It’s fair to say that the equity release market is continuing to evolve and adapt to changing customer needs. The use of lifetime mortgages has become synonymous with words such as ‘flexibility’ and ‘peace of mind’. One of the reasons why people could be turning to products such as equity release is mostly because they are seeking a solution that can give them the perfect blend of a comfortable lifestyle and a level of reassurance that their financial affairs are taken care of.
With the rising costs of living, people are feeling the squeeze as their basic day to day outgoings are getting higher and higher while their earnings are not necessarily able to keep up with increasing inflation. In fact, the Consumer Prices Index (CPI) showed prices were 9.1% higher in May 2022 than a year before. The inflation forecast is expected to peak at 11% in October 2022, meaning consumers across the UK will need to juggle both financial and family pressures all at the same time.
It’s only natural for a lot of consumers to put their family home at the heart of their financial strategy, especially in later life. Property can be treated either as a liability or leveraged as an asset, and for those with interest-only mortgages or other traditional mortgages knowing their financial options is more important than ever. The 1990s saw a boom of interest-only mortgages, but some homeowners are now at a crossroad where they still have a large amount of the capital needing to be paid off. Some interest only mortgages were designed to be repaid with an investment product when the mortgage term expired. However, in some of these cases the investment element didn’t reach an amount sufficient to repay the mortgage.
This can be a stressful period for many people in later life, experiencing the rising cost of living and having to think about repaying a large sum of money to secure the future of their home. For many their home is a lot more than just a place to live, especially when you are at a retirement age and having to think about potential long-term care needs, as well as leaving an inheritance to the family. Above all, people form emotional connections with their homes as they become a source of memories and experiences.
To tackle the interest-only mortgage challenge, some customers are looking towards equity release as a way of repaying the outstanding amount. Equity release, one form of which is known as a lifetime mortgage, can be a viable solution allowing customers in later life to unlock the capital built up in their property.
Here’s an example of how it can work in practice from a recent client case study.
About Mr and Mrs Clarke
They are both in their 70s and have lived in their home for over 30 years. The location of the property ticks all their boxes as it’s close to the shops and the local amenities as well as their family and friends. What’s more, their home has been adapted to their needs to help them feel more comfortable as their mobility has become restricted over time. Mr and Mrs Clarke share their home with their daughter and have a stable monthly pension income allowing them to maintain their current lifestyle. They are both retired and receive a nominal rent from their daughter.
Consumer classification: financially comfortable, married couple with annual income of £30,000.
Personal: worked in hotel management
Savings pot: £75,000
Property type: 4 Bedroom detached bungalow, in a residential area close to local amenities and bus routes.
Mr and Mrs Clarke’s objectives: to repay their £125,000 interest-only mortgage
- Wanting to release equity as they don’t have enough assets to pay the full balance when the mortgage term expires
- Using £25,000 of their savings pot to make up the balance and therefore borrow less, the impact of doing so reduces the cost to their estate over their lifetime
- Not wanting to make regular committed monthly repayments
- A fixed interest rate is preferred rather than a variable one
- Looking for a plan that would have a least impact to their estate
- Wanting a flexible option to make partial repayments without incurring an early repayment charge
- Include downsize protection
Mr and Mrs Clarke’s priorities:
- Not wanting to immediately downsize as they have lived in their home for over 30 years and are happy there with friends and family living close by
- They have considered downsizing however as well as not wanting to move home the current housing market is limiting their potential options meaning they are not comfortable with moving
- Ensuring their daughter has a place to live while they are still living in the home
- They are not comfortable with taking out a personal loan to pay off the mortgage due to the potential high monthly repayment costs
- Maintaining their current lifestyle
A Lump Sum Lifetime Mortgage is best suited for Mr and Mrs Clarke as it meets their requirement of enabling them to achieve their objectives while having the least impact on their estate. This plan is designed in a way that offers a cost-effective solution over Mr and Mrs Clarke’s lifetime to avoid accruing unnecessary interest so they can leave as much as possible behind to their daughter; the sole beneficiary of their will and for any potential future care costs. Mr and Mrs Clarke are used to making regular mortgage payments and would like to pay no more than £200 per month into an equity release plan to reduce the effect of interest rolling up over the years, but with the option to stop making payments in the future should their financial situation change.
- Allows you to retain 100% ownership of your property so you can benefit from any future house price rises. Please note you only continue to own your own home with a lifetime mortgage.
