Balancing Act

UK house price growth over the years has delivered increased property wealth for many…

To get a feel for house price growth, let’s take a look back. In the 20-year period to Q4 2018, house prices more than tripled* (even accounting for the Crash in 2007/8) – which equates to an average growth of about 6% a year.

If you’ve benefited from this growth and want to release some of your property’s value, do remember that if you take out a plan via a lender member of the Equity Release Council, there will be a no negative equity guarantee – limiting the roll-up effect to no more than the value of your home.

Plus, you could also take-up additional financial protections as part of your plan, which might further lessen the amount owed.
That said, a sum (plus any outstanding interest) will eventually need to be repaid, but against that, do also consider that there may be further house price growth over the years that may counter this debt.

Doing the maths…

Let’s assess a lump sum Lifetime Mortgage, and apply the average amount of £96,207, at the average lump sum customer fixed interest rate of 4.87%.** If you choose not to make any interest payments, then the total amount owed would have broadly doubled in 15 years.
To lessen the financial impact, you could opt for a draw down scheme, to avoid facing interest charges on any money you don’t need at that stage. Plus (whilst you don’t have to make any monthly payments), do consider paying the interest each month. The latter, alone, would save in the realms of £30,000 against the £196,325 owed (as per the 15-year chart example), although it would require almost £400 a month in interest payments.

Continued house price rises?

For the chart example, we’ve used a more conservative 2% growth figure, and applied that to the average house price of £312,301** for a lump-sum lifetime mortgage borrower. This will then give you a feel for possible property price growth vs. the cost of the loan.
Broadly, the chart shows that the size of the remaining equity in the property after 15 years would be slightly more than at the outset. And would be even more, if the interest payments had been made each month.

Of course, you must accept that there’s no guarantee of property price rises (they could just as easily fall), and the impact of inflation would need to be considered too.
(Sources: *Nationwide, House Prices to Q4 2018; **Equity Release Council, Autumn 2018 Market Report, 1st Half 2018 data)

Understandably, these are complex issues, with a bit of crystal ball gazing thrown in, so it’s essential that you take professional advice before making any decision.

Useful links
How much is your home worth?

Aside from getting it valued, you can check out the sale prices of comparable properties in your area – www.nethouseprices.com

Tracing lost or mislaid…

Pensionswww.gov.uk/find-lost-pension – 0800 731 0193
Bank, Building Society, or National Savings accounts www.mylostaccount.org.uk Bank account – 020 3934 0329 (UK Finance)
Building Society account – 020 7520 5900 (Building Societies Ass.)
National Savings account – 08085 007 007 (National Savings and Investments)
Insurance policies, pensions, unit trust holdings and share dividends
The Unclaimed Assets Register – www.uar.co.uk – 0333 000 0182

Information on State Benefits

To see what you may be entitled to – www.gov.uk/dwp

■ For Equity Release, we provide initial advice for free, and without obligation.
■ The contents of this article are believed to be correct at the date of publication (Jan. 2019).
■ Every care is taken that the information in this article is accurate at the time of going to press. However, all information and figures are subject to change and you should always make enquiries and check details and, where necessary, seek legal advice before entering into any transaction.
■This article is for information only and does not constitute advice. You should seek professional advice tailored to your needs and circumstances before making any decisions.

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Retirement interest-only mortgages

The later life lending marketplace is not only seeing a raft of new lenders, there are also new product options to give customers increased choice.

Retirement Interest-Only mortgages (RIO) are one such example, and are a relatively new introduction. They provide an opportunity to take out a new mortgage into your retirement years.

A RIO requires borrowers to pay the monthly mortgage interest until they die, sell their home or go into long-term care. At this point the loan is repaid by selling the home. So you need to be confident that you have an income stream to meet this cost.

The upside of paying the monthly interest, is that you will avoid any interest roll-up. Also, with a RIO the payments are limited to the interest charge, so you would not be required to start paying off some of the capital too.

However, this may be the case with some Later Life mortgage products, which are also tailored to meet the needs of this sector.

Affordability for a RIO is a big consideration, particularly with a joint application. Both individuals would be assessed given the possibly of reduced pension payments should one partner die.

