EQUITY RELEASE USES

The original and still popular reason for Equity Release. Equity in your home can be release as:

A single lump sum
An initial lump sum with an additional drawdown facility
A lump sum with regular income
A regular income

BOOSTING RETIREMENT INCOME

The original and popular reason for Equity Release. Equity in your home can be release as:

A single lump sum
An initial lump sum with an additional drawdown facility
A lump sum with regular income
A regular income

Typically, income needs are higher in the early to mid years of retirement than in the later years and Equity Release can be tailored to accommodate this. A Lifetime Mortgage or a Home Reversion Plan may provide a suitable solution as they don’t involve making monthly repayments.

Determining factors include whether your need for additional income is temporary (perhaps because you anticipate receiving an inheritance in the future) or permanent, and, is retaining ownership of your home important to you? Other factors to consider, which you probably have, include whether you’re eligible for any State benefits which you’re not claiming, or downsizing although our experience is that people don’t want to move from their home.

THE INFORMATION PROVIDED DOES NOT CONSITITUTE ADVICE AND SHOULD NOT BE ACTED UPON. We would be please to help you with your Equity Release enquiry by clicking the button below. To understand the features and risk, please ask for a personalised illustration.

REPAYING AN EXISTING MORTGAGE (including “mortgage prisoners”)

Most often this relates to repaying an existing Interest Only mortgage which is nearing the end of its term and, for one reason or another, there’s no means of repaying the mortgage. A grave situation which the Financial Conduct Authority (FCA) has warned could ultimately force a lender to take possession of the property in order to settle the mortgage. But it can also relate to repaying a Repayment mortgage, perhaps to facilitate early retirement, or perhaps pro-longed ill-health is making maintaining monthly repayments increasingly difficult, potentially putting the homeowner at risk of defaulting which can have serious consequences if not resolved.

Unlike today, in the ‘90’s and early 2000’s lenders were open to mortgages being arranged on an Interest Only basis, but fast-forward and these mortgages have come, or are coming, to an end. In their August 2023 analysis of Interest Only mortgages, the FCA reported that some 750,000 Interest Only and 245,000 part-Interest Only mortgages remained at the end of 2022, of which 623,101 fell due for repayment by 2033, many without the means to repay. The FCA also noted that three-quarters of homeowners with an Interest Only or part-Interest Only mortgage were aged over 50 which aligns with the past prevalence of Interest Only mortgages.

The predicament facing Interest Only borrowers who don’t have the mean to repay their mortgage, is meeting affordability criteria for a replacement mortgage. The reason being that standard mortgages are now only offered on a Repayment basis, except for the small proportion of borrowers who are able to meet very stringent Interest Only criteria, and the maximum term is to retirement age. This combination results much higher monthly repayments.

Another category of mortgage borrower identified by the FCA are mortgage prisoners, “who’s mortgage probably dates back to the pre-2008 global financial crisis who’s trapped in their current high interest variable rate mortgage and cannot change to a new lower interest rate because the lender no longer offers mortgages, nor can they remortgage to a new mortgage lender because their circumstances have changed which prevent them from passing a new lender’s affordability criteria”.

If it’s not possible to remortgage to a new Repayment mortgage, downsizing may be a possibility. Downsizing isn’t always feasible and it might not be practical, not to mention the emotional impact. Alternatively, Equity Release offers a range of potential solutions:

If you’re aged 50 or over (youngest if joint), and your current income and projected pension income is sufficient, remortgaging to a Later Life mortgage or Retirement Interest Only (RIO) mortgage could provide a long term Interest Only solution.
If you’re aged 50 (youngest if joint) or over, and your current income is sufficient to maintain Interest Only payments, but your projected pension income isn’t, remortgaging to a Payment Term Lifetime Mortgage (PTLM) could provide a solution. A PTLM only requires monthly Interest Only payments to be maintained during an initial “Payment Term” of your choosing, which is likely to be to when you retire, or if retired, to age 75 years. At the end of the Payment Term the mortgage converts to a Lifetime Mortgage which does not require any ongoing monthly repayments, instead the interest will now roll-up on a compound basis. You can however choose to make voluntary payments which, depending on how much you pay, will either slow down the rate at which the mortgage balance increases, or keep it level like it was before, or actually pay the mortgage down. It’ll be up to you because any payments you make after the Payment Term are voluntary.
If you’re aged 55 (youngest if joint) or over, remortgaging to a Lifetime Mortgage could provide a solution. Although no monthly repayments are required, instead interest rolls-up on a compound basis, you can choose to make voluntary payments and depending on how much you choose to pay, your payments will either slow down the rate at which the mortgage balance increases, or keep it level (like an Interest Only mortgage), or actually pay the mortgage down. It’s up to you as any payments you make are voluntary.
Home Reversion which involves selling your home, or part of it, to a Home Reversion provider and using the sales proceeds to repay your mortgage. Home Reversion grants you the right to remain living in the property for the rest of your life but does not take over responsibility for maintenance and upkeep, which remains your responsibility.

