Equity Release – an Option for the Older Homeowner
Retirement is supposed to be a golden age. It’s time to put your feet up and reap the rewards of everything you worked so hard for over the previous decades. That is assuming that you do not run into financial difficulty, though. Life can become expensive when you’re no longer bringing home a regular wage.
In the past, seniors that struggled to meet their financial demands had few options. The only real choices were to attempt to remortgage their home and sign up for decades more of debt, sell up and downsize for lower living expenses, or take in a lodger to spread the cost of a property.
Now, as you will no doubt have seen on countless TV adverts, equity release is gaining popularity as an alternative for older homeowners. The question is, is equity release a genuine attempt at helping those that need it, or an opportunistic attempt from private companies to exploit the vulnerable?
What is Equity Release?
Let’s start by explaining what equity release is not. It isn’t a short-term cash-grab to resolve a temporary cashflow problem. Equity release is a decision that has long-term, potentially far-reaching, consequences.
That may not be a problem – it depends on the scenario. Do not rush into equity release, though. As the old saying goes, act in haste and repent at leisure. Now, let’s explain in layman’s terms what equity release actually entails. Equity release mortgages come in two forms.
With a lifetime mortgage from an equity release company, you can typically borrow up to 60% of the home’s value as a lump sum. You then repay this mortgage (with interest, naturally) throughout the remainder of your lifetime. Equity release companies are likelier to lend to over-55s than traditional banks and building societies, but you can stay in your home.
If you leave the home or pass away before the debt is repaid in full, the equity release company takes ownership of the property to reclaim any outstanding funds. Any value left after this can be left as an inheritance. Think of a lifetime mortgage as a loan secured against your property; only take out what you need at any given time, and pay it back as early as is conceivable to minimise interest repayments.
Home Reversion Mortgages
An alternative for over-60s is a home reversion mortgage. This involves selling a share of your home to an equity release company. This business will pay you in a lump sum or issue you a monthly payment akin to a wage.
As with a lifetime mortgage, these arrears will be reclaimed after you pass away. You could move house after taking out a home reversion mortgage, but you’ll have to jump through several hoops. As moving is already stressful, especially for the elderly, this option should only really be considered if you plan to stay put for the rest of your life.
Naturally, this loan is not a charitable act from the equity release company. The money you receive will be below the market value of the home. If your home is valued at £160,000 and you sell a 25% stake to an equity release company, you would receive around £20,000 in cash rather than the £40,000 are you technically entitled to.
If the value of the home rises to £200,000 by the time you pass away, the equity release company still takes 25% of the full value. To use our example, the equity release company would claim £50,000 from the value of the property. This is the business model of an equity release company. They play the long game, offering a smaller sum in the short-term in exchange for a large eventual profit.
Is Equity Release a Good Idea?
Like most opportunities, equity release is in and of itself a neutral concept. It is neither good nor bad. It all depends on your personal circumstances. It’s important to understand the pros and cons or the process, so you can make a decision appropriate to your own circumstances.
Downsizing should be considered first. If you can sell a home at £200,000 and move to a smaller property priced at £125,000, you can live off your £75,000 of equity. For many, that is preferable to owing this money to a third party. This also ensures that you retain a full asset that can left to any heirs in your will. You can always use a self-storage facility if you run out of space in your new property.
However, if you are determined to stay in your home, equity release remains an option. The policy is particularly popular in those without children, or do not wish to leave a home as an inheritance. Alternatively, equity release in a large home with a high cash value could be a way to avoid inheritance tax for your children and leave you with a lump sum to pay with in your later life.
If you’ve always dreamt of taking a cruise, for example, equity release could finance this holiday while reducing the value of a home to below the inheritance tax threshold. That’s money that would have been lost to HMRC by your heirs anyway, so why not reap the benefits of your hard work yourself?
The Importance of a No Negative Equity Guarantee
If you decide that equity release is for you, ensure that the company is a member of the Equity Release Council.
As you can probably imagine, this industry has had a sketchy reputation in the past. Financial regulations ensure that parameters are now in place to protect people that use these schemes, and those governed by the Equity Release Council will behave above board.
The most important thing offered by members of the Equity Release Council is called a, “No Negative Equity Guarantee.” This protects your heirs by ensuring that the repayments owed will never exceed the value of a property.
For example, if you pass away owing £90,000 but the house has fallen into disrepair and is valued at just £75,000, a company that offers this guarantee will write off the outstanding £15,000. There is nothing left as inheritance, but the matter is closed. A company without this guarantee will chase your heirs and force them to settle this outstanding debt – potentially aggressively.
Equity release should always be considered an alternative to moving, but not necessarily a preference. It really all depends on your personal circumstances. Go into the decision with your eyes open, knowing the repercussions.