Debunking the myths

The term ‘Lifetime mortgage’ is a relatively new term and if you spoke to someone 5 years ago, they probably wouldn’t have heard of it. Mention equity release though and most people have heard of it, typically along with some sort of horror story.

Ben Darby of Darby & Darby Solicitors recently discussed this topic with Lee Howard of Howard Mortgages on Facebook LIVE.  If you have any queries, please contact Lee or the team at Howard Mortgages on 01803 554455 or contact us here.

We have a number of enquiries that start with clients saying they would like to learn more about ‘lifetime mortgages’ but definitely don’t want an equity release.

The first thing we always say is a ‘lifetime mortgage’ and an ‘equity release’ are essentially the same thing.  The reason for the change in name is that most of these products are very different than they used to be, so the new terminology is used by many advertisements to try and get away from the stigma these products used to have.

Why did equity release have a bad reputation?

It is common that people think these types of products mean that you are giving up all of the equity in your home or that you no longer own your home.  Even worse, that you could end up leaving a debt in excess of the property’s value if you died or had to go into long term care.  This is true of some products in the past that were very restrictive and came with extremely high rates, but fortunately these products have evolved to be far more flexible.

Equity release nowadays, has more similarities to a standard mortgage than it had with the older style equity release products that are associated with the same name.

The biggest issue from the equity release of old is that the products were very complicated and many people who took them either didn’t understand, or it wasn’t explained to them, how these products work and what impact changes to their circumstances would have on the equity release.

Now there are still some equity release products that have quite restrictive terms and conditions, and this is why it is imperative that you speak with a qualified whole of market equity release specialist such as us at Howard Mortgages.

What actually is equity release?

Equity release is a loan secured against your home much like a standard mortgage, the difference is that it has no end date. To be eligible you must be over 55 and own or be purchasing a home or property worth at least £75,000.

No monthly payments are required to be paid however a lot of lenders now give you the option to chop and change between having the interest added to the loan each month, or to make interest only payments or even capital repayments each month.

How does it work?

You can take the equity release loan in one of 3 ways;

• either as a one-off lump sum;
• a smaller lump sum with a built-in reserve that you can draw down at a later date;
• or even as an income that can be drawn either monthly /quarterly/ or annually to supplement your income.

The popularity of equity release in recent years has caused lenders to increase the number of products available and as such has created competition between the lenders to be more and more flexible and offer more favourable terms and to ensure clients are future-proofed.

What has caused this increase in popularity?

I think generally people want more out of their retirement and later life nowadays, where many may have planned to downsize in retirement or cut back on luxuries like holidays etc, they realise they don’t want to give up their home or their lifestyles.  Many people finally have the time and still have the health to do all of the things they wanted to like travel or home improvements, but now find they don’t have the money to do it as they are ‘asset rich and cash poor’.

With a growing choice of products and features now available, equity release has become even more flexible to suit a range of customer’s needs; from paying off debts or mortgages and funding care costs, to travelling and helping children and grandchildren get on to the property ladder.

A less commonly known reason for taking an equity release is to help purchase a new home.  Just like you would with a standard mortgage, you can use equity release to fund typically up to 40% of the new purchase price to enable you to buy the property you want.  Again, you have the option to make no payments or just pay the interest each month.

What are the main changes in Equity release that benefit clients?

Interest rates

Currently interest rates are the lowest they have ever been and are also fixed for life.  Rates currently are as low as 4.35% which is cheaper than many standard mortgages and again are fixed for life!

Inheritance protection

This allows clients who have not taken the maximum loan available to secure a percentage of their home’s future value as an inheritance.

Partial capital payments

Most lenders allow customers to make partial capital payments without incurring penalties. As an example, if you were to pay the interest each month, the loan amount owing would remain static for as long as you had the loan.

Downsizing protection

All equity release loans that are approved by the Equity release council are portable.  This means that if you did decide to move in the future, you can take the loan with you without paying the penalty, and some will even let you pay back the loan in full without penalties if the new property does not meet their lending criteria.

Equity release doesn’t have to be against your home either, there are products that mean you can take equity release on a buy to let investment property or a second home too.

What about the down sides?

It is so important to have the complete picture and that you know the downsides to these products too.

The loans are designed to run for life.  If you chose not to make voluntary interest payments (which many don’t), the loan will be increasing each month meaning that if you do decide to sell and move in the future, you won’t have as much equity for your onward purchase.  It will also mean there is less inheritance to leave to your beneficiaries.

Fixed early repayment charges.  Although lifetime mortgages are designed to last for life, in some cases you may want or need to pay back the loan early.  Typically, an equity release product would have a penalty if it is repaid in the first 8 or 10 years.  Much like a standard mortgage, many now offer a fixed early repayment penalty, meaning the cost of paying back the loan in the early years is known.

Having said this, the penalty does not apply if the borrower dies or has to go into long term care.  If this happens, you or your beneficiaries have 12 months from this time to sell the property or to make alternative arrangements to repay the loan.

Because deciding to take out equity release is a big decision, we always recommend having a friend or family member present for our meetings where possible so they can ask any questions you may not have thought of and to have someone you can talk to and discuss with after the meeting to make sure it is the right decision for you.  Equity release is not going to be right for everyone, and there are a number of clients that we have recommended not to take this as there were alternatives that saved them more money, but for those who it is right for, they can see a lot of benefit.

If you would like to find out more, we offer an initial appointment at no cost or obligation to explore the options and can be done in our offices in St. Marychurch in Torquay or we are happy to come to your home, or arrange a remote call via video such as Zoom or Skype.

Speaking to a professional mortgage adviser that works with many lenders is imperative.  For advice on the right mortgage to suit your personal circumstances, please contact the team at Howard Mortgages on 01803 554455 or contact us here.

Your home may be repossessed if you do not keep up repayments on your mortgage.

Buy to Let mortgages are not regulated by the Financial Conduct Authority.

Equity Release will reduce the value of your estate and can affect your eligibility for means tested benefits.