Many baby boomers (born between 1946 and 1964) have accumulated significant home equity. As interest in equity release options for those over 50 continues to grow, 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:
- 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. As a result, you might find a traditional equity release mortgage unaffordable or ill-suited for your situation. The good news is that you have other options, such as opting for a lifetime mortgage or a home reversion scheme.
We will now look at some of the more common questions you should ask your equity release advisor and the answers you should be looking for.
1. What is a lifetime mortgage?
A lifetime mortgage is a form of equity release without monthly capital or interest repayments. Instead, 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 consider.
2. 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. The property will be sold at that time, the outstanding mortgage capital and interest repaid, and the balance returned to yourself or your estate. While many people are concerned about the interest charge, which will grow the longer they remain in the property, there could also be an element of long-term capital appreciation in the value of your home if historical trends continue.
3. 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. You will pay interest on interest until the mortgage interest and capital are repaid.
4. 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 property's value. The older you are, the more potential to secure an LTV ratio towards the top end of the range.
5. 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”.
6. 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 or capital to repay. The home reversion company will take their share of net proceeds when you either die or move into full-time care.
7. 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. So, 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.
8. Will we pay rent after signing up for a home reversion scheme?
Although the home reversion scheme will have a stake in your property, you can live in the property rent-free until your death or move into full-time care. In addition, 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.
9. Is there a risk of negative equity with a home reversion scheme?
No. If your property's value was to fall to such an extent that the home reversion company’s stake was valued at less than their purchase price, that isn't your concern. Under no circumstances would you be obliged to make any additional payments.
10. Can you release equity twice?
If sufficient capital remains in your property after a first round of equity release (either a lifetime mortgage or a home reversion scheme), there are no restrictions against releasing further equity. It is also possible that the value of your property has increased since the first equity release, creating scope for additional fundraising.
Consulting your equity release advisor
There is no one-size-fits-all answer when it comes to lifetime mortgages or home reversion schemes, and it is important to take financial advice about your situation. While it's possible to secure a traditional remortgage or equity release, over 50s could prefer alternative financing routes. Whether looking to holiday around the world, buy that new car, spoil your family, or release sufficient funds to make up any shortfall in your regular income, equity release can prove beneficial.