Mark Thomson is an equity release specialist and shares his knowledge about how to use equity to buy a new home.
How many people use equity release to buy a new home?
The number of people using their equity to move home is on the increase. In recent months it has increased from 5% to 15%. There is some speculation that this is down to the stamp duty deadline approaching, but it’s more likely that people are just becoming more informed about the option to use their equity in this way.
At the moment 61% of people use equity release to improve their home or garden. But others are choosing to avoid the upheaval of home improvements and instead, moving to a home that suits them better.
Why do people use equity release to move house?
You will need a good level of equity for this approach to work, and equity release products are only open to people aged 55+. A common reason to move is to live nearer children and grandchildren. The younger generation may have moved to a different part of the country for work, and once the parents are no longer tied to jobs, they decide to move.
The pandemic has also made people release how important their family network is, especially those feeling isolated. It has created an added incentive to move.
Why choose equity release rather than a standard mortgage?
When you reach a certain age – and especially when you aren’t earning a steady income – lenders won’t offer you a standard mortgage. Their criteria are income-led. Getting a standard mortgage is possible, but you will need a very high pension income which is out of reach for many people.
Part of the issue is that the older you are, the shorter the mortgage term lenders will offer. But a shorter mortgage means higher repayments, which are unsustainable for the average person.
How does equity release to buy a home work?
We had a great example with some clients recently, who wanted to sell two homes to buy a new property. They couldn’t get a traditional mortgage, and the equity in their own homes didn’t allow them to buy a property of the standard they were looking for.
When they realised they could use equity release – also called a lifetime mortgage – to buy a new property, the whole world opened up. Now they can buy a lovely home in a fantastic area, with money left in the bank to spend as well.
What’s the process for equity release?
First, you need to be at least 55 to take out a lifetime mortgage, and then, depending upon your age, you can borrow a certain percentage of the value of the home. The younger you are, the less you will be able to borrow.
As a rough rule of thumb, if you’re 55, you can borrow 28% of the value of a property, but at the age of 85 or more, this doubles to 56%.
Some products are health-related. Believe it or not, if you’re in poorer health you can borrow more money because unfortunately, it’s all about how long the lender perceives you will live.
Can you give an example?
If I were 77 years old in good health, I could borrow 54%. Imagine I’m looking at a house at £250,000 – on a lifetime mortgage, I can borrow £125,000. And I’ve already got £200,000 from a house I’ve just sold, so I could use £125,000 of that to make up my purchase price.
Apart from some costs on top, I’ve ended up with a better house PLUS £75,000 in the bank.
What does it mean for my children’s inheritance?
There are various products that you can buy that will protect an inheritance for your children, if that is important to you.
Is it better to downsize or use equity release?
Everyone’s situation is slightly different and it depends on what you’re aiming for. But it’s always good to know what your options are. An example is where an older couple lives in their perfect home but, now they are retired, the lack of income makes it too difficult to maintain the property.
They don’t really want the upheaval of moving or to lose their standard of living. A lifetime mortgage might enable them to stay in the property for the rest of their years, with additional cash for the upkeep, until they die or move into long term care.
Can equity release help when you’ve sold a home but haven’t got a new property?
Sometimes cash buyers can hold up a whole property chain because they are restricted by their budget.
An extra £40,000 or £50,000 can mean getting the property they really want – and equity release could be the way for them to achieve this. This way there’s no compromise. When you’ve worked hard for your retirement, why not enjoy the next 20-30 years to the full?
How can a Mortgage Broker help?
Equity release can be complex, and it’s really important to understand all the options and the implications, so do speak to an expert. The number of products available has doubled in the last year and each one has its own idiosyncrasies. Speak to a specialist – we can find the right lender to achieve your goals, and we’ll give you reliable advice and recommendations.