Research shows there is a lot of misunderstanding in the later life lending market. I often have conversations with clients who make statements such as ‘I do not want to leave a debt to my family’ or ‘I cannot release equity as I still have a mortgage’. What does not help with this markets poor reputation, is how quickly the debt can increase. Just a few years ago, typical interest rates where at 5.5% meaning if no interest or capital payments were made, the original debt would double in 12 or 13 years. Now interest rates are so low, a typical product at 3% takes 23 to 24 years to double.
Everyone’s personal circumstances are different and later life lending is not suitable for everyone but for many, it can transform their life or their loved ones. The past decade has seen a flurry of product launches and innovation meaning the options available for the 55’s and over has expanded hugely.
There are a variety of reasons for borrowing in later life. It could be to pay for home and/or garden improvements to make your retirement more comfortable. To pay off debts helping you keep more of your monthly disposable income. To help family members financially, such as getting on the property ladder themselves. It could even be to buy a new car or plan some holidays. The reasons for this type of lending is endless and can improve your financial circumstances. On all these options though, it is important to seek financial advice from a qualified adviser.
Some Typical Myths are:
Myth #1 – You’ll end up owing more than your home’s worth
Years ago, this was a common complaint as the lower standards in the sector meant that some customers could end up owing more than their home’s value. This is no longer an issue as most providers offer a ‘no negative equity guarantee’. This means you will never owe more than your home is worth, even if house prices fall significantly and the interest rolls up above that value, this sum would be written off. It is worth noting here that with interest rates at an all-time low along with so much competition in the market, later life lending has never been so cost effective.
Myth #2 – You cannot release equity if you still have a mortgage on your property
This is not true. In fact, this is a legitimate way to pay off your current mortgage, especially where the current mortgage is going to expire soon and due to the various lenders age restrictions, re-mortgaging could present a challenge. Certain later life products do not require any repayments so this could help if your disposable income is not sufficient.
Myth #3 – You won’t be able to move home
Much like with a traditional mortgage, you’ll be able to move and take your later life lending agreement with you – provided the new property meets the eligibility criteria of your provider. If it does, it should simply be a case of transferring the plan to your new home.
Myth #4 – I’ll have to make monthly repayments
Depending on the product chosen, this is not the case. This will form part of the decision to which product is right for you. Whilst some products do require a monthly repayment, many do not. You can choose to make some, all or none of the interest payments over the life of your plan.
Myth #5 - You’ll be forced to move out if your partner dies or goes into long-term care (or vice versa)
Typically speaking, if you’re living with a partner, you’ll probably be taking out a joint lifetime mortgage. If this is the case, there’ll be no need for you to move out of the property if your partner dies or goes into long-term care – the plan will run for as long as you remain in the property. However, if a partner moves in with you after you have already taken out a lifetime mortgage, they may have to move out when one of these events happens.
Myth #6 - It’s not regulated
The Financial Conduct Authority (FCA) regulate all later life plans.
Myth #7 - You have to repay the loan by selling the property
Actually, this isn’t set in stone, and there’s the possibility that your beneficiaries may choose to repay the loan another way. Most do this by selling the property, but they by no means have to – if they’ve got other funds available, either personally or through any additional monies from your estate, they could theoretically pay back the loan via other means and keep the family home. An important point to note is that the plan must be repaid within a specific period of time, usually 12 months from death.
Myth #8 – You have to take a lump sum payment
Not so. While it’s true that a lot of people choose a lump sum equity release plan – which, as the name suggests, means you get the full loan amount in one go – it isn’t the only option. Drawdown is becoming increasingly popular, with this plan type allowing you to “draw down” sums of money from your home as and when you need it. The advantage of this is that interest is only charged on the amount you’ve actually withdrawn, and as you’re taking smaller sums over a longer period of time, the resulting interest payment will be lower. This method could also be a viable way to supplement your pension income, letting you drip-feed smaller sums into your finances rather than taking the full amount of equity available to you at the outset.
Myth #9 - You won’t own your home
There’s a common misconception that all equity release plans mean the provider owns your home, with you merely being granted the right to continue living there. This is false – equity release in the form of a lifetime mortgage is simply a method of borrowing against your property, much like any other mortgage, with the difference being that you don’t have to make any repayments in your lifetime (unless you want to). There is a second, less common, method of equity release called home reversion, where you do sell all or part of your home to the provider.
With a lifetime mortgage you’ll continue to own your home, and as such can make any modifications you deem fit. Even when it’s time to repay the loan, the equity release provider won’t have any claim to the house itself – they’ll simply need to be repaid the amount they’re owed, usually through sale of the property, but as discussed above, if other money is available (e.g. if there’s sufficient money left in the estate) your home may not even have to be sold.
When contemplating later life lending, other options should also be considered. Have you thought about downsizing property and freeing up the equity? Do you have other savings that could fulfil you aims? Can a family member help, or would you consider taking in a tenant? Could you use your existing pension pot? All of these have there own advantages and disadvantages but all should be deliberated.
Please note – receiving a later life lending product may affect your ability to claim any state benefits that are means tested. Legal advice should be taken on any later life lending products.
With so many lenders and products now in the market, coupled with low interest rates, later life lending products are worth considering as part of your Financial Planning, especially if you want to enjoy your retirement.
Here at Blake and Day, we are registered for all types of mortgages and additional borrowing. Please contact Mark with any queries you might have and he will be more than happy to help you.
Get in Touch
We are always looking for new ways to exceed our clients expectations.
Feel free to contact us.
9am till 5pm Mon to Thu
9am till 4pm Fridays
Closed Saturday and Sunday
Braintree – 01376 743595
Felixstowe – 01394 775711