If you are over 55 and have an interest only mortgage then this short article might help you consider your options.
Back in 2013 Experian, with support from the FCA (then FSA), published a review into Interest Only mortgages which had been very popular options for people especially in the 1990s and 2000s. With incomes rising, house values rising and greatly reduced monthly costs they seemed a great solution for home owners.
But now many homeowners are approaching the end of their interest-only mortgage terms and may face some difficult decisions. With rising property prices and stricter lending criteria, obtaining a new mortgage may prove challenging or impossible. Selling their homes and downsizing might not be an appealing option either. In such scenarios, equity release could emerge as a viable solution.
What is Equity Release?
Equity release is a financial product that allows homeowners aged 55 or over to access the equity built up in their properties. This is achieved by taking out a loan against the value of their homes, typically without the need for monthly repayments. This lump sum is used to clear the mortgage and where monthly repayments are not selected the interest rolls up against the value of the house.
Why Consider Equity Release?
For homeowners with interest-only mortgages nearing maturity, equity release can offer several benefits:
- Avoids Forced Sale: Equity release enables homeowners to remain in their homes without the pressure of selling due to mortgage repayment concerns.
- Access to Tax-Free Cash: The lump sum received from equity release is typically tax-free, providing homeowners with financial flexibility to address various needs.
- Retains Ownership: Homeowners retain full ownership of their properties, with the right to pass them on to their heirs.
- Negative Equity Guarantee: Virtually all equity release products now guarantee that you cannot own more than your home is worth.
Note: Actually, as its hard to borrow more than 50% of the value of your home, so it’s very unlikely you will see the net value of your home reduce to zero. Advisers can produce documents to model how the interest will accumulate and compare this with the estimated house price growth for your area.
Eligibility for Equity Release
To qualify for equity release, homeowners must meet certain key criteria:
- Age: Applicants must be aged 55 or over.
- Property Value: The property must be in a good state and have sufficient equity to secure the loan amount.
- Location: Commercial premises and other factors can determine where lenders consider a property easily re-sellable.
Types of Equity Release
There are two main types of equity release products:
- Lifetime Mortgages: These allow homeowners to access a lump sum or drawdown funds as needed, with interest accruing over time.
- Home Reversion: This means selling your property at a reduced price but with a guarantee that you can live in the property until you pass away or go permanently into care.
Lifetime mortgages are by some margin the more popular choice as ownership of the property is retained and very few Home Reversion’s are established today though they were more popular in the past.
For more detail please see our dedicated equity release page which discusses other scenarios for equity release;
Considerations Before Choosing Equity Release
Equity release is a significant financial decision that should not be taken lightly. Homeowners should carefully consider the following factors:
- Impact on Inheritance: Equity release can reduce the value of the property passed on to heirs.
- Early Repayment Charges: Early repayment penalties may apply if the loan is repaid within a specified period.
- Impact on Benefits: Equity release may affect eligibility for certain means-tested benefits.
Seeking Professional Guidance
Given the complexities involved, it is crucial to seek professional advice from an independent financial advisor specializing in equity release. They can assess individual circumstances, provide tailored recommendations, and guide homeowners through the application process.
In conclusion, equity release can offer a lifeline for homeowners with interest-only mortgages reaching their end dates, particularly those facing difficulties obtaining traditional mortgages or unwilling to sell their homes. However, it is essential to approach equity release with caution, careful consideration, and expert guidance to make an informed decision that aligns with one’s financial goals and long-term plans.
Please do get in touch with us or another qualified adviser if you would like to discuss your options.
By Alex Fry (Equity Release Adviser)