What is an Equity Release Mortgage?
An equity release mortgage is a product available to homeowners over the age of 55, which allows them to draw a tax-free lump sum, or several smaller sums (on which you’ll pay interest), from the equity in their home while continuing to live in the property until they die or move into residential care.
A Lifetime Mortgage is a popular type of equity release mortgage. With this type of mortgage you borrow money against the value of your home. This is repaid when the house is sold, when you move into residential care or die.
Taking out an equity release mortgage can impact the size of any inheritance you may wish to leave your family and can affect your eligibility for state benefits so it is really important to get good advice from a qualified mortgage advisor before taking out any plans so you can decide if equity release is right for you. Arrange to speak to one of our advisors for a no obligation discussion of your options.
Equity release works well for people who are property rich but cash poor. You don’t have to have paid off your mortgage to get equity release.
When Can You Get an Equity Release Mortgage?
Equity release mortgages are only available to people over the age of 55. To get a Lifetime Mortgage borrowers need to be over the age of 55 and for a Home Reversion Plan borrowers need to be over the age of 60.
Many people ask: can I get an equity release mortgage if I am aged under 55? The short answer is no.
However, if you are aged under 55 and want to try and release equity from your home there are other options so it is worth speaking to a mortgage advisor.
Options for taking out equity from your home if you are aged under 55 include taking out a loan secured against your property or remortgaging.
You can find out more information on mortgages for the over 50s in our blog.
How Much Equity Release Can I Get?
The amount of Equity Release you can get is dependent on a number of factors:
- The age of the youngest applicant (if you’re making a joint application)
- The value of your property
For a Lifetime Mortgage it is age dependent but you can usually borrow up to about 60% of the value of your home. Lenders generally prefer to lend larger amounts to older people or those with existing medical conditions.
What Can I Use Equity Release For?
There are a lot of reasons why people choose to select an equity release mortgage.
Some people own a home which is worth a considerable amount but are finding they are cash poor during their retirement due to low interest rates or a poorly performing pension.
Other people may not have any family to leave their money to on their death so want to release some equity to spend on themselves while they can enjoy it.
Some of the things you might choose to spend your equity release on include:
- Home improvements
- Helping family members with tuition fees or the deposit on a home
- Taking the holiday of a lifetime
- To supplement your retirement income
- Paying off debts
- Paying off an interest only mortgage
There are positives and negatives to using equity release for the above options but it is vital that you get some quality mortgage advice to ensure you make the right decision for you.
Can I Use Equity Release to Buy A Second Property?
Yes. One of the advantages of equity release is that you can use it to buy a holiday home, a buy-to-let property, or you could use it as a way to help your children get on the property ladder.
There are also some disadvantages to using equity release to buy another property. You must remember to factor in paying estate agents fees, stamp duty and any other moving costs.
You should also be cautious to only borrow what you need as the larger the loan the more interest you, or your beneficiaries, will ultimately have to pay.
Property Ownership and Equity Release
Before considering an equity release mortgage you should make sure your property qualifies for an equity release scheme.
We explore some of the types of homeownership and their eligibility for equity release below:
Can I Get Equity Release on a Leasehold Property?
Yes, you can get equity release on a leasehold property.
However, the acceptable term remaining on the lease may vary from lender to lender. The lender will need to be able to easily sell your property at the end of your equity release term and so they will likely require a leasehold term with at least 75 years left to run.
If you only have a short term left on your lease there are still some options open to you. For example, you could try and buy the freehold of your property or apply to lengthen the term on your lease.
Both these options can be costly and time consuming so it is important to get financial and legal advice before going ahead.
Can I Get Equity Release on a Second Property?
Yes, some lenders will now consider equity release on a second home, buy-to-let property or holiday home whereas previously equity release was only really an option on your main residence.
The rules are quite stringent, for example some lenders will only allow a second home to qualify for equity release if it is:
- Available for sole occupancy of the homeowner
- Occupied by the homeowner for at least four weeks of the year
- Not let out to anyone else for more than four weeks of the year
Can I get Equity Release on a Shared-Ownership Property?
Many lenders require that you have full ownership of a property before they will consider you for equity release. This means that if you co-own your property with a local authority or housing association you are unlikely to be able to secure equity release on your shared ownership home.
For those who co-own a property as tenants-in-common you can apply for equity release but it must be taken out in both names. On the death of one owner the lender may restrict the ability to borrow further money so it is best to seek out specialist advice before pursuing this.
Will an Equity Release Mortgage Affect my State Benefits?
Securing an equity release mortgage can affect your entitlement to state benefits because by releasing money from your home your ‘income’ will increase.
As a result it is very important to get financial advice to ensure you fully understand the impact equity release may have on any benefits or state grants you receive.
What are the Alternatives to Equity Release?
There are advantages and disadvantages to taking out an equity release mortgage and it is not the right solution for everyone.
It is worth considering what other options are available as an alternative to equity release.
Downsizing
Before considering equity release it might be a good idea to think about whether downsizing your property to release funds would be a better option for you.
By selling your property and buying a smaller, cheaper house you can free up some of the cash locked into your home.
Before downsizing make sure you factor in agent’s fees, stamp duty, legal fees and moving costs.
Retirement Interest Only Mortgage
Unlike a standard interest only mortgage a retirement interest only mortgage has no end date. The mortgage only needs to be paid off when you sell your home, go into long term care or die.
With a retirement interest only mortgage you pay off the interest each month, meaning that unlike many equity release schemes the interest does not continue rolling up.
This means that when you come to pay off the mortgage there isn’t as much to pay as there would be in an equity release mortgage.
However these types of later-life mortgages tend to offer higher interest rates than a standard mortgage so mortgage advice should be taken when considering one.
Other alternatives to raise some money other than equity release include:
- Remortgage/extend your current mortgage
- Sell other assets
- Take on a lodger
- Draw some money from a private pension
Conclusion
Equity release mortgages can be an excellent option for property rich but cash poor people over the age of 55.
However there can be a number of pitfalls to taking out an equity release mortgage, like losing your entitlement to state benefits and the size of any inheritance you may wish to leave your family might be reduced.
Before going ahead it is wise to explore all your options with a qualified mortgage advisor.