How they are set up

With a RIO the loan-to-value could go upto around 60% (far more than an equity re-lease plan, particularly for the borrowers aged 55 to 65), with the option of fixed, variable, and discounted rate deals. The minimum age at which you could take one out varies amongst lenders from 55 up to starting at around 65.

Part of the drive to develop this offering is a recognition that more than one in six of all standard mortgages are already on full interest-only and part capital repayment deals, with many coming to the end of their term over the next few years.
(Source: Financial Conduct Authority, January 2018)

New opportunity for some

Some older potential borrowers may have previously been excluded from further borrowing because of their age, despite having an income stream which would normally be acceptable. In this instance, a RIO meets that need, by accepting that the sale of the property is a viable repayment method.

Lasting Power of Attorney

As clients taking out a RIO would have to pay interest across the whole term period, it may make sense to have a Lasting Power of Attorney (LPA) in place, which would protect the borrower, and their family, if they can no longer manage their finances.

RIO vs. Equity Release

To some extent it’s not simply opt for one or the other, as some may take out a RIO when they have the disposable income, meaning they can meet the affordability
requirements.
Later in life, their situation could change. In which case, an Equity Release plan, where no further monthly payments are needed, with no affordability hurdles to counter, may be the better solution. And remember, additional protections are afforded to Equity Release plans.

Understandably, it’s all pretty complex, so please do get in touch.

■ For Equity Release, we provide initial advice for free, and without obligation.
■ The contents of this article are believed to be correct at the date of publication (Jan. 2019).
■ Every care is taken that the information in this article is accurate at the time of going to press. However, all information and figures are subject to change and you should always make enquiries and check details and, where necessary, seek legal advice before entering into any transaction.
■This article is for information only and does not constitute advice. You should seek professional advice tailored to your needs and circumstances before making any decisions.

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Something for all

Due to the extensive range of uses that the funds are put to, the customers for Equity Release are wide-ranging and varied.

However, the common issue for all is that the UK has an ageing population, which will simply increase the financial pressures on the State, and accelerate the need for those nearing, or in retirement, to take action. For example, let’s look at the trends for those aged 65+ in the UK:

■ Back in 1991, this amounted to 9.1m (15.8% of the population).
■ In 2016, it had increased to 11.8m (18% of the population).
■ By 2041, it’s projected to be 20.4m (26% of the population)!
(Source: Office for National Statistics, Living Longer survey, August 2018)

The Equity Release borrowers

To illustrate how wide-ranging the borrowers can be, some are coming to the end of their interest-only mortgage term, and want to remain in their home, but don’t have the money in place to pay off the mortgage. Others require the funds to modify the home for health and mobility reasons, and may also want to cover the cost of ‘at-home’ care. Equity release could help in both cases.

Whatever you require the money for, drawdown is the most popular route. This is where you take an initial amount and then have the option to drawdown further amounts down the line. Lump Sum relates to taking the full amount at the outset.

Drawdown plans info

Some lenders now offer this

■ A similar product to Equity Release applies to both Buy-to-Let properties and Second Homes, in most parts of the UK.
■ Instead of securing lump sum amounts, you could opt to receive regular monthly payments. Amongst other benefits, these options could overcome inheritance concerns about the main home, with regard to the former, and help to lessen the roll-up effect with the latter. Please get in touch to find out more.

The Alternatives

Equity Release may be the best solution, but you should consider other options. This might replace the need for an Equity Release plan, or perhaps reduce the size of the plan required.

Downsize your home

This offers a relatively easy way to raise the funds you need now – with the option to take up equity release at a later date, if wanted. Of course, you’d need to consider both the emotional attachment you (and your family) have with your current home, plus the cost of moving, which sits at a UK-wide average rate of around £9,000. (Source: comparemymove.com, October 2018)

Borrowing from family members

This is an avenue that you should consider.

Other borrowing options

Lenders recognise that we have an ageing population and are starting to provide different mortgage options for those entering, or who may already be in, their retirement years. These increasing options are good news. The downside is that you’ll probably need to meet the affordability criteria to show that you can pay either the monthly interest, or the interest plus capital repayments.

