In this episode, Craig is joined by regular guest and Equity Release Specialist, Mark Thomson, to discuss the rising trend for people over the age of 55 using equity release to buy new homes.
What’s the new trend?
A year or two ago we never came across anybody that knew it was even possible to buy a home using equity release. There are a lot of people in the financial industry who don’t even understand the details!
Most people see equity release as a loan taken out on an existing property, like a remortgage, rather than an option to buy a new home. But we’re now getting more and more enquiries on this.
How do you use equity release to buy a new home?
Equity release is also known as a lifetime mortgage. The standard approach is to release the equity from your existing home to boost your income or retirement fund. But in fact, as long as the new property will be your main residence, you can buy a new house, flat or retirement bungalow and take the money on that property.
Depending on your age and health you can borrow a certain percentage of the property value. Say you live in a £300,000 house with no mortgage, and your age dictates that you could borrow 50% on equity release. That means you can borrow up to £150,000.
It works in exactly the same way if you buy a new house. Most people don’t use equity release to buy a more expensive property, but they can.
Using equity release to move upmarket
My neighbours’ adult children live in London and the couple wants to go and live near the family. But prices in the south are perhaps 50% more than they are here. They could borrow using equity release to take 50% against the property they are buying.
Say their current house is worth £200,000 – they sell it and have that cash in the bank. So if they wanted a house at £400,000, they could put £200,000 down, and borrow the other £200,000 via equity release.
This needs to be carefully considered – we’re not encouraging people to overspend. Technically, though, you could almost double the value of your property using equity release and some people are using equity release for that purpose.
What happens if you want to downsize?
Downsizing is the standard approach in older age to release money and live in a more suitable home. There’s two ways of looking at it: downsizing in terms of size of property and downsizing in terms of value. Sometimes smaller properties, especially retirement bungalows, are actually more expensive than people’s current homes.
Equity release gives you the opportunity not to compromise. You might move to a nicer area using the equity release to buy. You might move to a smaller property that costs less in bills and maintenance, but at a cost similar to your three or four bedroom home. So all of a sudden you live in a better area, with a better quality of living, and are no worse off in a financial sense.
Why choosing the right property is important
It can be worth investing in a more expensive property, because house prices are always discussed in percentage terms. So if you have a £200,000 property and prices go up by 5%, that’s a £10,000 increase in value. On a £300,000 home, that’s a £15,000 increase.
The residual value of the property is important as well – if you want to move again or sell in the future, it’s easier to sell a home in the right area and you will get a better price. It’s worth more because you paid more in the first place.
Using the neighbours as an example, if they owned a house worth £400,000 in London, as opposed to £400,000 here over the next ten years, which one will make you the best return?
On the other hand I know some people who have bought a nice house in a poorer area, and the area has gradually become less popular and degraded over time.
How we help
First and foremost we explain to every client how a lifetime mortgage works and we assess whether it’s right for them. The biggest challenge I’ve had recently, of course, is finding houses because there’s been a shortage of supply.
Part of my service is assisting the clients in trying to locate the houses, but also negotiating the purchase for them. I’ve been in the industry for 35 years, buying and selling houses over all that time, whereas the average client moves every 13-14 years and as they get older it’s not necessarily something they feel comfortable with. So I can help them negotiate the purchase, advise on the property and make sure it is actually suitable for a lifetime mortgage – there are certain criteria to meet.
Generally, as long as it’s a standard construction property that’s resalable – so the lender knows that they can sell it at the end of the mortgage term – then it should be okay.
I’m like a ‘Buying Buddy’ – I take the stress away from clients and they know they’ve got me there every step of the way. I source the right mortgage, help them with the property purchase and make sure that they understand the process as we go along. As we know, moving house, other than death and divorce, is supposed to be the most stressful thing that people go through.
A client example
A gentleman was looking to downsize: he has a three bed terraced house and is looking for a two bedroom retirement flat on the coast. He’s selling his property at the same price as the retirement property. Although he’s got three pensions, they are only small and his income is tight. The flat needs some work which will cost around £20,000. So we’re borrowing some money on a lifetime mortgage on the flat to put in a new kitchen, new bathroom, and new heating.
It’s going to be really nice when it’s done. It’s all coming from a lifetime mortgage, because his income’s limited. Because his quality of life hasn’t been exactly as he would want it, we’re also looking at a drawdown facility.
With equity release you can take so much cash up front, and then have further money in reserve to take as and when you need it. The reason we’re doing it on a drawdown as opposed to just taking the money up front, is to avoid paying interest on it immediately.
This client wanted to take a certain total from the equity but didn’t need it all up front. Even though interest rates aren’t too bad, we can minimise the cost by taking the money as it’s needed rather than as a lump sum.
How equity release can improve quality of life
I enjoy this job so much because it’s about helping people improve their lives financially. We do a budget planner for every client, looking at income and outgoings and lifestyle goals. With this gentleman client, his lifestyle at the moment was just ‘OK’. He just could afford to live.
He has four children who are all grown up and we included them in the discussions. They’re all happy for him to use equity release to access some additional money and get more enjoyment out of life.
He’s now got a nice property in a nice area with the security of having extra resources if he needs it. It’s stressful not to know how you will cope if something unexpected happens – how will you pay for a new boiler if you need one?
Now this client doesn’t have to worry about that, and can afford more of a social life and to enjoy retirement.
Is Equity Release right for everyone?
No – it’s not right for some people’s situations and we will always explain that to them. We’ll work through all the options and find a suitable way to achieve what they need.
The positive thing about equity release is that the whole industry is working to make sure it’s done properly. In this sector it’s all about what’s right for the client.
I have often refused to do equity release because the client has other alternatives that are more cost effective or more suitable for their life stage. We always look at every option.
Finding the right property
I always remind clients that they need to take time choosing the right home. A lot of my research initially is on the property – my best friend is Google Earth.
It means you can really explore the area – it’s as if I’m sitting outside the property in my car. I might notice there’s a pub next door. That might cause us a problem, because not everyone is going to like living near a pub, especially at closing time.
I’ve got a client at the moment who wants to buy a bungalow with equity release. But there is an electrical pylon in a field adjacent to the property. Certain lenders don’t like that and she had been told that she couldn’t get equity release as a result.
I spent time researching with various providers and got confirmation from them. They looked at photographs, and online maps as I did and confirmed that there should be no problem. Now the purchase is all going through and the client is using equity release to gift money to her grandchildren.
We are here at every step. I am always looking at properties online before clients go and view them, to help them ask the right questions. We’re here because we love helping people find a good deal on their mortgages, using equity release to achieve their goals, or exploring other ways to buy a new home and release money for the future.
Just get in touch and we’ll look at your situation and how we can help.