OLDER homeowners with a chunk of equity in their property but in need of liquid cash could find a lifetime mortgage is the answer.
For people who are 55 and over, equity release is a type of lending that can unlock the cash in your home without selling the property.
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A lifetime mortgage is the most popular type of equity release.
Soaring house prices over the last decade or so mean that older homeowners collectively have billions of pounds tied up in property.
But many of these same people can struggle to access to cash needed for day to day living or bigger purchases, as they have retired and are living on pension income.
Homeowners could have many different reasons for needing access to cash.
Often equity release is used to consolidate debts or pay off an existing mortgage.
It comes as rising mortgage rates are making it more difficult for many older homeowners to afford previously manageable repayments.
Or it could be parents or grandparents who want to help younger family members on to the ladder by gifting a deposit.
Some property owners may just be looking to go on the holiday of a lifetime or need cash to make some home improvements.
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In all of these cases, equity release through a lifetime mortgage could help.
What is a lifetime mortgage?
When you take out a lifetime mortgage you are in effect borrowing a percentage of the value of your home from a specialist lender.
You’ll still own the property but the loan will be secured against it.
The plans are often good for older people who find they are asset rich but cash poor.
It means they don’t have to sell their home to access cash.
But as with most borrowing there is a price to pay and equity release comes with interest rates that are typically higher than mainstream mortgage rates.
High interest rates can erode a significant portion of wealth from your estate that could impact your beneficiaries.
Taking out equity release is not a commitment that should be entered lightly and you will usually have to have taken advice before you can proceed.
How does a lifetime mortgage work?
You can take cash out of your home through equity release either as a lump sum or through a regular drawdown agreement.
The amount you can take out will depend on the value of your home and how much equity you have built up.
Research from Legal & General found homeowners in England & Wales could expect to release an average £67,200 of equity from their home.
This is a typical increase of £12,000 in the past five years, thanks to a 22 per cent increase house price values.
You usually don’t have to worry about affording any monthly repayments on a lifetime mortgage as the interest is rolled up and added to the outstanding balance.
The loan plus interest is then repaid when the plan ends, which is usually when the home is sold after you pass away or move into long term care.
However, some lifetime mortgages will allow you to make regular interest payments so only the loan is rapid at the end.
If you don’t repay any of the interest it can quickly build up over time and there could be cheaper ways of accessing the cash.
As with any other types of borrowing, interest rates on lifetime mortgages can vary and an adviser can help you scope out the market to get the deal that best suits your situation.
Getting even a slightly more competitive rate could hugely impact the amount left to pass on to beneficiaries at the end of the plan.
As well as interest, you will have to pay arrangement and legal fees that need to be factored into your decision.
There are negative equity guarantees in place for equity release products that mean you won’t have to repay more than the value of your home if property prices were to fall significantly.
Who is eligible for a lifetime mortgage?
You need to be 55 or over to take out equity release or a lifetime mortgage. And you will need to the owner of your home.
You will normally have to repaid most – if not all – of your mortgage to access a lifetime mortgage.
Lenders usually require your property to be worth at least £70,000-£100,000 to take out equity release.
If you are receiving means-tested state benefits, taking a lifetime mortgage out could impact your entitlement.
An adviser should be able to help you navigate the best way forward.
