Here’s how you can free up cash from your property without having to make monthly repayments
THE number of older homeowners who have remortgaged their properties to free up cash has doubled.
Cash-poor couples borrowed £870million using so-called equity release plans between January and March, according to new figures.
That is twice the amount for the same period last year.
These schemes are basically mortgages for over-55s that run for the rest of their lives, but with a key difference to normal ones: They have no monthly repayments.
The loan needs to be paid off only when the house is sold should the owners go into care or die.
It enables those without spare cash to benefit from the soaring value of the property they live in.
A downside is there is less money left for the family in the inheritance.
This is because the costs — the interest charged on the borrowing and sometimes also the set-up fees — are paid off when the house is sold, eating into an inheritance.
But for an ageing population which is living longer and in better health, the schemes are an increasingly popular lifeline which often have to compensate for poorer-than-expected pension payments.
Numbers taking out new lifetime mortgages have been on the rise for years.
Figures from the Equity Release Council show 37,037 people took out an equity release plan last year, up from 27,563 in 2016 and 22,749 in 2015.
At the same time, there has been an explosion in the number of available products, which have tripled since 2007.
And the rising demand has driven down borrowing costs by a third over the past five years.
Interest rates for the average customer taking out a lifetime loan are now 3.7 per cent a year, down from 5.7 per cent in 2013, according to financial advisor Key Retirement.
That means less for the family to pay back when the house is sold.
For example, a borrower who takes the average £77,380 sum this year would owe £111,925 after ten years, or £161,893 after 20 years.
HOW TO GO ABOUT IT
- SET up a meeting with a financial adviser, who will assess your suitability and draw up some recommendations and a summary of all the important details and costs involved.
- If you are satisfied, you will need to fill in an application form and send it to your chosen equity release specialist. You will also need a solicitor. Find a list of specialist solicitors on the Equity Release Council website.
- A valuation of your home will be required by your chosen lender and a copy of the surveyor’s report will be sent to you and/or your solicitor.A valuation of your home will be required by your chosen lender and a copy of the surveyor’s report will be sent to you and/or your solicitor.
- You will receive an offer letter from your lender. The solicitor will prepare a report explaining the pros and cons of going ahead, including legal obligations. The Council’s rules insist on a face-to-face meeting with a solicitor from the firm, or who represents the firm, that prepared the report.
- If you are taking out a lifetime mortgage with a spouse or partner, your solicitor will check that you are both happy. Your solicitor will prepare documents to be sent to the lender’s solicitor, who will check everything and set a date to complete your equity release. It is important to note that this date is outside the control of you or your solicitor, so you should never commit the proceeds of your loan to anything before you receive the release date.
At 2013’s interest rates, the same amount would have cost £135,214 over ten years (a difference of £23,289), or £236,273 over 20 years — £74,380 more.
The rates on lifetime mortgages are still higher than the cheapest rates for standard mortgages, which can be as low as 1.5 per cent. But they are fixed for longer.
Ray Boulger, of mortgage adviser John Charcol, says: “A rate of four per cent, which could last for 40 to 50 years, could look very attractive, especially since you wouldn’t have to worry about remortgaging.”
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But homeowners have been warned to think carefully before taking the plunge.
Hannah Maundrell, of money.co.uk, says the risks include dwindling inheritance, loss of means-tested benefits such as pension credit, difficulty moving home and not able to pay off the loan early without incurring early repayment charges.
She adds: “It can be a complicated process and comes with costs and risks, so speak to an independent financial adviser to work out if it’s right for you.”
The two key questions for anyone thinking of taking advantage of equity release are, firstly, how much can I borrow and, secondly, how much will it cost me?
Under the terms of a lifetime mortgage, borrowing is usually limited to 35 per cent of the property’s value and interest is capped, so the total owed is not more than your home is worth.
'WORRY EASED'
PENSIONERS John and Kathleen Smith took out a £65,000 lifetime mortgage to fund improvements to their home in Sutton Coldfield, West Mids.
The couple had their 1930s semi externally coated and double-glazed to cut heating bills, and paid off debts.
Retired MD John, 74, says he and Kathleen, 73, are now £900 a month better off.
He says: “It’s taken a load off our mind about our outgoings. When you are retired you worry about the future.”
The couple consulted their twin sons, now 46, about their deal as it affected their inheritance.
The lifetime mortgage from Key Retirement is charged at 3.8 per cent, meaning over 16 years the couple will repay around £119,000.
You also need to know what to look out for.
Some lifetime mortgages let you make voluntary repayments or pay the interest.
Others allow you to move to a smaller house without punitive charges or offer inheritance protection that guarantees a minimum amount of the property’s value will be left for heirs.