Existing or potential State Benefits and Local Authority Grants

If you’re already claiming benefits, and some of those are means-tested, then raising funds may affect your ability to continue to claim (or reduce the regular payments). Additionally, there may be some benefits that you should be claiming for, but are not aware of.

Consider taking in a lodger

If you don’t have an issue with someone else living in your home, then this could be a revenue source.

Look at your existing pensions, investments and savings portfolios

You’ll need to take professional advice to decide if securing money this way is a better option. Also, across your lifetime, there’s a good chance that you may have forgotten about a long-held investment, or a small pension from a past employer. You can talk to us, or take a look at the useful links on the last page.

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Tailored to your needs

If you’ve previously considered Equity Release, or are looking at your current Equity Release plan, then you may be pleasantly surprised by the number of options now on offer.

Put simply, a Lifetime Mortgage (which accounts for almost all equity release plans and enables you to retain 100% ownership of your home), provides tax-free funds for 55+ homeowners, at a generally fixed interest rate, for you to use however you want.

Obviously, do remember that irrespective of any sizeable house price growth you may have benefitted from over the years, you (or your estate) are not being given ‘free money’ against the value of your home. You do, however, have the option of ‘freedom’ from any monthly payments, if wanted. The outstanding capital (and also any interest owing) would be redeemed when the final planholder dies, or moves into long-term care, with the amount never being more than the value of the home, if taken out with a lender member of the Equity Release Council (see below).

Advice on the best route

You can, though, influence at the outset what you or your beneficiaries may face down the line. There are a multitude of options we could discuss with you, such as:

  • Interest Payments – if you opt to make no payments at all, then the rolling-up of the interest can, for example, generally double the amount owed in around 15 years. Should you want to minimise this, you can make full or partial interest payments each month, and can revert to roll-up at any time.
  • Voluntary/partial repayments – paying back some of the capital borrowed, is also feasible, although rules will apply.
  • Drawdown facilities – you could opt for taking the whole amount at the outset, or receive a smaller amount, with an agreed drawdown facility to use, as and when needed. The drawdown approach would also reduce the build up of interest owed.
  • Inheritance guarantee – this would reduce the maximum loan amount, but enables a fixed percentage of the property value to be ring-fenced as a minimum inheritance, regardless of the total interest accrued.
  • Fixed Early Repayment Charge (ERC) – ERC is a fixed percentage of the loan that would have to be paid during an initial set period of time, should you want to pay back the loan. Typically, the ERC decreases on a sliding scale, with none payable once the fixed period has passed.
  • Downsizing protection – this allows plan- holders to downsize to a smaller property and repay the loan without incurring an ERC. Typically there’s a qualifying period of five years before this feature applies.

With the complexity of what’s on offer, it makes sense to take advice.

Reassurances for YOU…

Some people have concerns about taking out an Equity Release plan. However, customer protections put in place by the The Equity Release Council – the industry body – should dispel some of those worries (some examples are below). These are applicable if the plan goes via one of their lender members – which covers most plans out there.

Q: Can the provider take away my home?
A: All products from Equity Release Council lender members have a guaranteed security of tenure, so customers will be allowed to remain in their property for life, or until they move into long-term care, provided that the property continues to be their main residence. In the case of a joint policy, then this applies to the last surviving borrower.

Q: Can either my beneficiaries (or me) end up owing more than the value of my home?
A: Plans from Equity Release Council lender members have a no negative equity guarantee. This means that regard- less of the value of the home or how long the customer lives, they will never owe more than the value of their home, and no debt will ever be left to the estate.

Q: Can I still move home?
A: Customers, who’ve taken out an Equity Release plan, have the right to move, subject to the new property being accept- able to the product provider. Part of a lifetime mortgage loan may need to be repaid, if moving to a cheaper property.

Q: Can I be confident that all aspects of the plan will be explained to me?
A: Customers will be provided with a fair, simple and complete presentation of their proposed plan, ensuring that they can identify its benefits and limitations.

