Is equity release a good option for older borrowers?

How does equity release work?

Equity release is a product that gives you access to tax-free cash that’s tied up in your home. With most lenders, you must be 55 or older to release equity. You may be able to take cash out as a lump sum or as a monthly income or a combination of the two.

Equity release may be a good option for older borrowers who need to access funds from their property but who don’t want to move home. There are pros and cons to equity release, so it’s important to understand the implications of taking out this type of product.

When should you consider getting an equity release product?

If you are finding it hard to live comfortably in retirement on your pension income and you have equity in your property, you might consider releasing cash to make day-to-day living easier.

You might consider equity release if you need money for improvements, a large holiday, a car purchase or perhaps helping a family member get on the property ladder. You might want to support grandchildren by making regular payments towards university fees, living costs or other debts.

Equity release schemes for older borrowers

Equity release schemes are usually reserved for people over 55, though it’s worth shopping around as different lenders may have different lending criteria and interest rates can vary. The lender will look at the market value of the property, any loans secured already, and the applicants’ age.

Lifetime mortgage

A lifetime mortgage is a form of equity release product that allows you to take a tax-free one lump sum as a tax-free lump sum, loan secured against the property, which is flexible on the repayments.

You can repay all, some or none of the interest. You can borrow money for many reasons, including home improvements, gifts, and living costs. This is the most common way; however, you can borrow via a drawdown facility, which gives you a slow release of funds.

If you choose not to pay all the interest, the interest will roll up and be added to the outstanding balance, which is settled via the sale proceeds when you die or move into a long-term care facility. Lifetime mortgages often have a cap on the amount of capital you can repay each year, usually 10%. You can also opt to make monthly payments.

Home reversion plans

A home reversion provider will offer you 25-100% of your property in exchange for a lump sum or a monthly income. You will not pay interest on this money and providers will take the risk of the property price decreasing over the term of the agreement.

As an example, imagine your home is worth £400,000 and you sell 25% in exchange for £100,000. When the property is sold, it’s worth £600,000, so £150,000 will be paid to the provider of the plan.

Advantages of equity release for older borrowers

Releasing equity has a number of advantages for older borrowers. Many lenders won’t lend on a traditional standard mortgage to people over the age of 60. This can leave many older people asset-rich but cash-poor. You can release money from your property to assist with living costs.

Lifetime mortgages and home reversion plans enable older people to receive tax-free cash without having to make monthly interest payments, which increase their outgoings. You can also continue to benefit from any increase in the value of your home, which may be passed on to your family members later.

Lifetime mortgages are more flexible than ever; they allow you to move the loan to a new property should you move home.

Risks of equity release for older borrowers

• An equity release mortgage reduces the value of your estate and the remaining amount for the beneficiaries in your will. With a home reversion plan, the reversion company owns all or a part-share of your home, though you will still be allowed to live there until you die or move to long term care.
• Means-tested benefits could be impacted if you release equity and receive funds to supplement your income.
• If you get care at home and it’s funded by the local council, either fully or partially, the local council may start charging you or ask you to pay more.

What happens if the value of the house changes significantly?

If your property value increases, the equity release provider will receive some of the gain from the home reversion plan.

If house prices drop, many schemes offer a no negative equity guarantee so you will not owe more than the value of your home. The released equity will not be at risk.

Are there alternatives to equity release?

Retirement interest-only mortgages (RIOs) are similar to lifetime mortgage products but you must make interest payments.

A lifetime mortgage does not require any monthly repayments, although the amount you owe could substantially eat into your remaining asset and impact what’s left for your beneficiaries.

How can Simmonds Mortgage Services help you?

Simmonds Mortgage Services has extensive experience in obtaining mortgages for older people. We provide equity release advice and support lifetime mortgage applicants with the application paperwork.

If you are unsure if equity release plans are right for you, get in touch for a free, no-obligation chat about your situation. We can work out what the maximum equity release available would be.

Frequently asked questions about equity release for older borrowers