FISCUS MORTGAGES - INFORMATION AND ADVICE

Equity Release Mortgage

It is a common problem amongst retired homeowners that they are asset rich and cash poor. With the recent dramatic rise in property prices it is not unusual for an elderly person to own their home outright and have several hundred thousand pounds tied up in the bricks and mortar and yet still live on the basic state pension.

This presents the elderly with a serious problem. The cost of maintaining property is ever increasing, as is the cost of living. In recent years we have also seen huge rises in the amount of Council Tax being charged by local authorities. For a retired person on a fairly low income, the temptation is always there to sell off the family home in order to raise the cash to be able to afford a decent standard of living throughout retirement. Very often someone who would like to live the rest of their lives in the property that they have made into a home over a number of years, are forced, out of financial necessity, to sell up.

There is also the problem that a number of fairly modest homes now are valued at a level above the current Inheritance Tax threshold thus providing the Inland Revenue with another source of income from homeowners that have paid taxes throughout their lives and want to leave something for their children and grand-children.

HOW EQUITY RELEASE MORTGAGES WORK

Several lenders will now consider lending to retired borrowers, in order to release part of the equity in their homes to make their retirement a more pleasant experience.

Equity release allows the homeowner to benefit from a lump sum payment, a series of frequent payments or a combination of both. The mortgage (capital plus interest) is usually paid off when one of the following occurs:

- The borrower repays the loan.
- The homeowner moves into residential care, or some other form of long-term care.
- The homeowner moves to sheltered accommodation.
- The mortgage holder purchases another house and moves property. In this case, however, the equity release mortgage can often be transferred to the new property.
- If the mortgage provider exercises their right to repossess the mortgaged property.
- The death of the borrower.

With the exception of the loan repayment circumstance, any of the above will lead to the sale of the property that utilises an equity release mortgage. The monies raised from the sale of the home are used to repay the lender that has provided the equity release mortgage. The remainder of the money from the property sale is paid to the borrower. If the borrower is deceased, the remaining monies are passed on to the borrower’s beneficiaries.

TYPES OF EQUITY RELEASE MORTGAGES

There are several different varieties of this type of plan and some of the common terms used are Equity Release Plans, Home Income Plans and Home Reversion Schemes.

Equity Release Plans

With Equity Release Plans the interest is paid to the lender or alternatively rolled up to be settled when the property is sold, either upon the death of the borrower or if they decide to sell the property. This type of scheme is normally used by homeowners wanting to have a capital sum to spend, perhaps on home improvements or a luxury holiday. It can also be used as a tool to help plan to reduce a potential inheritance tax liability.

Obviously if the interest is to be repaid each month to the lender it is important to ensure that the borrower has sufficient income to cover such interest payments and allow for potential increases in the mortgage interest rate.

With several Equity Release Schemes the interest on the loan is not repaid until the death of the borrower or earlier sale of the property. At that time the whole amount of the mortgage and the accrued interest is taken from the proceeds of the house sale. This could dramatically reduce the value of any proceeds if interest rates were to rise or if property values were to fall.

Home Income Plans

Home Income Plans allow a homeowner to raise money during retirement in order to purchase an annuity, providing an income until the death of the borrower. The property is used as security and schemes vary in the amount that can be raised and what amount is ultimately retained by the provider of the scheme. We can guide you through the details of these schemes.

YOUR NEXT STEPS

Whilst these schemes require careful consideration on the part of the borrower, their family and their legal representatives, they are a useful and welcome method of raising capital. As an alternative to selling a cherished home, at a time when a homeowner is unwilling to consider that option, it is an avenue that should be considered.

However, as with all financial products, we advise against making your decision based solely on the information you have read. The best option is to speak to an Independent Financial Adviser (IFA), who can take numerous factors into account and find the best deals for your particular circumstances. If you would like us to put you in touch with an IFA, please complete our short mortgage enquiry form and we will have one call you within 24 hours.