Which option provides the most suitable solution will depend on a number of factors, including: your age (youngest if joint); level of current income and retirement income; whether you’re happy to make monthly repayments or not; whether you envisage being able to repay the Equity Release in the future (perhaps from an expected inheritance); and is retaining full ownership of your home important to you?

REPAYING CREDIT CARDS OR PERSONAL LOANS

Whilst Equity Release can be used to repay personal borrowings, the advice is always to think very carefully before doing so. This is because these types borrowings are not secured on your home whilst repaying them with an Equity Release arrangement will involve using your property is some way.

If Equity Release is to be used to consolidate unsecured borrowing, a mortgage based Equity Release solution, as opposed to Home Reversion, permits voluntary payments/overpayments to be made which provides the opportunity to repay the consolidated borrowing at an affordable rate, and on a lower interest rate than is charged on credit cards and personal loans etc. Possible solutions include:

A Later Life mortgage (from age 50, youngest if joint) or Retirement Interest Only (RIO) (from age 50, youngest if joint) mortgage requires Interest Only payments to be maintained, but they also allow voluntary overpayments of up to 10% per year to be made which will go towards repaying the mortgage. It’s therefore possible that over time you could perhaps repay the consolidated borrowing.
A Payment Term Lifetime Mortgage (PTLM) (from age 50, youngest if joint) requires monthly Interest Only payments to be maintained during an initial “Payment Term” of your choosing, which is likely to be to when you retire, or maximum age 75. Then, when the Payment Term expires the mortgage converts to a Lifetime Mortgage and the contractual monthly interest payments stop. From this point interest rolls-up on a compound basis. However, you are now able to make voluntary payments which, depending on how much you pay, will either slow down the rate at which the mortgage balance increases, or keep it level, or actually pay the mortgage down. It’ll be up to you. So whilst voluntary overpayments aren’t permitted during the Payment Term, after the mortgage converts to a Lifetime Mortgage, if your voluntary payment is greater than the monthly interest it will go towards repaying the consolidated borrowings.

A standard Lifetime Mortgage (from age 55, youngest if joint) requires no contractual monthly payments, instead the interest rolls-up on a compound basis. You can however choose to make voluntary payments of up 10% per year which, depending on how much you pay, will either slow down the rate at which the mortgage balance increases, or keep it level, or actually pay the mortgage down. It’ll be up to you because any payments you make are voluntary. It’s therefore possible to make voluntary payments to go towards repaying the consolidated borrowing.
Although not a flexible solution, Home Reversion (from age 70) can be used to release equity to repay personal borrowings and it involves selling your home, or part of it, to a Home Reversion provider and using the sales proceeds to repay the borrowings. Home Reversion grants you the right to remain living in the property for the rest of your life but does not take over responsibility for maintenance and upkeep, which remains your responsibility.

Which option provides the most suitable solution will depend on a number of factors, including: your level of retirement income; whether you prefer to make monthly repayments or not; whether you envisage being able to repay the amount needed in the future (perhaps from an expected inheritance); and is retaining full ownership of your home important to you?

Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage

MOVING HOME

Whilst Equity Release is generally associated with releasing equity from your current home, it’s not so widely known that it can be used to move home.

It isn’t always the case that moving home in later years means moving to a lower value home, for example: Chris and Jackie are in their late 60s, retired, have no mortgage, and they’d like to move closer their daughter and grandchildren. They were hopeful of being able to buy for around the same price as they’re selling for and have savings for fees, Stamp Duty, and moving costs. However, they’ve found the perfect property but it’s £40,000 more than they’ve sold for. Their daughter has suggested they enquire about Equity Release.

So how does Equity Release work when moving house? It’s Simple! Chris and Jackie apply for an Equity Release arrangement of £40,000 on the new property, and on moving day (completion) their solicitor will receive the funds from the sale of their current property plus £40,000 from Chris and Jackie’s Equity Release provider. So no different to any other house move.

Which option provides the most suitable solution will depend on Chris and Jackie’s circumstances and objectives, but in principle any one of the 5 options could provide a suitable solution, whether it be a Later Life mortgage, a Retirement Interest Only (RIO) mortgage, a Payment Term Lifetime Mortgage (PTLM), a standard Lifetime Mortgage, or a Home Reversion Plan.

PROPERTY IMPROVEMENTS AND ALTERATIONS

Whether it’s for a new kitchen, or a new bathroom, an extension, or alterations which will enable to continue living independently in your home, Equity Release can help. Along with garden landscaping, this is another popular use of Equity Release.