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Both enjoy & bank on your home

Both enjoy & bank on your home image
Both enjoy & bank on your home image

Property wealth can play an increasing role in delivering the money needed both ahead of, and into, the retirement years…

The old-established view that income in retirement will be largely based on pensions may not hold true anymore. Fortunately, other funding options do exist, and one route is through property wealth, where homeowners could:

downsize to a cheaper property to raise funds.
remortgage their existing home (if they meet the age and affordability criteria) via a later life mortgage product – which would require monthly payments.
■ take out an Equity Release mortgage (if the homeowner is 55+), which provides funds, and allows them to stay in their home.

No affordability criteria to meet.
– Can opt to not make any monthly payments against a, generally, fixed interest rate deal.
– You can potentially benefit from a better deal if you have a qualifying medical condition.
– The provider of the loan would reclaim the capital (and any accumulated interest) through the sale of the property, once the final planholder dies or moves into long-term care.
– There are also client protections in place if a plan is taken out via a lender aligned to the Equity Release Council

Whilst we focus on equity release in this article, it may not be the best route for everyone, and other options do exist.

Equity Release marketplace

If you want to get a feel for the total property value out there, UK property wealth held by homeowners aged 55+ stands at almost £3 trillion.* To put this figure into perspective, all outstanding regular mortgage lending is less than half that amount, at £1.4 trillion!**

So, it probably comes as no surprise that an increasing number of lenders are now entering this sector. This has resulted in a wider range of product offerings, with a sizeable part of those efforts targeted at the equity release arena.

Use of the funds – You decide

If it’s relevant for you (or perhaps your parents), it allows, for example, those aged 60 to borrow up to around 25% of the home’s value, rising to about 55%, if aged 90+. Also, do consider involving your children in the decision-making process, if applicable, since an equity release plan would reduce the value of your estate.

As for the funds you raise, you can then use the tax-free money for anything you like, such as:

■ help to clear an outstanding mortgage.
■ enable much-needed home improvements.
■ settle debts.
■ assist with regular bills.
■ secure money to adapt the home for care needs, or to help with ongoing care costs.

(Sources: *Office for National Statistics, Wealth and Assets Survey, July 2014-June 2016 period, released February 2018; **UK Finance, November 2018)

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A choice for many …..

Couple with small child
Couple with small child

You’re free to do whatever you like with the funds raised through Equity Release, which is why it appeals to such a wide range of people.

At the two ends of the spectrum is the impact of interest-only mortgages and care needs. For the former, there were 1.9m interest-only mortgage loans still in play at the end of 2016, accounting for 21% of all home-owner mortgages.* If payment vehicles aren’t able to fully cover the cost of the mortgage at the end of the loan term, then one option may be to raise funds through an equity release plan.

With regard to care needs, many may feel that they would ideally prefer to remain in their own home, plus avoid the sizeable care home costs (in the realms of £31,000-£44,000 per annum**) – unless you qualify for an element of means-tested support.
Conversely, at-home care, may be at a more manageable £11,000 a year for 14 hours a week, and this is where an equity release plan could help. Although do balance this against any means-tested state benefits, and threshold plans for care funding.
In between these two needs, there are a whole host of reasons why you may want to raise funds via equity release – pay bills, settle debts, home improvements, upsizing your home, gifting money to family and friends, holiday of a lifetime, and so on – hence the wide range of clients.

(Sources: *Council of Mortgage Lenders, May 2017 release, **LaingBuisson, May 2017)

Equity Release borrowers

Broadly, research shows that they fall into the following categories:

       
(Source: Equity Release Council, Spring 2018 Market Report, 2nd Half 2017 data)

Other OPTIONS

Equity Release can be the best solution for some, but you must consider the alternatives. This may replace the need for an equity release plan, or perhaps reduce the size of it.

Downsizing your home

Of course, there’s both the emotional attachment you have with your current home, plus the cost of moving, which is around £11,000.* However, this offers a relatively easy way to raise the funds you need now – with the option to take up equity release at a later date, if wanted.

Consider taking in a lodger

If you don’t have an issue with someone else living in your home, then this too could be a solution.

Existing or potential State Benefits and Local Authority Grants

If you’re already claiming benefits, and some are means-tested, then raising funds may affect your ability to continue to claim (or reduce the regular payments). Additionally, there may be some benefits that you should be claiming for, but are not aware of.

Look at your existing investments and savings portfolio

You’ll need to take professional advice to decide if securing money this way is a better option.

