Equity release mortgages are not for everyone but in the right circumstances can provide much-needed finance for home-owners in later life. We explore the pros and cons of lifetime mortgages to help you make an informed decision.
If you need to reduce your household budget or unlock cash in later life, a lifetime mortgage can help provide a useful cash sum or a regular income when there are no other financial alternatives available to you. The loan is secured on your property and enables you to gain access to cash otherwise tied up in your home.
However, taking out an equity release loan can reduce your financial options and the amount of inheritance available to leave to your loved ones. So it’s important to weigh up all the options in order to make an informed choice. In fact, stringent regulations put in place by the Equity Release Council now mean that all applicants have to undergo a consultation period with the lender and receive independent legal advice on their situation.
You will still own your own home
Unlike with a home reversion loan, with a lifetime mortgage you will still own your own property and it is possible to protect a portion of the future value of your home as an inheritance for your loved ones. You can also use some of the money as a ‘living inheritance’ to fund your family members’ dream home, pay for their home improvements or university fees, for example.
However, with a lifetime mortgage it is still the case that any inheritance you wish to leave after you die will be significantly reduced, even with the protection plans which can be put in place.
No repayments are required but the interest can quickly mount up
While applicants or their family members can make repayments on the loan if they wish to do so, it is not necessary to because the debt will be paid off when they die or move into long-term care and their property is sold. However, on the downside, interest on the loan can quickly mount up if no repayments are made and the rates are often higher than those charged on a conventional mortgage. There are also early redemption charges which kick in if you choose to pay off all or part of the loan early.
Always consider downsizing first
If the option is available to downsize to a smaller property, this is nearly always advised as a preferable alternative to equity release. You can only take out a lifetime mortgage through a financial advisor, not directly via a lender, because regulations mean that you must receive independent legal advice and a proper consultation must take place before an equity release loan can be agreed. It’s a good idea to get advice from a solicitor who specialises in advising on lifetime mortgages.
How much you can release will depend on your age
How much cash you can unlock from your property will depend on a number of factors – how old you are, how much your home is worth and how much of your existing mortgage is left to be paid off. The lender will arrange to have your property valued and the older you are, the more equity you will be able to release from it on a sliding scale. Currently, the maximum you can release is 60% of your property’s value although many lenders will only lend up to 30% of its value.
The ‘no negative equity guarantee’
In the past some mortgage holders who took out home reversion loans died or moved into care, leaving their beneficiaries with debts worth more than their property. Fortunately, now all lifetime mortgages come with a ‘no negative equity guarantee’ from the Equity Release Council, the sector’s regulator, ensuring that no mortgage holder will find that the debt on their loan becomes more than the value of their property. In the unusual event that the proceeds from the sale of their home fail to pay off the loan, the remaining amount is written off by the lender.
You can still move home but the lender must approve the purchase
With this type of equity release mortgage you can still move home or downsize if you wish to at a later stage, but bear in mind that the new property purchase must be approved by the lender. Many equity release providers do not lend on certain homes, such as those with thatched roofs, for example.
Your eligibility for state benefits could be affected
If you currently receive certain means-tested benefits taking out a lifetime mortgage could also reduce your eligibility for these.
All applicants must carefully weigh up the pros and cons of equity release mortgages and receive independent advice before entering into an agreement. Always think carefully before securing a loan on your home.
Written by Piper Terrett, Fluent Money Group