Equity Release: The Good, The Bad and The Ugly

You will no doubt have seen plenty of press coverage about equity release, including the TV adverts presented by a former chat show host, but what is equity release and what do you need to consider when looking at possible equity release products?

Equity release covers a range of products which allow people over the age of 55 to access the equity they’ve built up in their homes. The available products fall into two categories known as lifetime mortgages and home reversion plans.  With a lifetime mortgage you retain ownership of your property and take out a mortgage secured against which is repaid on the earlier of your death or leaving the property to go into long-term care.  With a home reversion plan you sell your home to a provider in return for a lump sum or regular payments and the right to live in your home rent free until your death.  Most people who take out an equity release product take out a lifetime mortgage so this article will focus on these.

Despite some of the negative press coverage, a lifetime mortgage can be a good way of accessing the equity in your home to release cash to cover living expenses or even upgrading your home.  However, as they are intended to be long-term products, they are unlikely to be suitable options if you are looking for short-term funding or expect to move home again.  You should always take financial advice before taking out a lifetime mortgage but in our experience, the key points to consider are:

• Interest – the interest rate will normally be fixed but will be higher than for a traditional mortgage. In addition, with a lifetime mortgage there are no monthly payments and the interest is rolled up and compounded so the outstanding balance will continue to increase throughout your lifetime, and may accumulate quite rapidly.
• Early repayment – as these are intended to be long-term products, most come with substantial early repayment charges which are calculated by reference to bond yields. This is one reason why these products are not suitable if you are looking for short-term funding to perhaps modernise a property before then selling it.
• No negative equity guarantee – any product that complies with the Equity Release Council standards will provide that if the net sale proceeds from your home are not sufficient to pay off the outstanding loan balance, the lender will write off the shortfall and will not pursue you or your estate.
• Further advances – many products will provide an initial lump sum with the ability to draw down additional funds during your lifetime. As with many things in life, you need to read the small print as the additional advances are not guaranteed and can be subject to things such as the lender still offering lifetime mortgages and you still meeting the lender’s lending criteria when you apply for the additional funds.  The interest rate for any additional drawdown is only fixed when the funds are advanced so may be higher than the rate you are paying on the original loan.
• Succession planning – as the outstanding loan balance is repaid from the sale of your home on your death, any lifetime mortgage is likely to substantially reduce the ultimate value of your estate and consequently there will be less for you to pass onto your family as an inheritance.

If you would like any more information in relation to the above, please contact James Davies or any member of the Property Team.

 

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