(Source: *Lloyds Bank, September 2016)

Peace of Mind for YOU

If you opt to borrow via a lender that’s a member of the Equity Release Council (ie. most of them), then a number of controls are already in place to protect you, such as:

■ All products from Equity Release Council members have a guaranteed security of tenure, so customers will be allowed to remain in their property for life, or until they move into long-term care, provided that the property continues to be their main residence. In the case of a joint policy, this then applies to the last surviving borrower.

■ Plans from Equity Release Council members have a ‘no negative equity’ guarantee. This means that regardless of the value of the home or how long the customer lives, they will never owe more than the value of their home and no debt will ever be left to the estate.

■ Customers have the right to move, although they may have to repay part of a lifetime mortgage loan if moving to a cheaper property.

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Make your home work for you

Lifetime Mortgages account for almost all Equity Release plans.

A Lifetime Mortgage is similar in principle to a standard mortgage, with the main difference being that there are normally no monthly repayments to make and the loan (plus the monthly interest owed) is redeemed when the final planholder dies, or moves into long-term care. The schemes are generally set up on the basis that – for the life of the loan – the interest rate is either fixed (at the time you take out a tranche of money), or at a capped variable interest rate.

Furthermore, as an increasing number of lenders enter the marketplace this has brought about new features and flexibili- ties, enabling you to opt for products that are better tailored to your own specific needs.

What’s the maximum I could raise?

This is largely dependent on the age of the youngest planholder and value of the home. As a rough guide there are differing percentages from aged 55 upwards. Broadly, it’s 25% of the property value aged 60, 35% aged 70, 45% aged 80 and 55% aged 90+.

However, if you have an unhealthy lifestyle (such as smoking), or face ill-health, then some ‘enhanced’ plans may allow you to receive a larger percentage than the standard age breakdowns – as the insurer assumes that you may not live as long.
Although you’re not penalised if you then go on and beat the odds!

Should I take all the money at once, or when I need it?

You can do either. Instead of opting for the full lump-sum at the outset, drawdown allows you to take up to the agreed amount as and when you require it.

Drawdown is the most popular route and around 76% of all lifetime plans are currently set up this way.* The effect of this approach is that it may enable you to stay within limits for means-tested benefits. It would also lessen the impact of the ‘rolling-up’ of the interest, as some of the loan would not have been drawn down. However, do remember that the interest rate applicable when you draw-down further funds may be at a different amount. Additionally, perhaps consider products that guarantee the drawdown facility, so that you’ll know it won’t be an issue whenever you come to act.

What’s a typical plan?

Lump-sum lifetime mortgages tend to raise around a third of the value of the home, and amount to about £101,000.
For drawdown, the average amount initially taken is around £63,500, with a further £36,000 or so available to draw down over time. In total, that’s about 27% of the property’s value.*

What is Roll-Up?

If you don’t make monthly payments to pay off the interest, then the interest owed is added to the capital that you originally borrowed.

To gauge the impact of ‘roll-up’, if the interest rate for the lifetime mortgage loan is 5.5%, for example, a £50,000 lump-sum loan (with the added interest) would have doubled to around £100,000 after 13 years. In some cases, and if you’re able to, the option exists to pay off some (or all) of the interest. The benefit of this approach is that you’ll lessen the amount owing, and limit (or avoid entirely) the roll-up effect. Additionally, with certain plans, there is also the opportunity to pay off some of the capital – without incurring a financial penalty.

In some instances, it will be family members, such as the children, who may help pay off any interest/capital, as they are the ones who are likely to benefit further down the line when it comes to the inheritance.

What happens if I want to cancel the plan?

In much the same way as a standard mortgage, there may be an Early Repayment Charge against certain timescales – the terms of which would vary across the providers.

Are there other equity release plans?

Home Reversion, which accounts for less than 1% of the marketplace is the other option. Unlike a lifetime mortgage, where you retain a full share in your home, in this scenario you sell all or part of your home, thereby giving up at the outset all or part of the ownership.

As Equity Release is a complex area, it’s essential that you take advice, so do get in touch to find out more.

(Source: *Equity Release Council, Spring 2018 Market Report, 2nd Half 2017 data)

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