Equity Release for Over 70s – Detailed Overview
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Equity release for over 70s is a real possibility and may allow the homeowner to access a large percentage of their property value as a loan with no monthly repayments. Just because it is difficult to get home equity loans as a senior doesn’t mean accessing your equity is off the table. Uncover the key details with us here.
How to release equity from your home
Releasing equity from your home is achieved by taking out credit – usually a loan – that is secured against some of your available home equity. To calculate how much equity you have in your home, you need to subtract your remaining mortgage balance (plus any other debts secured by your home) away from the value of your home today – not the property value when it was purchased.
For example, if you have a £300,000 home with an outstanding £150,000 mortgage, you own 50% home equity which equals £150,000. You will not be allowed to borrow against all of your equity, but you might be able to borrow against as much as 85% of it in some cases.
The most common methods of releasing equity from your home are to take out a home equity loan, home equity line of credit (HELOC), or to remortgage and ask to borrow more secured by your equity.
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Can an elderly person get a home equity loan?
Elderly people can find it difficult to get a home equity loan or HELOC, especially for larger amounts where a longer repayment period is required. Lenders usually offer home equity loans to younger homeowners who are still working with a regular income.
But just because elderly people cannot get home equity loans easily does not mean they are not able to borrow against their home equity. Many senior homeowners decide to use an equity release product instead.
What are equity release schemes? Find out below.
Equity release explained
Equity release is a method of borrowing against your home equity that is exclusive to senior homeowners. It can be done with one of two standard methods known as a lifetime mortgage or a home reversion plan. Either type of equity release should only be considered from reputable companies that are authorised and regulated by the Financial Conduct Authority.
Despite these methods having significant differences, the fundamentals of how they work are the same. With either equity release method, the senior homeowner can borrow against their home equity to receive a cash lump sum or drawdown facility (regular repayments). This loan is not repaid through monthly repayments over a fixed term like other loans. The homeowner repays the loan after they die through some of the sale proceeds from their home, which must be sold to clear the debt.
The loan will have to be repaid earlier if the homeowner moves out of the property and into long-term care. The lender cannot repossess the property or force you to sell it for any other reason.
Why do people use equity release plans?
The main reason that seniors use equity release plans is to make their retirement more comfortable. What makes retirement more comfortable and creates a higher quality of living will be subjective. Some spend the money on annual holidays and home improvements. Others spend the loan on private at-home care and medical services.
The loan money can be given to loved ones as a way to give their inheritance early and help them buy houses or set up businesses. Note that any financial gifts to others within seven years prior to your death can still be subject to inheritance tax when applicable.
What is the catch with equity release?
Equity release can sound fantastic. You get a load of money that only has to be repaid after death. But there is somewhat of a ‘catch’. The total cost of equity release can be eye-watering. The amount you have to pay back out of your future property sale can be double or more than what you receive initially. This means you will have much less to pass on to family from your estate.
To illustrate just how expensive equity release can become, we’ve added some examples to explain each type of equity release.
The different types of equity release
Lifetime mortgages and home reversion plans are the two methods of equity release in the UK. The former is more common than the latter, but both are viable options and can provide benefits in different situations. We explain how each method works below:
- Lifetime mortgages
A lifetime mortgage can provide the homeowner with a lump sum or drawdown facility and will charge the homeowner interest on the amount taken out for the duration of the loan, possibly the homeowner’s whole lifetime as the name suggests. The interest is not required to be paid each month and simply adds to the total debt owed, but voluntary payments can be made to stop the debt from growing too big.
There are some variations of these mortgages, such as an enhanced lifetime mortgage. These are for people with poor health and a shorter life expectancy than someone their age. By answering medical questions and supplying medical records during the application, the homeowner might be allowed to release even more equity, which can come in useful if they need to pay for private care or private medical services.
- Home reversion plans
Home reversion plans also offer lump sums or drawdowns, but they do not charge any interest on the amount borrowed by the homeowner. To ensure the lender makes a profit on the agreement, they require the homeowner to agree to give them a percentage of the property’s future sale proceeds. This percentage is always much more than the percentage of equity they release – often double if not more.
