Income shortfalls can be solved by releasing cash tied up in a house without having to move, writes Stephen Savill.
We are living through turbulent times. Interest rates are at a 14-year high and living costs are continuing to increase, fuelled by inflation and soaring energy costs. Most households are feeling the squeeze financially, and longstanding homeowners are not immune to these pressures.
While some are approaching the end of their mortgage or are tied in on fixed-rate deals for several years, others may have an interest-only mortgage, and be struggling to meet the affordability criteria to remortgage in the current environment. This juggle can become more acute in later life, especially for those who want to retire and are worried their pension won’t cover all their costs.
How to balance being asset rich, but income poor, especially in the face of an investment market which is more volatile than usual?
Thinking creatively can offer a way forward – finding a way to unlock the value held in a home to open up retirement opportunities. One way of doing this is through a later life mortgage – and these specialist mortgages, which enable homeowners to free up money without having to move, are gaining in popularity as they become more widely understood.
What is a later life mortgage?
Later life mortgage solutions do what they say on the tin – they are aimed at people aged 55 and over and tailored to individual financial situations. They offer owners a way to stay in their home while releasing money which can be used in a variety of ways, from repaying an existing mortgage or supplementing retirement income, to making home improvements or travelling.
For those who have an income and can afford to make monthly payments, a retirement interest only mortgage (RIO) could be the most appropriate solution. This loan releases a lump sum and is based on the income of the lowest earner. As it requires monthly repayments for life, there is a risk of repossession if these are missed. This type of mortgage is designed to be repaid when the last borrower dies or moves into permanent care.
One of the most popular later life options is equity release through a lifetime mortgage. This is a loan based on the property value and the age of the youngest borrower. There is no requirement to make any payments, although voluntary payments of up to 10% of the original loan can be made per year. And the equity can either be accessed as a lump sum, or as a drawdown facility with some money released immediately and the rest held in reserve for future expenditure. Rates are fixed at the initial release, and then at whatever they are whenever money is drawn down subsequently. Interest is only payable on money that is accessed. Ultimately, this type of loan is repaid from the sale of the property when the final borrower dies or moves into permanent care.
Equity release through a lifetime mortgage also brings additional safeguards. Firstly, a right to reside for life is built in. This is important where a couple is borrowing against a shared home, or where not wanting to leave an existing home is a key driver. Also, full ownership is retained, as with a standard mortgage, as a lifetime mortgage is about releasing equity which has already built up in the property. There is also a no negative equity guarantee. This would apply in the event that the eventual sale of the property, which is handled by the executors, is not enough to repay the original loan and any unpaid interest that has accrued. Any shortfall in this situation would be borne by the lender.
Another later life solution to raise capital
There is a second equity release option called a home reversion scheme, which is a sale of between 25% and 100% of the property in exchange for a lifetime lease and a cash lump sum, and/or a regular income. As this option is ideally used from the age of 65 and requires surrendering ownership, it is a less popular choice. In addition, only a maximum of 60% of the market value can be achieved through such a sale. However, there is no interest charge as it is a sale not a loan, so scheme holders can be sure of what percentage of their property they will be able to bequeath. Any percentage not sold is paid to the estate on death or move into permanent care, once the property has been sold on the open market.
For additional peace of mind, all later life mortgage solutions – like other financial services – are heavily regulated.
For borrowers interested in exploring the later life mortgage options available to them, we discuss all possible scenarios and provide illustrated plans to talk through and share with any beneficiaries as appropriate. A full and deep understanding of the numbers involved, and any future implications, is crucial before agreeing the best type of later life mortgage option to use. That is because our overriding concern is providing the best advice for clients to meet their objectives.
If you’d like to find out more about later life mortgages, please get in touch for a no-obligation chat.
Please note we do not offer personalised advice regarding home reversion. The information provided about home reversion is for general information purposes only and does not constitute financial or professional advice. Please also note, a mortgage is secured against your property. Your property may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it. To understand the features and risks, always obtain a personalised illustration.