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Equity Release Lifetime Mortgage Popularity Soars - is it for everyone over 55?
- AuthorRichard Carter
Over the past 12 months, I have dealt with more equity release lifetime mortgage cases than in the previous 5 years put together. There is no doubt that equity release is becoming a more popular product and this is likely to increase as house prices rise and, as a result, the equity that homeowners aged over 55 have within their property surges.
Put simply, equity release via a lifetime mortgage scheme is a way of releasing capital, a loan against the value of your property. It is usually to provide a lump sum or to enable you to draw down cash as you need it. Equity release is generally only available to those aged over 55 and over. It is more popular for those who are unable to obtain mortgages from traditional High Street lenders because of their age or that they no longer work. Some borrowers seek to make the interest payments on the loan during their lifetime and, therefore, it is just the capital that needs to be repaid at the end of the mortgage term. Others do not seek to make any payments, and it is both the capital and accrued interest that need to be repaid when the property is sold. Usually, the property will be sold either when the owner dies or requires residential care or decides to sell to move to alternative accommodation, such as with a family member.
This form of equity release, known as lifetime mortgages, was often something that I have previously warned clients against due to it’s poor reputation in the past – high interest rates, complex schemes that borrowers did not understand, and a failure to put in place safeguards all gave equity release schemes a bad name. But looking at the various mortgages that I have offered legal advice on over the last year, it seems to me that equity release lifetime mortgages have come of age and offer a real alternative for many older homeowners who have a need to raise some capital from their significant equity. More mainstream mortgage providers (including Legal & General and the Nationwide Building Society) are now prominent in the market and it is becoming common to see competitive interest rates being offered.
I recently spoke at length with a couple who were both aged 65, who were raising £120,000 on a lifetime mortgage to enable them to move nearer their family in Surrey. I talked to them about alternative ways of raising the money (for example, perhaps their family could help out). They explained to me that they were moving closer to their family to help provide child care and they could only afford to move to the higher-priced area with the benefit of an equity release mortgage. They were helping their full time working “children” (in their 30s) by collecting their grandchildren from primary school and taking them home for dinner. From their perspective, the scheme made perfect sense as it enabled them to move nearer to their family to help out. They were looking to make monthly interest payments from their pensions, and they felt it was a very worthwhile exercise to enable them to achieve the lifetime choices that they and their family wanted.
In 2020, £3.9 billion of equity release mortgages were undertaken and the average age of borrowers has decreased. However, it is also clear that these products are not for everyone, and they need to be undertaken only after the homeowner has considered all options and taken full independent financial advice. Based on the numerous discussions and meetings that I have had with homeowners looking to take out lifetime mortgages over the course of the last year, I would urge anyone considering equity release to ensure they do the following: –
- Take independent financial advice from a specialist financial adviser who has previously undertaken equity release mortgages. Make sure it is an unbiased view and not one tied to an equity release company.
- Make sure that the lender/provider of the equity release loan belongs to the Equity Release Council.
- Consider whether you need an initial lump sum or whether you want to stagger the drawdowns of the sum that you are borrowing. This may reduce the interest that accrues.
- Try to pay off all or part of the interest that accrues so that the sum owed does not compound.
- Look at alternative ways of dealing with your situation. Can you downsize? Is a family member able to assist you with your financial situation on more favourable terms?
- Equity release can affect the state benefits that you can claim, this can make it a poor option for some. This is particularly important if you are already in receipt of benefits.
- Discuss the matter with your family; particularly, those that might be beneficiaries under your Will. If you take out a loan on your property it is likely to reduce the value of your estate, they may therefore inherit less monies than they originally anticipated.
- Look at the whole deal that you are being offered; particularly note, if there are any early repayment charges that are applicable and whether there is a “negative equity guarantee” (which means that, if the amount you have borrowed ends up exceeding with interest the value of the house, then you or your estate will only pay back the maximum of the house value).
- Consider all fees that are being paid – fees are often paid to financial advisers by the lender/provider, check what fees you are paying or, potentially could pay in the future for administration.
- A lender/provider who is a member of the Equity Release Council will always ensure that you are able to live at the property until you require long term care if necessary, or for your lifetime.
Finally (and I am bound to say this, aren’t I!), please make sure you that you take full independent legal advice in addition to the financial advice that you have received and any advice from the lender/provider. We always make sure that we have a face-to-face meeting with clients who are entering into equity release mortgages or lifetime mortgages, to make sure that they understand the implications of the scheme, have considered all of the options available and all of the legal consequences. These meetings usually take at least an hour and are well worth the time spent.