Typically, the minimum Equity Release sum is £10,000. For larger sums such as for building an extension, the Equity Release doesn’t have to be taken as a single lump sum. After an initial £10,000 release the remainder can be drawn down on as and when needed during the course of the build.

Once you’ve a clear idea of the cost of the work, Equity Release applications typically take around 6 weeks to complete so you’ll be able to get the work underway in no time.

A Later Life mortgage (from age 50, youngest if joint), a Retirement Interest Only (RIO) mortgage (from age 50, youngest if joint), a Payment Term Lifetime Mortgage (PTLM) (from age 50, youngest if joint), a standard Lifetime Mortgage (from age 55, youngest if joint), or a Home Reversion Plan (from age 70, youngest if joint), could provide a suitable solution depending on your circumstances and needs.

PROFESIONSAL GARDEN DESIGN AND LANDSCAPING

If you’re a garden lover and know your Anagallis Arvensis from your Helianthus Tuberosus, or a fan of flower shows or garden make-over programmes, Equity Release can help you create you very own dream garden and is a popular use of Equity Release.

Typically, the minimum Equity Release sum is £10,000. For larger sums, the Equity Release doesn’t have to be taken as a single lump sum. After an initial £10,000 release the remainder can be drawn down on as and when needed during your garden’s transformation.

Once you’ve a clear idea of the cost of your garden transformation, Equity Release applications typically take around 6 weeks to complete so it won’t be long before work can commence.

“BIG TICKET” PURCHASE (E.g. a luxury cruise, a car, caravan, motorhome, boat, etc.)

“Big ticket” purchases have long been a popular use of Equity Release, whether for a luxury cruise, a big family holiday, or a new car. But often overlooked is how flexible some Equity Release products are and how they can be applied when considering a big ticket purchase, which can be categorised:

“Experience” purchases such as a:

Luxury cruise
Holiday of a lifetime
Visiting family or friends on the other side of the world

“Asset” purchases, such as a:

Car
Caravan
Motorhome
Boat

It’s “Asset” purchases we focus on here, purchases which can involve taking up a loan or finance agreement, or are perhaps out of reach, but which would be expected to have a future value when eventually sold. Let’s use a motorhome for example. With new prices starting at around £50,000 and almost no upper limit, and with pre-owned motorhomes maintaining good values, these are very significant purchases and it’s not uncommon for Equity Release to be used to make such a purchase.

One approach is simply to release equity, purchase the motorhome (or boat etc.), and that’s the end of it. Another is to see how making payments to an Equity Release arrangement compares to funding the purchase with a personal loan, or HP, or PCP.

First and foremost, whilst a Home Reversion Plan can be used to release a lump sum to fund a big ticket purchase, you need to be aged 60 or over (youngest if joint), and because Home Reversion involves selling all or part of your home to a Home Reversion provider, it’s not at all flexible. Home Reversion doesn’t facilitate buying back some of the Home Reversion provider’s stake in the property, either by regular payments or when you eventually sell your motorhome (or boat etc.). It therefore isn’t an alternative to a personal loan, or HP, or PCP. So here, we’re only exploring how the various Equity Release mortgage options might provide a flexible and affordable means of realising your big ticket “Asset” purchase:

If your current income and projected pension income is sufficient, a Later Life mortgage (from age 50, youngest if joint) or Retirement Interest Only (RIO) mortgage (from age 50, youngest if joint) might provide an alternative solution. Both require monthly Interest Only payments to be maintained for the life of the mortgage, but they also permit voluntary overpayments. So you are able to pay down the mortgage balance which will reduce next month’s interest charge, which in turn will increase the rate at which your voluntary overpayments reduce the balance. Then, when you eventually sell you motorhome (or boat etc.), you can pay the sale proceeds into the mortgage. Then, depending on whether the sale proceeds fully repay the mortgage or not, you can either continue paying the now much reduced monthly interest payment, or continue making voluntary overpayments repay the remaining mortgage. Or…

For homeowners aged 50 and over (youngest if joint), if your current income is sufficient to maintain Interest Only payments, but your projected pension income isn’t, a Payment Term Lifetime Mortgage (PTLM) may provide a solution. A PTLM is a hybrid product which enables you release equity on an Interest Only basis for a chosen period, the “Payment Term”, which is likely to be when you retire, or maximum age 75. Then, at the end of the Payment Term, contractual monthly interest payments stop and the mortgage converts to a Lifetime Mortgage which doesn’t require any ongoing monthly repayments. From this point voluntary payments can be made but if you choose not to make voluntary payments, interest will now roll-up on a compound basis, but if you do make voluntary payments, depending how much you pay, your payments will either slow down the rate of balance increase, or keep the mortgage balance level, or pay the mortgage balance down. Then, when you eventually sell you motorhome (or boat etc.), you can pay the sale proceeds into the mortgage. Ultimately, whether you fully repay the mortgage, or allow the balance to roll-up, or somewhere in between, will be your choice entirely.

