With the use of equity release surpassing 3 billion in 2017, an increase of 120% since 2016, could equity release really be the solution in helping an estimated 1.7 million mortgage customers pay off their interest-only mortgages? This issue is particularly worrying considering 200,000 of these customers have their loan maturing within 2 years, and many are in their 60s, 70s and above.
With interest only mortgages, the borrower agrees to pay the interest each month but makes no capital repayments. Borrowers are expected to have some sort of repayment vehicle in place, whether that be an investment, lump sum or endowment. However, the shortfalls produced from these vehicles can be attributed to mis-selling, poor performance and in other cases borrowers just simply never setting anything up.
What are the options?
Many could be considering the recently introduced products from mortgage lenders such as Hodge Lifetime, offering lending into retirement; but this will only go so far with affordability assessments still being required along with provable repayment plans and minimum equity requirements. Similarly, lack of pension planning has resulted in small pension pots, declining annual pension income and 1 in 8 retirees in 2018 retiring with no private pension at all! Therefore, with consumers facing retirement with high mortgages; how will they fund these when their income is low and affordability checks are still taking place?
With this lack of pension provision, the alternative is to downsize. However, a recent survey carried out by L&G signified that poor housing and inflated house prices have resulted in over 50% of over 65s stating they would not consider downsizing an option. This poses the question that if they can’t afford to sustain the mortgage and don’t intend to downsize, what other options do they have?
Property prices have increased five-fold in the past 25 years so many people have the majority of their wealth tied up in their homes. It comes as no surprise then that the public want to access this cash without having to downsize
Could Equity Release be the answer?
On one hand, equity release or more specifically lifetime mortgages operate differently to generic mortgages. In most cases, monthly repayments aren’t required (but are an option) and therefore income multiples aren’t taken into account when determining the loan size. Instead, interest is rolled up with the initial borrowing that is calculated based on the age and health of the applicant, and the property value.
Equity release also doesn’t require downsizing. As previously mentioned, the interest is added to the initial borrowing which although increases the debt, does provides peace of mind that you don’t have to move to a smaller or cheaper property. Most lenders include a ‘no negative equity guarantee’ on their lifetime mortgages and this ensures that the roll up of debt does not exceed the property value; but the added interest will eat into the equity and reduce the potential inheritance for the beneficiaries.
However, borrowers may be able to build in an ‘Inheritance Protection’ on a lifetime mortgage which will provide a useful benefit to those wishing to avoid repayments and still provide some inheritance to their beneficiaries. Although the initial lump sum will be reduced, this proves beneficial to those wishing to leave a percentage of the property to their loved ones.
Equity release products are available for the older generation – the minimum age is usually 55 or 60 with big player providers such as Aviva or Legal and General. At the lower end of this age group lender will release approximately 35% of the property value so it’s worth bearing in mind, if your conventional mortgage is operating at a high loan to value ratio (LTV), then equity release may not work for you
What Interest rate can you expect to be charged?
Interest rates on equity release products have always been higher then generic mortgage rates, but the growth in the market has led to intensified competition leading to rates being available under 4% (as at September 2018). Considering no payment is required, this is highly competitive and under most conventional mortgage lenders Standard Variable Rate (SVR). Halifax, for example, are the part of the largest lender in the country and their SVR is currently 4.24%.
Equity release will not be the right option for everyone, but it may be worthy of consideration for many older customers, particularly those on low incomes who face losing their homes if they cannot find a way of paying back their interest-only mortgages.
At PF Financial we have continued to grow and develop our understanding of this ever-growing market. We are graduate members of the Later Life Academy so have an excellent understanding of the requirements of older clients. As independent advisers we will ensure you fully understand all your options relating to equity release, so you can make an informed decision on whether it can help you. Please contact us for a free, no obligation initial discussion.
Learn more about our Equity Release services here