- Penalty free repayments up to a percentage of the initial borrowing per annum, depending on the lender and plan. For example, with some lenders up to 10% is permitted which in this case would be £10,000 per year.
- A “No Negative Equity Guarantee”. This means that you can carry on living in the property even if the amount you owe under your lifetime mortgage becomes more than the value of your home. When the lifetime mortgage is repaid (for example if you move house or on your death) you or your beneficiaries will not have to repay more than the amount your home is sold for even if the amount owed is higher.
- If you move home and want to transfer this lifetime mortgage to the new property, you can do so if the new property meets the lenders criteria. If the new property is of a lower value, the lender may ask you to repay part of the amount outstanding on the mortgage.
- Downsize protection – Some plans offer this. If you have had your lifetime mortgage for at least 5 years and you move home and want to transfer this lifetime mortgage to the new property but the new property does not meet the lending conditions at the time you can repay the lifetime mortgage in full without penalty.
- With some plans, the lifetime mortgage can be repaid in full with no penalty within 3 years of the death of or entry into Long Term Care of the first borrower.
- Applications for further borrowing are allowed subject to Mr and Mrs Clarke’s property value at the time of application.
*Please note the visual is only for illustrative purposes based on this specific customer case study. Interest rates can go up and down depending on when the lifetime mortgage is taken.
Lifetime mortgages – some things to consider
When making a long-term financial commitment it is important to consider all the future implications carefully. This is a summary of some of the key points that you need to be aware of.
- You will need to make sure to keep adequate building’s insurance on the property that the equity release loan is secured against.
- It’s your responsibility to keep up the maintenance of your property, so it remains in the condition it was when you took out the lifetime mortgage.
- You will need to obtain permission from the lender before allowing any other person to occupy part of your home. For example, upon marriage/formation of a civil partnership, or where someone acts as your carer.
- Taking out a lifetime mortgage may affect your ability to claim social security benefits as well as your tax position. Both tax and social security benefits may change as a consequence, therefore if you have any concerns, you should seek further advice from HM Revenue & Customs; the Pension Service; Benefits Agency or your local Citizens Advice Bureau.
The impact of releasing funds over time
Based on the Lump Sum Lifetime Mortgage that Mr and Mrs Clarke have taken out, the graph below demonstrates how the value of their estate may be affected over time. We are not able to forecast future house prices and so the graph below illustrates a range of different scenarios; a 1% decline in house prices, a 1% increase and a 3% increase. The latter is based upon actual average house price growth over the past 20 years (source:https://www.nationwidehousepriceindex.co.uk/reports/annual-house-price-growth-slows-in-june-but-remains-in-double-digits).
The bar chart illustrating the increase in the loan’s value over time is based on Mr and Mrs Clarke making no repayments in the future and even with a 1% decline in house prices there would still be significant equity remaining in the property over their 15 year life expectancy. However, if they were to make ongoing payments then this would reduce the amount outstanding and the impact of the interest over time. As with all products, equity release rates and plan features can change over time.
*Please note that we are unable to guarantee what will happen to house prices in the future and these figures are for illustrative purposes only.
Making repayments to their lifetime mortgage plan during its term can have an impact on the cost of equity release to their estate over time. You will see in the table below the amounts show the cost of interest as well as the initial amount borrowed over their life expectancy of 15 years. Mr and Mrs Clarke would like to make payments of £200 per month to their plan. The example in the third column reflects the reduced cost to their estate as well as the cost to them of making the repayments.
Please note, these figures are for illustrative purposes only and have been calculated using the annual interest rate of the recommended plan based on the customers’ projected life expectancy.
The figures for each plan and customer will be different depending on their circumstances and criteria.
Today’s equity release customer is a lot more focused on planning for the future and having control over their finances. If you are considering ways to leverage your property wealth in order to bridge the gap, please get in touch and I will be happy to discuss further.
I will tell you everything you need to know about equity release including how it can affect the amount of inheritance you can leave and if your entitlement to means-tested benefits could be affected now or in the future.
Use our equity release calculator to see how much money you could unlock from your home https://harbourequityrelease.co.uk/calculator/
Equity release may involve a home reversion or a lifetime mortgage which is secured against your property. To understand the features and risks, ask for a personalised illustration.
Equity release requires paying off any existing mortgage. Any money released, plus accrued interest would be repaid upon death, or moving into long term care.