Sunday, January 16, 2022

Should you take out a lifetime mortgage or go for an equity release? How the two options work

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Stock release plans can be very useful for those tight on cash or nearing retirement, but experts say you shouldn’t enter into any of these arrangements lightly. Paul Thomas reports

Data from the industry’s Equity Release Council (ERC) shows that more than 40,000 over-55s released cash from their homes in 2020 to fund renovations, pay down debt or gift money to loved ones.

Older homeowners released nearly £3.9bn of the equity locked up in their homes last year to help them get through retirement.

But while stock-splitting plans can be very useful for those who are tight on cash or nearing retirement, experts say you shouldn’t enter into any of these arrangements lightly.

Below we describe exactly how these loans work and what the alternatives are, so you can figure out if they’re the right option for you.

Equity Release is an acronym for two separate products that allow senior homeowners to release tax-free money from their property: lifetime mortgages and home reversion plans.

Lifetime mortgages are by far the most popular option. If you’re 55 or older, a lifetime mortgage lets you borrow for your home while retaining full ownership of it.

However, unlike a regular loan, you do not have to make monthly repayments. Instead, interest rates are usually rolled up and thus your overall debt grows over time.

That debt will be paid off when you die or enter foster care and your home is sold, leaving what’s left, if anything, to your loved ones.

Crucially, lifetime mortgages allow you to stay in your home for the rest of your life, meaning you don’t have to downsize to free up cash.

How much you can borrow ultimately depends on how much your property is worth and how old you are, but the absolute maximum is currently 58 percent of your property’s value.

You often have the choice of taking the money as a lump sum or withdrawing it in smaller, regular chunks, which comes in handy if you need the money to augment your income in retirement.

The other type of equity release loan is known as a home reversion plan, although these are no longer popular.

As with lifetime mortgages, home reversion plans allow you to release tax-free cash — in the form of a lump sum or as a recurring payment — from your home.

The main difference, however, is that you have to sell all or part of your home – usually below market value – in exchange for the money.

If you die or are cared for, your home will be sold and the provider will receive their agreed share of the proceeds.

For example, if you sell 50 percent of your property to a home repossession provider, they will take 50 percent if the home is sold on the open market and the rest will go to your beneficiaries.

Although you do not retain full ownership of your home, you are free to live in it rent-free for the rest of your life as long as you agree to keep it in good condition.

While lifetime mortgage rates have come down in recent years, they can still be a very expensive option as interest rates accumulate — or roll up — over time.

For example, let’s say you’re 65 and you borrow £40,000 at 2.44 per cent – the lowest rate on the market – against a £250,000 property.

If you choose to roll interest rates, your debt will have grown to £50,904 by the time you hit 75, according to the Equity Release Advisor Key. If you were lucky enough to live to be 90, your debt would have increased to £73,080.

However, remember that this is the lowest price on the market that not everyone will get. If your provider were to charge you 3 per cent instead – just 0.56 percentage point more – your debt would have more than doubled to £83,751 by the time you were 90.

Considering how expensive they can be, you have to ask yourself if a lifetime mortgage is right for you, especially if you have a legacy to leave loved ones.

Actually yes. Stock release plans are much more flexible than they used to be, and these days many providers, like Legal & General and Aviva, let you pay interest off each month. This stops your debt from growing and can end up saving you thousands.

For example, paying the £81 monthly interest on your £40,000 lifetime mortgage would cost you a total of £64,300 up to the age of 90 – about £8,780 less than if you let the interest roll up aloud button,

With other providers, for example, you can repay the entire loan after 10 years without penalty, which in turn can save you a fortune. This is something to consider if you need cash now but anticipate an inheritance at some point in the future.

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