Releasing equity tied up in your home can mean the difference between living in the house you love and moving out. We speak to three people who’ve done it
Home improvements, holidays and medical treatment are among the most popular reasons people release equity from their home.
But with more and more people coming to the end of an interest-only mortgage with no way to repay it, equity release is becoming a valuable way to pay a mortgage off without having to sell up and move.
This was the case for Nigel and Jenny Gordon, aged 74 and 75 respectively. With an interest-only mortgage to clear, the couple put their 17th-century cottage in Bedfordshire on the market last year.
“We really didn’t want to sell. We’ve lived here for nearly 20 years and we love it,” says Jenny. “On top of that, after we’d cleared the mortgage, we would have had to move into a much smaller place. The thought of it made me really unhappy.”
Thankfully, her husband of 53 years, Nigel, found a solution. After reading a piece on lifetime mortgages in the press, he contacted specialist adviser Key.
Jenny says: “They sent an adviser around who talked us through all our options and arranged a lifetime mortgage with Legal & General that would clear the outstanding debt. It was such a relief to be able to stay in our home.”
Lifetime mortgage lifeline
Lifetime mortgages allow homeowners to borrow money against the value of their properties. The amount they can borrow depends on their property’s value, the homeowner’s age and, in some cases, their health.
“Products are flexible, so you can build them around what you want to do,” says Tom Moloney, partnership development manager at equity release adviser Age Partnership.
“You can leave the interest to roll up or you can repay all or some of it if you prefer. You can also draw down equity as you need it, which works out more cost effective, as you’re only paying interest on what you take.”
In most cases, capital is only repaid when your property is sold – on the death of the owner or a move into a nursing home, for example. It may be possible to repay a lifetime mortgage to reduce the interest you pay. However, Mr Moloney says you need to be careful this won’t cost you.
“Look out for early repayment charges,” he says. “These vary considerably, so weigh them up if there’s a possibility you’ll repay early. Some have a fixed charge, typically of around 5%, for the first five years. Others have charges that apply up to your 85th or 90th birthday and can be as much as 25% of your loan.”
Paul Gale has released some of his equity to pay for holidays
Paul Gale, 70, from Kent (pictured above), took out a lifetime mortgage to clear his interest-only mortgage. When he got divorced 12 years ago, rather than sell up, he and his ex-wife had their four-storey home converted into two flats. Paul remortgaged to cover the cost of the conversion.
“It was my ex-wife who told me about equity release,” he says. “She had used it to help our son with his mortgage deposit, and when I told her I needed to pay off my interest-only mortgage, she suggested I speak to an adviser. They explained it all and arranged a lifetime mortgage for me.”
Rather than stay in the UK, June Baker, 65, from Cambridgeshire, decided she wanted to enjoy her retirement in sunnier climes, so she released equity in 2016 to buy a holiday home in Spain.
“It has been brilliant,” she says. “I’ve been five times already, and my kids and their families have also used it for their holidays. It was really easy to release the equity.”
Although Paul used most of the equity he released to clear his mortgage, he is also enjoying more holidays – a trip to Kerala in India is next.
“You never know how much longer you’ll be able to enjoy it,” he says. “I worked for the fire brigade for 25 years, and some of my ex-colleagues aren’t around anymore.”
You don’t need to worry about when you’ll pay off the loan, as equity release products don’t come with a fixed term like a standard mortgage.
Will Hale, chief executive of Key, explains: “Customers have security of tenure, so they can stay in the property as long as they like or until they move into nursing care. There is also downsizing protection. If you want to move to another property, it is fine as long as the equity release provider is happy it will still cover the loan.”
“Most advisers will provide a full report for free”
Your debt can grow
It’s reassuring to have this guarantee, but it’s important to understand how the debt will grow over time (see box, below).
Age Partnership’s Mr Moloney says that if you are only borrowing a relatively small sum, interest rates will be lower, starting at around 3.6%. However, with larger sums you will probably have to pay north of 4%. At 4%, it will take just 17 years for your initial debt to double.
