Equity Release Mortgages

Many homeowners believe that the only way to release the money tied up in their home once they are retired is to sell it.

With a traditional remortgage being reliant on making regular repayments for many years, it no longer becomes a relevant product without a working income, leaving selling up and downsizing the obvious way to get that investment back as usable capital.

However, a range of products exist to release that equity in your property without forcing you to move out of it. These are called equity release and provide those over 55 with a valuable way to get more out of their largest asset. 

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What is Equity Release?

Equity release covers a range of products that provide you with a lump sum of capital in return for legal equity in your property. They do not have to be paid back with regular monthly repayments like a standard mortgage or remortgage product, giving you the freedom to use the money as you need without any worries regarding its repayment.

Choosing your preferred equity release product will come down to assessing what’s right for your circumstances and your family - we highly recommend you speak to a qualified advisor about the best option for you.

What is a Lifetime Mortgage?

An equity release, or ‘lifetime’ mortgage is a contract of senior debt on your property that doesn’t have to be repaid until you no longer live in the home. This could be because:

• You decide to sell the property.
• You move from the property into a full-time care facility.
• You pass away.

With a lifetime mortgage, you have instant access to funds tied up in your house that are reclaimed by the lender once you are no longer resident.

Lifetime mortgages accrue interest in the years which also forms part of the debt that is repaid by your estate.

What is Home Reversion?

A home reversion policy involves you selling all or part of your home to a third-party for either a lump sum or regular monthly payments. It includes a lifetime tenancy, meaning you are able to continue living in the property for the rest of your life.

Unlike a lifetime mortgage, a home reversion doesn’t accrue any interest and is not a debt, but you no longer own your property outright.

Lifetime Mortgage vs. Home Reversion

Whether you choose an equity release mortgage or home reversion will come down to what you feel suits your circumstances the best. As property tends to increase in value over time, many people opt for the lifetime mortgage as they want to gain the maximum benefit from the investment rather than selling early at a lower value. However, some prefer the clearly defined and stable nature of a home reversion contract.

5 Reasons to Get an Equity Release Mortgage

There are several reasons why equity release mortgage may be of advantage, not all of which are obvious:

1 - Freeing Capital for Personal Use

Perhaps the most obvious reason for a lifetime mortgage is to get an influx of capital for personal use. This may be to improve your lifestyle during retirement, to give you the freedom to do the things you have always wanted to do in life, for further home improvements, or simply to ensure that a financial cushion is in place to give you security and peace of mind in your later years.

2 - Helping Children

Giving your children or grandchildren some financial support is another prime reason for considering equity release. With it becoming ever more difficult to get onto the property market, releasing the equity in your home to give your children the chance to own one of their own has many advantages.

Of course, helping your children is not limited to giving them the money they need for a home of their own, it could be to provide investment in their entrepreneurial enterprises, or providing the support for any other need.

3 - Paying Off Debt

Some homeowners look to equity release to clear other outstanding debts in retirement, lifting the burden of regular debt repayments from their monthly pensions and cashflow. Using an equity release mortgage in this way can ensure that your retirement years are able to be enjoyed without the constant worry and struggle of ongoing bad debt.

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4 - As Part of Inheritance Tax Planning

Inheritance tax often makes passing your estate to your children a complicated matter with substantial taxes presenting your heirs with difficult choices where it is easy for them to make a misstep; especially considering the emotional turmoil of the time. Comprehensive estate planning includes considering equity release to limit the amount of inheritance tax and release capital over the years.

Through our partners in estate management and financial planning, Clifton Private Finance are here to help you make a detailed holistic plan for maximising your estate and ensuring your descendants receive the maximum possible sum from your investments.

Look to this case study to see how equity release can be used to minimise future inheritance tax.

5 - For End-of-Life Comfort and Care

We don’t like to think of the difficulties that come with the final years of our lives, but planning for end-of-life care early will make sure that should there be a need for substantial support in your last years, that this does not become a burden to your loved ones.

Alongside other financial products that have been developed to give you the best possible care and comfort in later years, equity release provides a means to have the financial capacity you need to feel secure for the future. 

The 5 Concerns of Equity Release Mortgages

Many people have a distrust of equity release mortgages due to the nature of how the interest works. There can be a fear of spiralling interest, and of some other downsides.

