There is fear and concern in equal measures, with many people struggling to make ends meet as inflation pushes the cost of living higher. This is most acute amongst those facing retirement and limited income, even though many have a home without a mortgage. Forced to consider alternatives, more people are now looking to release equity in their property, with the average UK home now worth approaching £300,000.
The traditional method of remortgaging, a means of releasing equity, is not always applicable to those approaching retirement due to a reduction in regular income. However, there are two alternatives when it comes to equity release.
Lifetime mortgages
The significant difference between a lifetime mortgage and a traditional mortgage is that there are no monthly repayments with the lifetime option. Instead, interest is added to the outstanding mortgage each month, rolled up and repaid when the owner dies or moves into full-time care and the property is sold. While this does introduce an element of interest on interest, it also means there is no affordability test, paving the way to releasing equity in your home.
While some traditional mortgages offer a Loan to Value (LTV) ratio of around 80%, or even higher in some cases, the range for a lifetime mortgage tends to be between 20% and 60% of the property value. This is partly because of the impact of interest on interest and because the lender has no definitive date when the mortgage will be repaid.
This type of mortgage is traditionally available to those aged 55 and over. However, with many people forced to extend their employment careers, a traditional remortgage option may still be open to some.
Home reversion schemes
There is also an additional equity release option for those aged 55 and above in the shape of home reversion schemes. These are very different to lifetime mortgages, as an investor is buying a share in your property (up to 100%). However, you will live rent-free until you die or move into full-time care. Does this sound too good to be true?
Unfortunately, there are some issues to be aware of when it comes to home reversion schemes:
Valuation
Typically, a home reversion scheme company would look to acquire all or a share (at the discretion of the homeowner) of your property at a discount to the market value. This discount could be between 40% and 80%, depending on the property value, your age, and state of health. This means that you could receive anywhere between 20% and 60% of the market value of your property or part thereof. Usually, the older you are, the lower the discount because the buyer’s funds shouldn’t be tied up for an extended period.
On a positive note, as you have sold part of your property, there is no debt and, consequently, no repayments or tax implications. You will also live rent-free in the property, and upon your death or move into full-time care, the property will be sold, and the home reversion scheme’s share of sale proceeds will be distributed accordingly.
Occasionally, homeowners have enquired about buying back all or part of the share in their home. However, if you wanted to buy back a share of your property, you would be expected to pay 100% of the market price. Therefore, it is vital to take advice when considering a home reversion scheme, with many experts suggesting they are more suitable for those aged 70 and above.
Summary
Thankfully, several options exist for those looking to release equity in later life and part-fund their retirement. Initially, the lifetime mortgage and home reversion schemes fell outside the Financial Conduct Authority (FCA) remit. However, there have been significant changes recently, and the FCA is now regulating both options.