Tighter regulations for standard mortgage lending introduced over a year ago seems to have had an effect on older borrowers. With the need to assess affordability, some lenders may now be less enthusiastic about lending on a mortgage term that will run into the borrower's retirement years. For this reason, some people are turning to equity release to help pay off the loan, should they be unable to remortgage.
Additionally, some borrowers on interest-only mortgages and nearing the end of their mortgage term, but sensing that there may be a shortfall in investments to pay off the loan, might also turn to equity release to make up the difference.
This is a problem that is unlikely to go away. According to the Financial Conduct Authority, around 600,000 interest-only loans will mature by 2020. Just under half of the borrowers are expected to be unable to pay off some, or all, of the outstanding loan. And with a third of them, the shortfall is expected to be over £50,000. This scenario then creates two key choices. Sell up and downsize to raise the required cash to pay off the loan or retain the home and perhaps opt for equity release to raise those funds (if taking out a new mortgage loan or extending the existing one is not an option).
So, it probably comes as no surprise that recent figures from the Equity Release Council have shown that equity release loans for the 55-64 age group accounts for 18% of all lending. The overall average age for take-up still sits at around 70.
While the new standard mortgage lending rules may reduce loan arrangements into the retirement years, a sizeable number of mortgage deals would have already been in place, and they too could present a problem. For example, continuing to pay off the loan each month when retired may put a strain on the borrowers reduced income. So, again, equity release may help to meet any shortfall.
If you have, or expect to face, issues with your standard mortgage loan, then it's obvious that you're not alone and, if you want to, contact us to see if an equity release plan could deliver the solution for you.
Lifetime mortgages account for around 99% of all equity release plans and can offer flexibility to meet your needs. A lifetime mortgage is similar in principle to a standard mortgage, with the main difference being that there are normally no monthly repayments to make and the loan, plus the monthly interest owed, is redeemed when you die or move into long-term care.
The amount of value that you can extract from your home tends to be largely influenced by the age of the youngest planholder and the value of the property. As a rough guide, there are differing percentages from aged 55 upwards. Broadly, it's 20% of the property value aged 60, 30% aged 70, 40% aged 80, and 50% aged 90+.
The benefit of not paying off the interest as you go along is that it may free up much needed funds for other use and it is one less regular payment to worry about. The downside is that the interest is added to the capital that you originally borrowed. To gauge the impact of 'roll-up', if the interest rate for the lifetime mortgage loan is 6%, for example, a £50,000 loan (with the added interest) would have doubled to around £100,000 after 12 years.
Drawdown enables you to take out an initial lump-sum to meet your immediate needs and then you have the option to drawdown a further agreed amount at a later stage against set time constraints.
About 65% of all plans taken out opt for drawdown (Source: Equity Release Council, 1st half 2015 data). The obvious benefit is that it will lessen the impact of roll-up if you don't release all of the money at the outset. There's no point having interest added to borrowings that you don't need at that particular moment in time. An additional benefit is that by taking out your loan in smaller blocks, it may enable you to also stay within limits for means-tested benefits.
However, do remember that the interest rate applicable when you do drawdown further funds may be at a different rate. Additionally, do consider products that guarantee the drawdown facility, so that you'll know it won't be an issue whenever you do come to act.
In much the same way as with a standard mortgage, there may be an early repayment charge against certain timescales, the terms of which would vary across the providers. As this is a complex area, it's essential that you take advice, so do get in touch to find out more.