Equity Release for Over 65 – Complete Review
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Equity release for over 65 does exist and it includes no monthly repayments. Sounds too good to be true? Well, you need to hear this.
Deciding to use an equity release plan when you are older than 65 can be a smart move that enables you to borrow against more equity than normal. Learn the finer details right here.
What is releasing equity?
Releasing equity is when you take out the monetary value of an asset, usually through a loan. One of the most common methods of releasing equity is to get a home equity loan, which as the name suggests is a loan secured by your home equity.
Equity is the value you hold within an asset, which makes home equity the value you own in your property. You can work out the amount of home equity you have by subtracting your outstanding mortgage balance away from the current value of your home (not the value of your property when you bought it!).
For example, a £200,000 property with a £50,000 existing residential mortgage would mean the homeowner has 75% home equity equating to £150,000. With a home equity loan, the homeowner can access up to around 80% of their equity as a loan and repay this money over a fixed period with interest. It’s a method of borrowing large amounts at competitive interest rates.
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Can an elderly person get a home equity loan?
Home equity loan lenders are reluctant to give secured loans to people over a certain age. These people may not have a regular income to afford repayments for the duration of the repayment period, or the lender may worry that the homeowner could pass away before the loan is repaid, which may then not be paid back at all.
But there is a way for senior homeowners to release equity from their home, simply called equity release.
What is equity release?
Equity release refers to two types of financial products called lifetime mortgages and home reversion plans. Although these two types of equity release are different, the fundamentals in how they work are the same.
They both allow the homeowner to take out a loan as a lump sum or drawdown facility. Either form of equity release does not require the homeowner to make any monthly repayments at all because the debt is only repaid after the last surviving homeowner dies and the debt is repaid from the sale of the property. The lender will force an earlier property sale if the homeowner moves into long-term care.
It is mandatory to speak with an equity release financial adviser before you take out a lifetime mortgage or home reversion plan. They will explain all costs and should help you look at alternative options as well. You should only choose financial advice from a company that is authorised and regulated by the Financial Conduct Authority.
Lifetime mortgages vs home reversion plans
A lifetime mortgage is the most used type of equity release plan among UK seniors. Lifetime mortgages allow homeowners to access their equity as a lump sum loan or drawdown loan. The lender applies a fixed interest rate to the loan which does not have to be repaid each month either.
The interest rolls up and gets added to the total debt, which can make the total debt grow significantly over time. Some homeowners make voluntary interest repayments to prevent the debt from escalating too much. With a lifetime mortgage, the homeowner can access up to 60% of their home equity at best.
Fewer seniors use a home reversion plan but that doesn’t mean they should not be considered. This equity release method may allow the homeowner to also access a lump sum or drawdown loan, but no interest is charged on the loan amount.
The Equity Release Council
The Equity Release Council (ERC) is a membership group that invites all legal advice companies and lenders to join. It is not mandatory to join the ERC, but it can have benefits to these businesses by making them more attractive to senior homeowners considering releasing equity.
All members of the ERC agree to abide by the group’s rules and guidelines, which are predominantly made to serve the interest of the senior homeowners. When a lender is an ERC member, the homeowner knows that they must agree to the rules that protect them and typically makes the lender more appealing than lenders that are not members of the ERC.
We discuss some of these rules later in our equity release for over 65 guide.
Who qualifies for equity release?
To qualify for equity release you must be a senior homeowner wanting to borrow against the equity in your main residence, which you own with no outstanding mortgage, or in some cases only have a small outstanding mortgage to pay. The property may have to meet the lender’s minimum valuation for equity release and it will be assessed to ensure it meets building regulations and other criteria.
Is there an age limit on equity release?
Equity release is only available to senior homeowners over 55 years old. Some lifetime mortgage and home reversion plan providers may set higher age restrictions, meaning you can only apply if you are 60+ or 65+. There is no maximum age limit to use equity release.
Equity release for over 65
Releasing equity when you are 65 or older can be even more beneficial than releasing equity when you are slightly younger. Equity release lenders allow older applicants to access more of their home equity than those that have just turned 55, which could help you get a bigger loan. It might even help you to secure a lower interest rate if you are taking out a lifetime mortgage.