Like many financial products, if poorly managed, equity release mortgages can lead to financial upset.

However, when properly considered and undertaken as part of a well-planned comprehensive financial plan, equity release is a valuable product that brings multiple benefits.

Working with an independent professional financial advisor will ensure that your equity release mortgage is properly suited to your needs.

Nonetheless, here are the main potential disadvantages and 'good to knows' about equity release: 

1 - Lifetime Mortgages Generate Large Amounts of Interest

The primary concern for many is that the interest accrued on equity release mortgage results in a far larger debt than is reasonable. However, the interest rate on a lifetime mortgage product is typically low, and can often be outpaced by an increase in property value.

An equity release mortgage will only encompass a portion of the value of the property. Consider a property valued at £300,000 with an equity release of £100,000 at 6%.

It is not unreasonable to assume that the property value will rise at an average 3% per year. In fact, as the Office of National Statistics details, the average UK house price increased by 6.3% in the 12 months to January 2023, making 3% a very conservative estimate.

In the first year, therefore, the interest on the equity release mortgage will be £6,167.72 (compound interest of 6% of £100,000 calculated monthly for a year), and in the second year, £6,548.13. Conversely, the property value will increase by £9,000 in the first year (£3% of £300,000) and by £9,270 in the second (£3% of £309,000).

It can easily be seen that the increase in property value outpaces the interest on the loan. In this case, not only will the interest be covered, but there is additional return on the house investment even when tied to the equity release mortgage. There is no guarantee that property prices will continue to rise, so this is an investment decision you'll need to weigh up independently and with help from a mortgage adviser.

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2 - Lifetime Mortgages Leave Nothing to Inherit

Another falsehood is that equity release mortgages suck all the remaining equity from the home, leaving any heirs with nothing for their inheritance.

Although this is a possibility in some cases, particularly for those who live to a very old age while holding an equity release mortgage, as is already shown in the first argument, with the increase in property value, this is rarely the case.

Using the figures from the earlier example, after ten years, the balance of the equity release mortgage would be £181,939.67, while the property would be valued at over £400,000. Even once the mortgage provider reclaims their debt with all the interest, there is still more than £218,000 in the estate for the heirs.

Another significant factor is that the money obtained through the equity release is often used to help those heirs, making an argument that they lose out on their inheritance somewhat moot.

3 - Equity Release Mortgages Are Inflexible

This argument is also untrue. While an equity release mortgage is senior debt on a property, many of them are quite flexible, allowing part repayments without penalty and with reasonable fees for early repayment in full.

This is a particular part of equity release mortgage products that is constantly being revised by providers, with new products and different terms available each year. Working with a specialist broker with the experience to compare products on the marketplace and find the most suitable equity release mortgage will ensure that you obtain an equity mortgage with the terms that work best for your circumstances.

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4 - Lifetime Mortgage Providers Prey on the Old

It is true that equity release products are designed for those over 55, and in the past there have been a few equity release providers with marketing and after sales support that presented equity release poorly and gave the industry a negative reputation; however, transparency and comprehensive support exist to ensure that no one is sold a product that is not suited to their needs.

Working with an independent advisor also mitigates this concern fully, as we will work alongside you and for you, without bias, to ensure that any equity release product is obtained with comprehensive understanding.

5 - If a Property has Negative Equity, Heirs Will be Left in Debt

This concern is simply a misconception. The worry is that if the size of the lifetime mortgage debt with all accrued interest, is greater than the value of the property, that the estate will have to pay the difference.

Because of the No Negative Equity Guarantee safeguard that is part of the Equity Release Council, all lifetime mortgages from accredited providers are protected and the total sum of the debt can never exceed the value of the property. 

Getting Advice on an Equity Release Mortgage with Clifton Private Finance

As discussed in this article, one of the most important stages of obtaining an equity release mortgage is getting independent advice on its suitability. At Clifton Private Finance, we will discuss your financial position and work with you to obtain the best product to suit your personal circumstances and needs.

We worth with experts in all aspects of estate planning and inheritance tax and can create a comprehensive financial plan that utilises equity release solutions to minimise inheritance tax and maximises the support you can provide your family, both in the immediate term, and for inheritance on your passing.

To learn more about equity release mortgages and to understand your personal options, speak to one of the team at Clifton Private Finance today.

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