There have been more and more adverts on television recently outlining the benefits of using Equity Release to raise capital from property to enhance retirement lifestyles by way of home improvements, holidays, debt consolidation and helping family members.
However, a further option with this increasingly popular over 55's mortgage is its ability to assist with a house purchase.
I thought it would be a good idea to investigate how Equity Release could be used to support someone to buy a new home. I have done some research, so let's look into this in more detail.
What is Equity Release?
Before we start, it is probably a good idea to give a quick explanation as to what Equity Release actually is. In simple terms, Equity Release is a way for homeowners over 55, whose property is worth at least £70,000, to release tax-free cash from their homes whilst they are still living there. There are restrictions on the types of property that may be eligible for equity release.
There are two types of Equity Release products:
A lifetime mortgage is a loan secured against your property that runs until you either enter permanent, long-term care or you die. This is the most popular product and is available to those aged 55 and over. There are a number of different types available and you are not required to make any repayments, but you can if you wish to. If you decide not to make repayments, the interest is added to the loan amount and can quickly increase the amount owed. When you pass away or move into long-term care, your home will be sold, and the money made from the sale will pay off the rest of the loan. Anything left over will be left to people in your will.
A home reversion plan allows you to exchange the ownership of some or all of your property for a lump sum of cash, along with the right to stay in your property, rent-free, for as long as you live subject to the lender’s terms and conditions. For this product, you need to be aged 65 and over. These plans involve the sale of part, or all, of the property and would result in a change to the title deeds and the sale will only achieve a percentage of the property value at below market value. This part of your home would belong to someone else while you continue to live in it until you pass away or move into long-term care. When the house is sold, the money is split based on the percentages you and the lender owns.
How can Equity Release be used to support someone to buy a new home?
The chances are you are aware of how a standard mortgage works. When funds need to be raised to assist with a house purchase, a mortgage is normally used to bridge the shortfall between the purchase price and any deposit already held. Equity Release can also assist a house purchase by using exactly the same principles as a mortgage.
After working in this industry for many years, my experience has shown me that as people move through their retirement years, their priorities and aspirations change. Their health may deteriorate, and as a result, their existing property may become less suitable if stairs or even the property’s location is unsuitable.
As a result, someone’s situation may dictate that a move to a more appropriate property is required. As the purchase price of a bungalow or new house could be more expensive, there may be a cash shortfall to fulfil the transaction. Equity Release can therefore be applied for on the new property to bridge the difference between the equity available from the sale of the existing house and the purchase price of the new house.
Is getting an Equity Release plan to help buy a new home complicated?
The short answer is no. The Equity Release application process is virtually the same as any standard mortgage:
Before you take out Equity Release, it is crucial you seek expert independent Equity Release advice. It is a regulatory requirement, and your application will not be accepted without it. That is where Optimus Mortgages comes in.
The first step is to have a free, no obligation chat with us to see if Equity Release is going to be right for you. If Equity Release is not right for you, we will tell you. If it is, we will arrange an appointment to carry out a full fact find with you. We encourage clients to involve their family or a trusted friend in these meetings, either online via a video call or on the phone. It is very reassuring to have the support and acceptance of others, and they may think of questions that haven’t occurred to you.
Once we have completed the fact find, we will complete our research for you. Our Equity Release advice is unique to you and your needs. Your dedicated adviser will take the time to understand you and your unique requirements, ensuring that they find and recommend the right solution for you.
Once your adviser has run through their suitability report with you, and you are happy to proceed, the application is submitted to the lender.
The mortgage valuation is carried out by an independent surveyor appointed by the lender.
The solicitor is instructed to commence legal work and enquiries made on behalf of the applicant.
Upon the return of a satisfactory valuation, an offer is then made by the lender.
Upon receipt of the offer, the paperwork is drawn up by the solicitor which is signed by the client.
Exchange takes place and a completion date is set.
On the day of completion, the solicitor requests funds from the Equity Release provider and along with the client’s deposit, transfers the proceeds to the vendor’s solicitor to complete the legal process & purchase.
What advice would I give my clients?
The most important thing to remember when it comes to equity release is that deciding to take out a plan is a major financial decision. It is important to take independent financial advice about this decision, and your own financial circumstances, and what you hope to achieve through Equity Release will need to be considered in detail. Equity Release is not the right solution for everyone, so having a no obligation consultation will help establish what is going to be right for you.
I encourage all of my clients to involve their families in all discussions regarding Equity Release. I find it useful to get their feedback on discussions, and the overall process is made easier if families are aware that an Equity Release plan is being taken, especially if the plan holder passes away.
An Equity Release plan is not the only option if you wish to move home in retirement. Borrowing money from a close friend or family member could be a preferable alternative to releasing equity from your home. Releasing capital from your property will reduce the amount of inheritance that can be left and may impact the receipt of any means-tested benefits.
If you want to find out more about Equity Release and whether it is right for you, please click on the link below to get in contact with me.
Equity Release may require a lifetime mortgage or home reversion plan. To understand the features and risks, ask for a personalised illustration.
Optimus Mortgages Ltd is authorised and regulated by the Financial Conduct Authority. Optimus Mortgages Ltd is entered on the Financial Services Register under reference 945578.
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