The pensions industry has been turned on its head by recent reforms but for those approaching, or in retirement, the challenge of securing a decent quality of life remains just as pressing.
Many find themselves asset rich but cash poor after years of rising house prices, so the option of tapping into housing wealth as a source of funding is particularly attractive. Using an equity release product can unlock many benefits in retirement but is also a good way of transferring wealth between generations and paying for the luxuries in life without actually having to move home.
Our mortgage expert Marie Dalrymple explores when equity release can work as a suitable option for retirement.
Equity release is progressing
Equity release schemes have previously generated negative publicity but the industry has evolved from those dark days, with the launch of new and more flexible products under the supervision of an industry trade body and closely regulated by the Financial Conduct Authority.
The plans allow people aged 55 and over to release money from their property, with the interest on the loan rolled up and compounded each year. It is up to the customer how much of the loan they repay; as proceeds from the sale of their house will be used to cover the debt on their passing or moving into care. The figures from the equity release provider also show that...
...the total amount of equity released by home owners so far in 2018 is 132% more than the total amount released during the same period in 2017 £3.06 billion lending completed in 2017, this is projected to reach £5bn by 2020 (Source: Retirement Advantage).
Borrowers have been attracted by interest rates, which are now below 6% for the first time as new players enter the market and competition increases. The interest rate will be fixed so customers won’t have to worry about what happens with the Bank of England base rate.
When is equity release suitable?
Equity release is a particularly effective solution for homeowners who are approaching the end of an interest-only mortgage and do not have any other means to repay the capital on the loan.
Other Ascot Lloyd clients have used the funds to help get their children on to the property ladder or to enable the purchase of a second home.
They have also put the proceeds away in a trust as part of inheritance tax planning, meaning there will be no delay in their family accessing money when it comes to paying for arrangements.
If you opt for modern-day lifetime mortgages, you can have a new security option built into them which is referred to as ‘inheritance protection guarantee’. There are a number of equity release providers that all offer this safety element. By electing a percentage of the property value to be protected, it allows a fixed percentage of the property value to remain on the subsequent sale of the property. The higher the percentage inheritance guarantee chosen, the more it reduces the maximum loan amount available from the start of the plan.
This year, Ascot Lloyd has advised on equity release cases ranging in value from £600,000 down to £25,000, as was the case of a woman who wanted to fund home improvements that would enable her to stay in her current property.
The minimum age for equity release is 55 but the typical age for borrowers is between 68 and 72.
If you’re aged 55, the usual loan-to-value limit is 21% because you’re expected to live for longer, whereas the percentage rises to as much as 39% at age 73 and 52% at 90 years.
The tight loan-to-value boundaries help to safeguard inheritances for loved ones, whilst the products are portable so there’s still the freedom to move to another property if you so wish.
Types of lifetime mortgages
The basic types of lifetime mortgages we offer at Ascot Lloyd are drawdown lifetime mortgages and lump sum lifetime mortgages.
Drawdown lifetime mortgage
A drawdown lifetime mortgage enables you to release some of the money you have tied up in your home by providing you with an initial lump sum, concurrently with an approved 'cash reserve' that you can draw on, as and when you need it. Interest is then only charged on the amount outstanding rather than the full amount available to you.
Drawdown lifetime mortgages are an alternative option of lump sum lifetime mortgages, but with the following benefits:
- You only incur interest on the amount you have borrowed so the interest that builds up over time is likely to be less than if you had taken all the money at once.
- You can often take further withdrawals in small amounts from your cash facility when you need them – this can be done quickly on the initial request.
Lump sum lifetime mortgage
Lump sum lifetime mortgages allow you to release money tied up in your home in one cash lump sum. While drawdown lifetime mortgages might offer more flexibility, some people may choose this type of lifetime mortgage because they have specific use for the money in mind, or only want to release a certain amount. Some lenders are also able to consider taking any health and lifestyle conditions you may have into consideration which may result in the potential to borrow an even higher amount.
Equity release schemes have their advantages and disadvantages. Whilst they may not work for some, they could be perfect for many others. As far as protecting your loved ones, modern-day equity release plans can provide both a no-negative equity guarantee and an inheritance protection guarantee so as not to affect your family. Nevertheless, always bear in mind releasing equity out of your house inevitably reduces the value of
the property you do leave behind.
It is important customers understand that this is a long-term agreement as early repayment charges apply but getting advice is free so there’s really nothing to lose. You can find out more about equity release by contacting the Ascot Lloyd mortgages department on 0345 475 7500.