Whatever the interest rate, the fact that a small equity release loan can turn into a big debt over time means there is a risk that it will swallow up the total value of your home, taking the kids’ inheritance with it.
While this is one of the most common criticisms of equity release products, it doesn’t bother everyone.
“We did talk it through with our son and daughter before we took it out, but they both thought it was a really good idea,” says Jenny. “They wanted us to be able to stay in our home.”
It was a similar story for Paul, who spoke to his three kids about his plans.
“They were all happy for me to do this,” he says. “They all own their homes and the no negative equity guarantee provides reassurance that, however long I live, the debt will always be covered by the sale of the property.”
Advisers are usually keen for the individual to involve their family in discussions about equity release, which can often result in different approaches to raising the money.
“We’ve seen cases where the parents release equity, but the family then covers the interest payments. This ensures the debt doesn’t increase, so there’s something left for an inheritance,” Mr Maloney explains.
Even without servicing the interest, it’s possible to guarantee a future inheritance.
Mr Hale explains: “Some providers offer an inheritance protection guarantee. With this, a percentage of your property’s value will always be outside the equity release arrangement. This reduces the amount you can release, but it guarantees that you can leave something to your friends and family.”
Assess other options
Before taking equity out of your house, consider whether there are other ways to get the money you need.
“When we see someone looking for advice on equity release, we ask whether they have considered other ways to raise the money,” says Mr Moloney. “It might reduce the sum they take from their home or remove the need for equity release altogether.”
Mr Hale agrees. “Equity release is not right for everyone,” he says. “It is an expensive form of borrowing, so if you have savings or assets, use them first. Downsizing can be a good alternative if you’re not set on staying in your home. Always speak to your family first, as they may be able to help. Once you’ve exhausted these options, then consider equity release.”
Seeking specialist advice is essential. The equity release market is regulated by the Financial Conduct Authority, the financial watchdog, and you will need to see a specialist adviser if you do want to take out a plan.
An adviser must be certified to advise in this market. The two main qualifications are the Certificate in Regulated Equity Release from the Institute of Financial Services and the Certificate in Equity Release from the Chartered Insurance Institute.
Mr Moloney recommends speaking to a few advisers after checking out their credentials.
“Shop around,” he says. “Most advisers will conduct a full report for free.”
“I downsized instead”
Not all retirees feel compelled to stay in their own home. Olive Young (pictured left), 65, from Ilford, London, decided to sell up, take the money and rent instead. This not only helped her raise some money to help her family, but it also suited her changing needs.
“I was living in a maisonette, and as I’ve got arthritis, mobility was becoming an issue,” she explains. “I also wanted some money to help my daughter with her mortgage deposit.”
Olive contacted a company called Girlings, which specialises in renting properties to older people who want the peace of mind offered by secure tenancy agreements.
As a former civil servant, Olive is comfortably able to pay her rent with her pension, which pays a guaranteed income.
“Although I thought I wanted the security of an assured tenancy, I saw a place just opposite where I was living with a two-year shorthold tenancy and I loved it. It looked out on a park with a stream and, as it was south facing, I had sun all day long,” she says. “I talked to Girlings, and I was able to arrange a five-year shorthold tenancy, which suited me perfectly.”
With the five years nearly up, Olive is planning another move and is looking for a property with an assured tenancy in Southend-on-Sea, Essex. “I’m really looking forward to it: it’ll feel like I’m always on holiday,” she says.
As well as enabling her to help her daughter get on the property ladder, downsizing has really suited Olive.
“I didn’t want the responsibility of looking after a property as I got older: it can be expensive and also stressful finding people to do the work,” she says. “I’ve made lots of friends and been able to help out with my grandson, and my health has even improved.”
SAM BARRETT is a personal finance journalist who writes for publications such as Money Observer and FTAdviser.com