For many people of retirement age the house they live in is their most valuable asset. Whether they are still paying off an earlier mortgage or own it outright, they probably hold substantial equity locked into their home. At the same time it could be that a home-owner needs or could benefit from some extra cash – either as monthly income or lump sum. The problem is how can you keep the house and raise the cash. There are a number of possible solutions:
Equity release has been around for many years but has been given a new impetus by extensive and competitive advertising in the national press and the internet. Most equity release products are offered by insurance companies, and so are a bet on how long you will live and the future value of your house. As you would expect, insurance companies take a conservative view on both aspects of their investment.
So how does it work? Let’s assume that you have £100,000 equity in your home and want to raise £10,000. If you meet the insurance company’s criteria they will pay you £10,000, less an arrangement fee and any broker’s commission and other expenses, and the interest charged will “roll up” until you die or sell the house, at which point both the original £10,000 and the interest charges are repaid out of the sale proceeds.
Interest rates have come down from the 6% plus that insurance companies used to charge, but are still higher than normal interest rates. Even so, at an average 5% interest per annum a loan of £10,000 (before any up-front charges or deductions) would lead to a debt of over £15,000 after 10 years and over £25,000 after 20 years. Of course, if the interest rate charged increases with the bank base rate the debt will grow to an even higher level than in my example.
So before taking out an equity release loan it is essential that you check what you are committed to, and in particular:
- Commissions, arrangement fees and any other charges that will be deducted from the loan. Also your own legal costs
- Whether interest is fixed or variable with movements in the bank base rate
- Whether you have to pay off an existing mortgage, and any penalty costs incurred
- If you do not have to pay off an existing mortgage you will have to confirm that your current mortgage provider will accept a second charge over your property and agree any costs incurred
- Early redemption options and fees charged by the equity release provider if you decide to pay back the loan earler.
Retirement Lifestyle Booster
Retirement Lifestyle Booster provides an added extra monthly income secured on your home for borrowers between 60 and 79 years old. At the time of writing this is a new and innovative product and is only offered by the Family Building Society , so there aren’t many options. Let’s say your house is worth £240,000. Against this you can borrow a maximum of 25%, £60,000. So over a 10 year period Family Building Society will pay you £500.00 each month, after which you have to repay the loan of £60,000, either by realising other savings or selling the house and downsizing. As you draw down the loan you pay interest – currently 3.44%. However, the interest rate is variable, and early repayment fees are payable for the first three years, and you also have to pay a Mortgage exit fee of £100 and a set-up charge, so there are strings attached. Further details are available from their website.
In the past insurance banks and building societies have been reluctant to provide mortgages to people beyond retirement age. This is now changing and a few funders are now coming in the market with extended upper age limits for borrowers. These are conventional mortgage products, so there is no need to explain how they work. However, each mortgage provider will have their own rules and restrictions, but as this is a new market we can expect terms and conditions to become more relaxed as competition increases. Halifax have raised the maximum age to 80, followed by Nationwide to 85. New entrant Metro Bank may be worth considering – they claim a flexible policy towards their age cap.
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