Craig is joined by Mark Thompson, Equity Release Specialist, to go back to basics about equity release.
What is equity release?
There can be some confusion here, as anyone can access their equity by remortgaging, which is technically equity release. You might increase your mortgage to fund home improvements, for example. But what we’re talking about here is equity release specifically for the over 55s.
Our equity release product is primarily a lifetime mortgage. It’s as it says on the tin: a customer takes a mortgage on their property that only ends once they either die or go into long term care. The mortgage becomes repayable by their estate and there’s usually about a year to pay it back.
Equity release is essentially releasing money from your house by mortgaging it to a specialist provider. There are a lot of lenders now prepared to lend money for that length of time.
Isn’t equity release quite controversial?
There are a lot of horror stories from many years ago when people were losing their homes and their equity was eroded very quickly. And in the old days, there used to also be another form of equity release that’s almost nonexistent now, called a home reversion plan. That’s where somebody would sell their home to a provider for a certain amount of money or a percentage of the value. They were allowed to live in it until they died or went into long term care.
The big difference between the two is that on a home reversion plan, you’re actually selling your home, or a share of it. But with a lifetime mortgage, you keep the property and just release some of its value with a mortgage – like most people have done for most of their lives.
You own the home until you die or go into long term care. You’ve got to pay back the loan, but you never lose ownership of the property.
There are certain instances in the fine print about how you could potentially lose it, for example if you made false representations when obtaining the money, or if you let the house run into disrepair. But I’ve never heard of this happening in reality.
How does a lifetime mortgage work?
It’s usually a fixed rate agreement for the full term. You can get one with a variable rate but I wouldn’t recommend taking this type of mortgage where the rate can go up or down.
If this is something that you’re interested in doing, speak to a specialist who deals with this day in, day out to get the full facts.
Why are people worried about equity release?
I saw a client last week and his first question was ‘Mark, what’s wrong with equity release?’ Everybody was telling him not to do it. But the issue is that people don’t understand it or are basing their views on what it was like 25 years ago.
For this client, equity release was the only way he would be able to avoid selling his family home. It was a fantastic solution to his problem. At the end, once he understood everything, he was very happy with it. People’s perception is that you will lose your home because of those old home reversion plans – but it’s not the case.
Isn’t it better just to sell my house in the current market?
Right now, you should be able to sell your home pretty quickly, and at a good price. But the problem is finding a new one. There’s a real shortage of properties in the market. The risk is that you might panic and end up with a house that’s not right, or in a location that doesn’t work for you.
It’s all about really considering your options, not just going with what other people suggest. This is a big decision about living in the right home, in the right place and having the lifestyle you want to have.
And for many people, selling the home isn’t in fact an option. The client I mentioned earlier didn’t have enough money left to pay off the existing mortgage, which was due soon. They wouldn’t have had enough equity to go and buy another home.
In that situation, a man who has owned his own home all his life was faced with selling his detached house and going into a rental property. With a lifetime mortgage he can choose to service the interest on the loan so it doesn’t increase, or he can choose not to make any payment whatsoever. And he keeps the home until he dies or goes into long term care.
What’s the difference between a lifetime mortgage and a RIO?
With a lifetime mortgage, you don’t have to make any payments. You can choose to make voluntary payments to keep on top of the interest that potentially could accrue. But you don’t have to.
It doesn’t matter what you’re earning – that’s irrelevant. You don’t have to service any payments and, unlike a normal mortgage, your home is not at risk if you don’t keep up the repayments.
Meanwhile, a Retirement Interest Only (RIO) mortgage is a sort of halfway-house. It gives you the ability to take a mortgage into retirement where you just pay the interest. You don’t pay the capital back, but you do have to make those regular monthly payments.
You need to be earning enough in retirement to qualify for the mortgage and fit certain criteria. Another drawback is that you can’t fix it for life. You might fix the interest rate for five years or ten years. So at some stage you’re going to have to go and remortgage again or change your product. Once your fixed rate ends you go on to a variable rate – which could be a lot higher than your fixed rate product.
Somebody aged 80 or more would then potentially have to look at remortgaging – they’re paying 3.5% now perhaps, but without switching they will have to pay, say 6.5%.
Is income important for equity release?
A retirement interest only mortgage is still based on affordability, so you have to go through the process of proving your pension income. Whereas with equity release, the assessment is done on the house, not the actual individual person.
The only assessment on the customer is to look at their age. With equity release, the older you are the more you can borrow. For a lender offering you money for life, the nearer you are to the end of it, the less risk they have in allocating those funds to you.
With a RIO, depending on your financial situation, you might be able to borrow a bit more. My client had already looked at a RIO and even though he was still earning and taking his pension, once in retirement he wouldn’t have qualified for a RIO because his earnings weren’t sufficient for the amount of money he wanted.
With equity release, you can still service the interest, and as it’s fixed, you know exactly what it will cost, month in, month out. It’s potentially the same as a RIO without needing to meet the financial criteria.
Why is equity release becoming so popular?
There are now at least 60 equity release products on the market – but far fewer providers for RIO mortgages overall. There are more providers joining the equity release market all the time which means it’s much easier to find a competitive product that works for you.
We will of course explore all the options for you. As a financial adviser, I need to understand my client’s financial position. Even though an equity release provider doesn’t need to know that information, I need to establish your financial position to make sure we make the right decisions. My input might even affect a client’s thoughts about whether he needs more money. He might come to me looking for £30,000 on equity for something, but when we actually evaluate his position, he doesn’t need it after all.
Can any financial advisor support me with equity release?
It’s always best to seek out a specialist if you’re interested in equity release. it’s not just the public that don’t always understand it – some financial advisors don’t either.
One of my clients was told by their financial advisor not to do equity release. So I rang the advisor and spent 15 minutes educating him on what we were doing. At the end he admitted that he didn’t realise it was so simple and straightforward.
Everybody links financial advisors as though we’re all under one roof. But we’re like solicitors in a way. We specialise in certain fields. I’m qualified and authorised to operate on equity release. I have a knowledge of pensions, too, but not full, up to date knowledge about the latest rules. So find a specialist.
We’re members of the Equity Release Council, which has a ‘no negative equity’ guarantee in place. If somebody takes a lifetime mortgage with us and chooses not to service the interest, their estate can never owe more than the original value of the home.
25 years ago, interest rates were massive and people ended up owing more than their homes were worth. That can’t happen today – there’s so much protection.