A guide to the risks, the costs and the benefits.
What do you need to think about if you’re taking out an equity release or lifetime mortgage?
Equity release has come in for some pretty bad press over the years, but for some older homeowners, it’s a better option than selling up or trying to survive on their pension. The main disadvantage of equity release is that it can be an expensive way of raising money (sometimes very expensive). But if you don’t want to move or can’t afford to downsize, it may be worth considering. However, it’s an important financial step and you have to be aware of the disadvantages as well as the benefits.
Raise a mortgage or sell your home?
If you want to release equity, you have two different options:
• A lifetime mortgage: Here, you take out a loan against the value of your home but never make any payments. Interest builds up every year and the loan is paid off either when you die or when the house is sold.
TIP: Because you never make any mortgage repayments, the unpaid interest ‘rolls up’. This means the debt can grow significantly. There’s more about lifetime mortgages on the independent Money Advice Service website. There’s also a factsheet on equity release from Age UK.
• A home reversion plan: Instead of taking out a loan, you sell part or all of your home to an insurance company. You have the right to continue living in there until you die ‘rent free’ (although you’re normally responsible for all the maintenance and any service charges). When the property is sold, the insurance company takes its share.
TIP: If you sell part of your property through a home reversion scheme you’ll only get a percentage of its true value – typically between 30-60% – and the older you are, the higher the percentage. You’ll also miss out on any rise in value of the percentage you sell, so if property prices rocket away you could really lose out.
Where to start
Your starting point is to make sure you get good quality advice from someone who’s independent (pay a fee rather than letting them receive a commission) and who can look at products offered by all the companies in this market and not just one or two.
TIP Make sure you talk to someone who’s already done equity release before you go ahead, preferably someone who took it out at least 10 years ago.
• Look for products offered by companies that have signed up to a code of conduct. All providers that are members of the Equity Release Council (previously known as SHIP) have to guarantee that you will never owe more than the property is worth and you can live in your home for the rest of your life.
TIP: Equity Release Council members also give consumers the right to choose their own independent solicitor rather than using one linked to the equity release provider. But be aware that this is a specialist area and many high street solicitors won’t have the level of expertise you need. Contact a specialist solicitor, such as one who’s a member of Solicitors for the elderly.
• The older you are, the more you’re able to borrow. The amount you can release will depend on the value of your property, your health and your age.
TIP: Although the amount you can borrow is tiered according to your age, some equity release providers will let you release more cash than others.
• Ask about the impact on benefits. If you’re entitled to means-tested benefits you may find you’re no longer entitled to them if you receive income or a lump sum payment. However, if you’re aged 75 or over or you receive disability benefits, these shouldn’t be affected.
TIP: The Joseph Rowntree Foundation and financial providers Just Retirement have launched a pilot scheme in two London boroughs and Maidstone in Kent, with an equity release product that is designed not to have an impact on benefits.
What to look for
• Redemption penalties: Early repayment penalties vary between providers, both in terms of how high they are and how they are calculated. Make sure you understand exactly how much you might have to pay if you need to pay off the mortgage early.
TIP: It’s also worth checking how long you (or your estate) would have to pay back the loan if you die or need to move into a care home. .