Is equity release a good way to pay off your home loan?
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Version 0 of 1. The number of people raiding the equity locked up in their home to pay off their interest-only mortgage is set to rocket. But is signing up for an equity release plan a good idea? And what are the other options for those who took out an interest-only deal perhaps 20-25 years ago who are now staring down the barrel of a hefty shortfall? The City watchdog has identified 2017-18 as the first of three “peak periods” when large numbers of interest-only mortgages will mature. It estimated that about 85,000 of these home loans are due for repayment this year, and then the same again next year. This has in turn prompted claims that the equity release market stands to benefit hugely. The Financial Conduct Authority has previously warned that many of those with maturing interest-only mortgages may not have enough money to pay what they owe. With this type of home loan, the borrower agrees to pay off the interest each month but makes no capital repayments. Borrowers are expected to make sure they have an investment plan in place – traditionally an endowment policy – to pay off the debt at the end of the term. However, some people are facing a shortfall because their endowment has underperformed. Others never set anything up and have given little or no thought to how they will repay the capital. What lenders are doing In cases where someone with a maturing interest-only mortgage is unable to repay the capital but doesn’t want to sell their home, their lender will sometimes agree to extend the mortgage term at the same time as switching the loan to a repayment basis. However, because the individual will be paying back capital each month as well as interest, their monthly repayments will be higher. Also, their age may well be a big factor, says David Hollingworth at mortgage broker London & Country. Getting on for half of the people whose interest-only loans are maturing this year and next will be over 65. Some lenders have maximum age caps – often it’s 70 or 75. As Hollingworth explains, a homeowner in this situation might be prepared to make such a switch, but if they are then bumping up against their lender’s maximum age limit, this may shorten the mortgage term to such a degree that it means the monthly payments would be unaffordable. However, he says some lenders are more flexible than others on age, and adds that in some cases it might be possible for the borrower to continue on an interest-only basis. For borrowers with limited options equity release might be a solution. The basics Between 40% and 50% of those with no repayment method should find hope within the equity release market Equity release is a way for older people – the minimum age is usually 55, sometimes 60 – to get cash out of their property without the need to move home. Typically, there are no monthly repayments. Leading providers include Aviva, Legal & General, More 2 Life and LV=. It can prove an expensive way to borrow because the way these schemes usually work means you end up paying interest on interest, so that over 18 years, say, the total owed can easily double. Generally speaking, for most older people the most financially effective way of releasing equity will be to move to a smaller property or a cheaper part of the country. The most common equity release schemes are mortgage-based products secured against your home and repaid – usually from the sale of the property – when you die or go into long-term care. These are known as “lifetime mortgages” and allow you to take out a loan on your property in return for a one-off lump sum or regular smaller sums. Some products give people the option of paying the interest as they go, says Nigel Waterson, chairman of main trade body the Equity Release Council. How much? The amount you can borrow via equity release usually depends on your age, the value of your property and sometimes your health. Let’s take someone aged 72 with a £300,000 house. They could typically borrow a maximum of £123,000 from Just (the new name for the combined Just Retirement and Partnership Assurance), £114,000 from Aviva, or £96,000 from Hodge Lifetime, according to calculators on their websites. Dean Mirfin at independent specialist firm Key Retirement crunched some numbers for Guardian Money. He says someone who wants to release £60,000 as a lump sum upfront could take an equity release loan with More 2 Life which has an interest rate of 4.26%. After 22 years (the average remaining life expectancy in this scenario) the total amount owing – the loan plus interest – would have swelled to £151,635. Earlier this month Key Retirement published a report showing that last year the average equity release customer accessed nearly £78,000 from their property, with more than one in five using the funds to clear an outstanding mortgage. How old? The average age of those releasing equity has risen in recent years and now stands at 72, though Mirfin says: “Because of interest-only we are expecting that to fall. A lot of interest-only mortgages were written to age 65.” The downsides All members of the Equity Release Council offer a “no negative equity guarantee” which means customers will never owe more than the value of their home. But that could still mean your family is left with little or nothing from your property when you die. Also, some people with maturing interest-only mortgages won’t be eligible for equity release. Mirfin says: “Our analysis shows that between 40% and 50% of those with no repayment method should find hope within the equity release market. But some will simply have too high a loan-to-value for existing products to help.” Any other options? Yes, possibly. There is the 55+ Mortgage from retirement specialist Hodge Lifetime which, as the name suggests, is exclusively for over-55s, but isn’t an equity release deal – it’s a standard mortgage where you pay the interest on the loan each month and retain 100% ownership of your property. It’s available for house purchases/remortgages, but can also be used to raise capital – ie, to consolidate existing debts. There are three rates available for the 55+ Mortgage: a two-year fix at 3.1%, a 3.3% five-year fix, and a two-year discounted-rate deal with a pay rate of 2.99%. We are seeing a shift to people gifting an inheritance early because the child needs it now more than ever A helping hand Could equity release play a bigger role in helping younger people get on the housing ladder? Not all older people are accessing the value locked up in their home in order to pay off debts. Some are doing it to help their children or grandchildren buy a place of their own. Around 24% of people who released equity in 2016 used the money to help family or friends, according to Key Retirement, a leading firm in the sector. Often this will take the form of cash given to younger family members to help towards a deposit, or to help with the cost of a wedding or university. “We are seeing a shift to people gifting an inheritance early because the child needs it now more than ever,” says Alice Watson, head of marketing for equity release at specialist firm Retirement Advantage. Last summer Key Retirement published research showing that more than two-fifths (44%) of those unlocking equity to pass on to family members were gifting £20,000, 18% were paying out more than £50,000, and 6% more than £100,000. It found that where they were helping someone get a foot on the property ladder, the average amount contributed was £33,350. “Many retirees don’t relish the thought of their children and grandchildren going without, and are happy to step in to ease the financial pressures on families just starting out,” the firm said. |