Having covered equity release in as much detail as I could over the last few weeks, I’ll now detail the options available for those of you considering releasing equity.
There are two types of equity release (although I could argue that selling and downsizing is another). A lifetime mortgage and a home reversion plan are the two equity release schemes.
Lifetime mortgages are the most popular for many reasons, particularly because of some of the downsides of the home reversion scheme.
Lifetime mortgages make up around 95 per cent of the market. They are pretty straightforward to understand, are flexible and portable. The rate is fixed or capped, and the homeowner is allowed to make interest payments. There is a no negative equity guarantee, which means you will never owe more than the house is worth as interest rolls up.
Perhaps the lifetime mortgage’s biggest advantage is the fact you still own the house and can participate in any increases in its value.
A home reversion scheme means you simply sell a portion of your home and effectively become a tenant. Typically, the minimum age of entry is 60, whereas the lifetime mortgage is 55. There are no interest charges on the home reversion plan as the lender/provider owns the home.
While most companies don’t offer equity release after the age of 90, there are some that do. The younger you are, the more interest will roll up over time obviously, and you should consider that calculation with your Independent Financial Adviser prior to entering a lifetime mortgage.
It’s easy to see why so few people opt for the home reversion plan, but there are significant differences between the various providers out there.
When choosing a lifetime mortgage, naturally use an Independent Financial Adviser as they can compare the rates across the board. For example, if we look at the difference between the highest and lowest rates, it’s a tad beefy!
Different providers’ rates vary depending on age, Loan to Value (LTV) and various other factors, but just to give you an idea of costs, let’s use an example of a 70-year-old taking out a lifetime mortgage of £150,000 on a property valued at £500,000.
The rolled-up interest on the Canada Life Capital Select Gold account is over £100,000 more than the Standard Life Horizon account. That is a tad beefy. For those customers who service the loan, the difference between the best and worst rate is also significant at over 1.3 per cent per year difference.
An Independent Financial Adviser will ascertain your needs and choose the cheapest provider available. They will also look at the most efficient up-front charges which can be hefty. There are other varying potential fees, like adding or removing someone from an equity release plan (ie after a divorce) so the adviser would look at who is also the more competitive.
There are a few alternatives to consider before equity release, so think them through.
You could take out a personal loan if you can service the monthly interest or alternatively re-mortgage and borrow the extra against the property as the rate will likely be more competitive than a personal loan or equity release.
A Retirement Interest Only (RIO) Mortgage allows you to borrow against the property but just service the interest. The remaining loan is repaid on death or if you sell the home.
Be sure you look at local authority grants and loans before using your own money especially if you are looking at improving the home from an energy efficiency point of view. There are also disabled facilities grants for those who need them to live an independent life. Exhaust all those options first.
If you own your house as a tenant in common there can be issues with some providers when you apply for an equity release loan, but your lender will advise you on that and your solicitor will be able to guide you as to the pros and cons of altering how the property is owned if the equity release provider is uncomfortable.
And finally, set up a lasting power of attorney at the same time to ensure someone you trust can act for you should you become incapacitated.
- If you want to know if equity release is for you please do call my Mortgage Director, Pat Greene and ask for a complimentary 30 minute exploratory meeting. You can contact Pat on pgreene@wwfp.net or call 01872 222422.
- Peter McGahan is the Chief Executive Officer of Independent Financial Adviser Worldwide Financial Planning. Worldwide Financial Planning is authorised and regulated by the Financial Conduct Authority.