For example, you might release 25% equity from your £200,000 property but in return must give the lender 50% of the future sale money. The lender is almost guaranteed to get twice back than what they lent to the homeowner (£100,000). But if the property increases in value, they get even more back in return.
Is there an age restriction on equity release?
Because equity release is exclusive to senior homeowners, you must be at least 55 years old to apply for a lifetime mortgage or home reversion plan. There may be some lifetime mortgages that are only available to people over 60, 65 or 70 years old. But as long as you are at least 55 years old, you’ll have plenty of options to release equity as a senior.
When you want to apply for equity release as joint homeowners, the youngest homeowner must meet the age requirement, meaning a couple aged 57 and 54 would not be able to apply just yet.
Is there an upper age limit for equity release?
Most lenders do not apply an upper age limit to their lifetime mortgages or home reversion schemes. In fact, Martin Lewis states that equity release is best left as late as possible. This is because there is naturally less time for the lifetime mortgage to accrue interest and become so expensive to repay.
Other equity release eligibility criteria
Getting an equity release plan is not just about meeting the minimum age requirement. There are other criteria you must meet which may differ between lenders. In general, you must:
- Be releasing equity from your main residence and not a rental investment or second property.
- Own a main residence that has a minimum value set usually around £75,000.
- Have already paid off your residential mortgage in full and have no other debts secured by your home.
Where can you get equity release for over 70s?
Over 70s have a number of options when seeking an equity release loan. They can use companies like Aviva or search high-street banks. Most of the time, the company that provides you with mandatory financial/legal advice can also help to find you the most suitable deals and make the application. There is a fee for these services which can be as high as 3% of your loan value.
Just remember to only opt for financial services and lenders that are authorised and regulated by the Financial Conduct Authority. You should also give preference to lenders that are members of the Equity Release Council because they offer additional protection, such as the negative equity guarantee.
This guarantee states that a lender cannot try to recover any debt that exceeds the money raised from your property sale. For example, imagine you had a lifetime mortgage for 20 years and then had to move into long-term care. If the total debt becomes bigger than what your property is now worth when it is time to repay, only the sale proceeds need to be paid to the lender. They cannot chase you for the additional debt.
Equity release for over 70s – a good idea?
Equity release can be a good idea for those who need credit but have no better alternatives. It is usually recommended to use equity release loans as late as possible. Martin Lewis himself has been on TV and stated to use them “as late as possible”. Considering equity release loans after 70 could allow you to release more equity or get a better deal.
Why consider equity release?
Equity release is usually chosen as a way to make retirement more comfortable, either as a financial cushion or to pay for home renovations and annual holidays. Some retirees choose to give some or all of the loan to family members to help them buy a home.
The main reasons to consider equity release are:
- The money is paid as a lump sum or drawdown
- The money can be spent as the homeowner desires
- The money is not taxed
- The homeowner keeps living in their home as normal
- The homeowner does not pay rent and cannot be evicted for normal reasons
- The homeowner does not make any monthly repayments
- The homeowner can volunteer repayments to reduce the debt and maximise the estate they pass on
What are the pitfalls of equity release?
One of the major pitfalls of equity release is not choosing to get independent equity release advice from a professional who specialises in this area of finance. They should be fully explaining all costs and exploring alternatives. If not, you could claim to have been mis-sold equity release.
Does equity release affect your state pension?
Taking out a lifetime mortgage or home reversion plan will not stop you from receiving your state pension in full. But equity release can affect eligibility to receive means-tested benefits that take into account your wealth before awarding payments.
Pension Credits is one benefit that is means-tested and can be affected by equity release. Your Pension Credit payments can be reduced by having £10,500. You might lose all access to Pension Credits, which can then stop you from receiving a council tax reduction.
This is best discussed when you receive financial advice.
Still considering a lifetime mortgage?
You’ll be pleased to hear that we have more free guides for over 70s considering a lifetime mortgage. You probably have plenty more questions about releasing equity with a lifetime mortgage – and we have answers. Search your question on our site now and find dedicated jargon-free guides.