Equity release mortgages explained
Growing numbers of older homeowners are turning to equity release so they can give a financial boost to younger members of their families whose incomes have been affected by coronavirus.
According to equity release provider SunLife, homeowners who unlock some of their property wealth via equity release typically use the proceeds to improve their own lifestyles.
Recently however, it has seen more enquiries from those wanting to offer support to loved ones who are struggling with the added financial pressures lockdown has brought.
Simon Stanney, equity release director at SunLife, said: “We have definitely seen a shift in the reasons why people are enquiring about equity release since lockdown started, from the more traditional ‘enhance’ to ‘gifting’.
“I think with so many people suffering financially it’s understandable that older homeowners – who have built up equity in their homes and are in a position to help – will be looking to support family in any way they can.”
How equity release mortgages work
Equity release schemes enable homeowners aged 55 or over to release some of the equity they own in their homes. The money is tax-free and can be used however you like.
Unlike a standard mortgage, where you repay some of the amount you’ve borrowed plus interest each month, with an equity release scheme, interest rolls up over time. It only has to be repaid, along with the equity released, when you die or move into long term care.
The most popular type of equity release scheme is a lifetime mortgage. This type of equity release plan enables you to choose to take the sum you’ve released either in smaller, regular payments or as a lump sum, and you retain ownership of your property.
The number of retired homeowners accessing the wealth in their property via equity release schemes increased in the first three months of the year, with the total amount released totalling more than £1bn.
The equity release mortgage market is on the up
Rachel Springall, finance expert at financial website Moneyfacts.co.uk, said: “The equity release market has had a buoyant start to the year.
“Indeed, according to the Equity Release Council, during the first quarter of 2020 the number of new plans taken out hit 11,079, the most seen in any first quarter period.
“In fact, £1.06bn of property wealth was accessed via equity release products, up by 14 per cent from £936m a year earlier.
“As the year progresses, it will be interesting to see how this activity may adapt to the ongoing influences of the coronavirus pandemic.”
What to consider before going for an equity release mortgage
Many people are drawn to equity release because it allows them to take money out of their property without having to make any repayments.
However, there are several things to consider before using this type of scheme, not least that it could affect your entitlement to some means-tested benefits. It will also reduce the value of any inheritance that you might have been planning to leave to your loved ones.
It can be expensive too, as equity release interest rolls up over time and is compounded which means the amount you owe increases every year.
Compound interest essentially means that at the end of the first month – or the first year, depending on the type of plan you have – the interest charged is added to the amount you’ve borrowed.
The following month or year, the interest you’re charged is worked out based on the amount you’ve borrowed plus the interest that’s already been added.
This continues over time, so that each year you end up owing more. Although when your equity release deal starts you’ll know the rate at which your mortgage rolls up and the sum borrowed, it’s impossible to know exactly how much debt you’ll build up overall as you won’t know how long it’ll be before you die or move into long term care.
Ms Springall said: “If borrowers are still sitting on the fence on whether to take out a lifetime mortgage, then they would be wise to set up a phone call or video call with their financial advisor to go through their options during the lockdown if they have the time to spare.
“However, it is also important to discuss the implications with their family on how such an arrangement can impact their inheritance.”
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