Martin Lewis says that you should release equity “as late as possible”.
Why release equity after 65?
Equity release for over 65s can be used to help fund their retirement, which is the primary reason that over 65s choose a lifetime mortgage or home reversion scheme. What this means exactly can be different for different homeowners. Some may just want a pool of cash to help them pay for everyday expenses and make their quality of living better. Others may use the money for holidays, home improvements or to pay for at-home care services each week.
The money might be gifted to family members to help them buy their first home. It can be rewarding for children to use the money and gain something from it while they are still alive to see it put to good use. Just note that financial gifts within seven years of death are subject to inheritance tax when applicable.
What is the catch with equity release?
The ‘catch’ with equity release is that it can be very expensive. This is best illustrated with some examples:
If you took out a lifetime mortgage for £65,000 at a fixed interest rate of 6.4%, and after 12 years you need to move into aged care, the total amount you would owe at this point will be just shy of £137,000.
If you agreed to a home reversion scheme giving you 20% equity of a £200,000 home today (£40,000) and then had to give the lender 60% of the sale proceeds in the future when the home is now worth £220,000, your £40,000 loan would cost £132,000.
By costing so much, equity release can significantly eat into any inheritance you had planned to give to your family.
Is equity release a good idea in retirement?
There are many reasons why you would still go ahead with equity release in retirement as an over 65, such as:
- You can choose to receive a lump sum or drawdown in most cases
- The money can be spent as you wish, or even given away to loved ones
- You make zero repayments on the capital or interest (when applied)
- You can volunteer repayments to reduce the total debt
- You continue to live in your home as normal
If you use a lender that is a member of the Equity Release Council, there are further assurances and benefits of choosing equity release, including but not limited to:
- The lender promises to never try to evict you and sell your home for other reasons unless you lie or commit fraud on your application.
- The lender agrees that you never have to pay debts beyond the sale proceeds from your home, known as the negative equity guarantee. Your debt could exceed the property value if you have a lifetime mortgage for a long time and/or the value of your home decreases.
- The lender agrees to let you move to suitable properties and take your lifetime mortgage with you.
What is the downside of equity release?
Aside from the overall costs of equity release and the effects this has on the estate you leave behind to loved ones, there are a couple more downsides to equity release. Taking out an equity release plan could stop you from being eligible to receive some means-tested state benefits because of your new wealth. Moreover, there may be various costs involved with getting equity release products, including advice and set-up fees.
Does a lifetime mortgage affect your state pension?
Taking out a lifetime mortgage will instantly increase your wealth. If the money is not spent quickly and sits in your bank account, you may lose access to some means-tested state benefits. The good news is that your basic state pension is not means-tested so you cannot lose access to this because of equity release.
If you receive Pension Credits as well, these payments may be reduced or stopped after equity release because Pension Credits are means-tested.
Can I downsize after taking out a lifetime mortgage?
It can still be possible to downsize to a less valuable home after taking out a lifetime mortgage. However, you will need to repay some of your loan early to do so, which can activate expensive early repayment charges.
If you already have downsizing plans, it is best to let your financial adviser know. They will search for plans that include a downsizing clause that enables you to downsize at any time and repay some of the lifetime mortgage without incurring any early repayment fees.
Can you be denied a lifetime mortgage?
You can be denied lifetime mortgages if you have previous debts and arrears that have resulted in a CCJ or Charging Order on your property. But the most common reasons for being denied a lifetime mortgage centre around the way the property is built, its location, the percentage of the roof that is flat and its flood risk.
Are lifetime mortgages subject to tax?
All equity release loans are tax-free, just like any other loan in the UK. You will not have to pay any Capital Gains Tax or income tax on the money you receive because you will have to repay the debt eventually.
Start your equity release journey with MoneyNerd
If you meet the minimum age for equity release, why not learn more about it and how it works with MoneyNerd. You’ll need to get financial advice eventually, but all our introductory lifetime mortgage content is 100% free and written without jargon. Check more of our guides out today!