The twist with a PTLM is that, subject to current income passing affordability criteria during the Payment Term, the maximum Equity Release is based on the borrower’s age (youngest if joint) at the end of the Payment Term, not their current age. Meaning, that a greater sum can be released, if required, than their current age would otherwise qualify for. A PTLM can therefore bridge the gap for “younger” Equity Release borrowers who don’t yet qualify for a Lifetime Mortgage which start at age 55 (youngest if joint), or for borrowers aged 55+ who aren’t eligible for the level of Equity Release they’d like, but will be in the future and in the meanwhile can make monthly Interest Only payments. For example, a home owner aged 52 who plans to retire at age 68, can release equity based on the age of 68, subject to their current income passing affordability criteria. Or a borrower aged 55 who plans to retire at age 70 can release equity based on the age of 70, again, subject to their current income passing affordability criteria.

Voluntary overpayments aren’t permissible during the Payment Term, which should be taken into consideration because if you sold your motorhome (or boat etc.), you’ll incur early repayment charges in paying the sale proceeds into the mortgage. But voluntary overpayments are permissible when the Payment Term expires and the mortgage converts to a Lifetime Mortgage.

For homeowners aged 55 (youngest if joint), a standard Lifetime Mortgage does not require you to make monthly repayments although you can make voluntary payments. If you choose not to make voluntary payments, interest will roll-up on a compound basis thereby increasing the mortgage balance. But if you do make voluntary payments, perhaps at a level equal to what you would pay on a finance agreement, or a lower amount, but at least more than the monthly interest charge, the excess will go towards reducing the balance of the mortgage. Consequently, each month’s interest charge will be less than the previous month’s, which correspondingly will increase the amount your voluntary overpayment pays off the mortgage. If we then jump ahead to when you eventually sell your motorhome (or boat etc.), you can pay the sale proceeds into your Lifetime Mortgage and reduce the balance further. What you decide to do then is up to you. You might decide to stop making payments in which case the interest will start rolling-up on a compound basis, thereby increasing the mortgage balance. Or, you might decide to pay the now reduced monthly interest in order to maintain the balance at its current lower level. Or, you might decide to pay more than the monthly interest in order to continue to pay the mortgage down, and perhaps pay it off. It’s entirely your choice.

(i) Not all Lifetime Mortgages are suitable to be used in this way due to the structure of the Early Repayment Charges.

(ii) Whilst a Home Reversion Plan could be used for a big ticket “Asset” purchase, it doesn’t offer the flexibility of a Later Life mortgage, RIO mortgage, PTLM or some Lifetime Mortgages as it involves selling a part, or all, of your property to a Home Reversion provider.

HELPING CHILDREN GET ON TO THE PROPERTY LADDER OR MOVE HOUSE

Buying a first home or moving to a larger property to accommodate a growing family has never been easy, and for each new generation of homebuyers, the situation continues to get more difficult. The problems faced by young buyers include:

House prices
Even a 5% or 10% deposit is a substantial sum for wannabe homeowners to save, especially if they’re already living independently and renting
Whilst savings for a deposit, house prices seem only to keep rising, meaning larger minimum deposits
Tiered interest rates. Lenders reserve their lowest interest rates for mortgages up to 60% of the property value, known as “Loan to Value” (LTV). And when borrowing more that 60% LTV interest rates increase in steps (tiers) with the highest rates for mortgages over 90% LTV, which is invariably first time buyer territory and even first time movers.

In short, for many wannabe buyers, home ownership has become the proverbial elusive carrot. In recognising this parents and grandparents, are providing invaluable assistance in releasing equity in their home to give children/grandchildren a pre-inheritance.to help towards a property purchase. The “Bank of Mum and Dad”.

If it’s your only child that you’re helping, things are perhaps more straightforward because your child is likely to be your sole beneficiary. But if you have two or more children it’ll be important to you and your other children to ensure that the Equity Release is structured accordingly which will impact on the choice of Equity Release solution. This might involve:

Including all your children in the pre-inheritance
“Ring-fencing” a proportion of equity in your property so that your other child’s/children’s future inheritance is not eroded by you helping one of them now
The son/daughter you’re helping covering any monthly interest on the equity released

A Later Life mortgage (from age 50), a Retirement Interest Only (RIO) mortgage (from age 50), a Payment Term Lifetime Mortgage (PTLM) (from age 50), a standard Lifetime Mortgage from age 55), or a Home Reversion Plan (from age 60), could provide a suitable to helping a son or daughter or grandchild with their first house or moving house. These four mortgage based options offer varying degrees of flexibility, but whilst Home Reversion can’t be considered a flexible product, it may nevertheless be suitable in specific circumstances.