Many baby boomers (born between 1946 and 1964) have accumulated significant equity in their homes. As interest in equity release options for those over 50 continues to grow, it seems that many are looking to live the life they dreamed of in their later years. When it comes to equity release, there are two main options for those aged over 50 which are:-
- Lifetime mortgage
- Home reversion scheme
Even though UK life expectancy continues to improve and working careers have been extended, many individuals and couples in their 50s, 60s and above may experience a drop in their regular income. With a traditional equity release mortgage, you would need to undertake a mortgage affordability test which many over 50s may fail. As there are no regular payments with a lifetime mortgage or home reversion scheme, there is no need for a mortgage affordability test.
We will now take a look at some of the more common questions you should ask your equity release advisor and the answers you should be looking for.
What is a Lifetime Mortgage?
In simple terms, a lifetime mortgage is a form of equity release without monthly capital or interest repayments. Monthly interest will be rolled up and repaid at the end of the mortgage together with the original capital. It can be an effective means of releasing equity from your home, but there are several issues to take into consideration.
How Long Does a Lifetime Mortgage Last?
When taking out a lifetime mortgage, the term will be open-ended, which means that the mortgage will only be repaid upon your death or move into full-time care. At that time, the property will be sold, the outstanding mortgage capital and interest repaid, and the balance returned to the homeowner/their estate. While many people are concerned the interest charge which will grow the longer they remain in the property, there should/could also be an element of long-term capital appreciation in the value of your home, if historical trends continue.
How is Interest Calculated on a Lifetime Mortgage?
At the end of 2019, the average lifetime mortgage interest rate stood at 4.91%. Even though this is still a premium compared to traditional mortgages, we have seen an increase in competition and the average lifetime mortgage interest rate is coming down. It is important to note that while there are no monthly interest payments, they will be rolled up and you will pay interest on interest until the mortgage interest and capital are repaid.
What is the Maximum you can raise with a Lifetime Mortgage?
The Loan to Value (LTV) ratio for a lifetime mortgage is unlikely to exceed 60% to give enough headroom between lifetime mortgage capital, interest payments and the value of the property. The older you are, the more potential to secure an LTV ratio towards the top end of the range.
Is there a Risk of Negative Equity with a Lifetime Mortgage?
As the maximum LTV is unlikely to exceed 60%, this should leave enough of a gap between mortgage liabilities and the value of your property. With a lifetime mortgage, if the value of your property falls below your lifetime mortgage liability, there is a “no negative equity guarantee”.
What is a Home Reversion Scheme?
While the home reversion industry we see today is very different to that of 20 years ago, with tighter regulation and greater transparency, this has been a controversial subject in the past. It involves a third party acquiring a stake in your home at a price often well below the market value. There are no interest payments to make, no capital to repay, the home reversion company will simply take their share of net proceeds when the occupant either dies or moves into full-time care.
What is the Discount Rate for a Home Reversion Scheme Investment?
Traditionally, those administering home reversion schemes will pay between 20% and 50% of the market value for an agreed share in your property. For example, if you had a property worth £200,000 and were looking to sell a 50% stake, the market value would be £100,000. However, under a home reversion scheme you would receive between £20,000 and £50,000 for a 50% stake.
Will we Pay Rent after Signing Up to a Home Reversion Scheme?
Although the home reversion scheme will have a stake in your property, you will be able to live in the property rent-free until your death or you move into full-time care. There is no interest on the home reversion scheme proceeds, as you are selling a share of your property. Therefore, your reduced equity element will remain constant throughout - subject to property price fluctuations.
Is there a Risk of Negative Equity with a Home Reversion Scheme?
No. If the value of your property was to fall to such an extent that the home reversion company’s stake was valued at less than their original purchase price that is not of your concern. Under no circumstances would you be obliged to make any additional payments.
Can you do Equity Release Twice?
If there is sufficient capital left in your property after a first round of equity release (either a lifetime mortgage or a home reversion scheme) there are no restrictions on arranging further equity releases. It is also possible that the value of your property has increased since the first equity release creating scope for an additional fundraising.
There is no one size fits all when it comes to lifetime mortgages or home reversion schemes, and it is important to take financial advice about your situation. In some cases, it may be possible to secure a traditional remortgage or equity release, although many individuals and couples over 50 may struggle to pass the mortgage affordability test. Whether looking to holiday around the world, buy that new car, spoil your family or simply release sufficient funds to make up any shortfall in your regular income, equity release funds can prove very useful.