sitting on, (or living in!), to benefit you or your loved ones now, rather than it being shared as part of your estate in the future.

If downsizing is not an option you wish to consider, you could stay where you are and take out an equity release mortgage.

But, like most things in life, there are pros and cons to equity release mortgages and it is important if you are considering going down this route to be well informed when you are making your decision.

In this article, our expert team at PIL, a leading mortgage broker in the Southampton area, explores the key areas you should think about when you are considering whether an equity release mortgage will be right for you.

Why do people want an equity release mortgage?

Some want to release equity from their existing property to pay for home or garden improvements. 

Others want to purchase a new home, to clear existing debts or to pay off an existing mortgage – the incentive of switching to this type of mortgage is that there are no monthly repayments on an equity release mortgage.

The biggest attraction to many people choosing an equity release mortgage is to increase their savings and perhaps increase their disposable income if they are currently making monthly mortgage repayments. 

They can increase their income in retirement or have the financial freedom to pay for holidays, a new car or anything else they might want.

Another motivation for people wanting to release equity from their property is so they can financially support family members. This could be to pay off their children’s mortgages, or to help grandchildren with university fees or to buy their first home.

Who is eligible for an equity release mortgage and how does it work?

You have to be at least 55 years of age and, if there are more than one of you applying, you all have to be at least 55. There is no upper age limit. Not all providers lend to all ages, but most plans are available to applicants aged between 60 and 85.

The main difference between applying for an equity release mortgage and a standard one is that you don’t need to go through an affordability assessment or pass any income criteria.

Equity release mortgages enable homeowners to take out in cash the equity that has accumulated in their home. This can be done as a lump sum in cash, in instalments, or a combination of the two.

You borrow against the equity you have built up in your home. This amount, plus the interest, doesn’t have to be paid back until you die or move out and into care, although you can choose to make repayments to avoid the interest building up.

How much equity will I be able to release from my home?

The percentage of your home’s value you will be able to borrow will depend on various factors, including your age, and the value of your property. The maximum is usually 60%. 

Typically, the older you are the more you will be able to borrow, and some providers lend more to people who have, or have had, particular medical conditions.

Are there different types of equity release mortgage?

There are two options for an equity release mortgage. The most common is a ‘lifetime mortgage’, where you take out a mortgage secured on your property and keep ownership. 

You remain the owner of the property for the rest of your life, and you may be able to ringfence part of the value of your property to be passed on as inheritance. Some contracts give you the flexibility to make repayments to cover the interest, or you can leave the interest to be added to the amount you have borrowed against your property.

The other type of equity release mortgage is called ‘home reversion’. This is when you sell part of your home to a home reversion provider. In return, you receive a lump cash sum or regular payments. 

You have the right to stay in your home for the rest of your life, and you are effectively co-owning your property with your lender. 

You will normally receive 20-60% of the market value of your home – or the part that you sell.

The percentage share of the property you keep stays the same, regardless of changes in the property’s value, unless you decide to increase the cash you take from the property. 

Then, when the last borrower dies or moves into long-term care, your property is sold and the proceeds are shared in line with the remaining ownership, which could include percentages you had ring-fenced for inheritance.

What about negative equity?

If you take out a lifetime mortgage, your equity release mortgage will come with a ‘no negative equity guarantee’. 

This means that after your property has been sold, and all agents’ and solicitors’ fees have been paid, you and your estate will not be liable to pay any more money if the amount that is left is not enough to repay the outstanding loan to the lender. This is the Equity Release Council standard.

Do equity release mortgages have any special conditions?

If you have a home reversion mortgage you will have to make sure you adhere to certain ‘mandatory obligations’ which include:

• Maintaining the property to a reasonable standard
• Never leaving the property vacant
• Having adequate insurance cover 
• Never renting the property out

What else should I consider about equity release mortgages?

Equity release can be a good option if you are looking for a way to get more money without moving house. However, it may not be the best fit for you for several reasons, which you need to weigh up and take into account: 

1. The interest rates on lifetime mortgages are usually higher than for standard mortgages, and the debt can quickly increase if the interest is rolled up. If you choose not to pay the interest, the final loan amount that your estate has to pay back can be a shock to the executors and beneficiaries.
   Tip: Only borrow what you need, to minimise the compound interest that will build up. You can always borrow more later.
2. Arrangement fees on an equity release mortgage could be £1,000-£3,000, and these types of mortgages can be complicated to get out of if you change your mind, and could include early repayment fees (not applicable if you die or go into long-term care).
3. If you release equity from your home, you might not have enough money in your property to fund later in your retirement, like long-term care.
4. Although you can move house with a lifetime mortgage, if you decide to downsize later on you might not have enough equity to do this.
5. The money that you receive from equity release might affect your state benefit entitlement.
6. Choosing an equity release mortgage could have an impact on the inheritance passed down to family plans, so it’s a good idea to discuss your plans with them to hopefully avoid future potential conflicts and complications.

Do I have other options?

Yes, you might find that a ‘retirement interest-only mortgage’ is a suitable option for you. It is similar to a standard interest-only mortgage, with two key differences. 

Firstly, the loan is usually only paid off when you die, move into long-term care or sell your house.  Secondly, you only have to prove you can afford the monthly interest payments, not the whole mortgage.

Although there is no minimum age requirement for this type of mortgage, they are designed for older borrowers and pensioners who are likely to find them easier to qualify for.

We have also written an article to help compare equity release mortgages with retirement interest only (RIO) mortgages.

How Protection & Investment Ltd can help you 

We have a team of experts in this specific area of equity release mortgages, who would be delighted to talk you through your options and advise you on the most suitable product for your particular circumstances.

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.