The Question
My daughter has been helping us to solve some financial difficulties by looking into equity release or a retirement interest-only mortgage. My husband and I own our house, but we have fallen into debt and we are struggling with some bills.
From what she has told us equity release makes sense. But I am really concerned that we will lose ownership of our home. It sounds like the house will become the property of the equity release company and we will be paying to live there? Is this correct? I am quite confused.
Mark’s Answer
Thank you for your question, and I can understand that equity release can be confusing as there are two options with different features with equity release. Plus as you rightly mentioned there are Retirement Interest Only mortgages (RIOs) which are now also part of later life lending.
Firstly, with equity release one type of plan allows you to retain 100% ownership of your home – this is the most popular type of equity release called a Lifetime Mortgage. The second plan involves selling a share or all of the equity in your home to raise capital – this is a Home Reversion plan.
Let me explain, currently over 99% of all equity release products advised and purchased are called a Lifetime mortgage. The flexible Lifetime mortgage plan allows you to retain 100% ownership of your home in return for securing a mortgage that has a fixed rate of interest for the rest of you and your husband’s life.
This Lifetime mortgage is different from a conventional residential mortgage because you are in control of making payments and servicing the capital and interest. I assume you are aware with a conventional mortgage, the provider will demand that the interest or the interest and part of the capital is repaid each month and if payments are missed or not paid, there is a risk of repossession.
Assuming you and your husband are over 55 and your home is worth a minimum of £70,000 you are likely to be eligible for a flexible Lifetime mortgage dependent on a survey of your home.
Once an adviser has assessed your situation, they will make a recommendation and if that recommendation is for a Lifetime mortgage, you can secure the funds for the rest of your lives or until you need long-term care. You could use the funds to produce capital to assist with your lifestyle, consolidate and replace debts and ease your finances.
The decision to service the interest payments is your choice as the benefit of a Lifetime mortgage is that all plans allow you to make voluntary payments. However, if you chose not to, the provider would simply add the interest to the loan, and the loan will increase with compound interest.
With compounding interest, you are reducing the equity for your estate and the consequences will be made clear by your expert whole of market adviser before you consider an application.
The standard feature of all plans is flexible voluntary payments which means that you are in control of the future balance, without placing your home at risk. By this I mean you can make repayments up to 10% of the original amount you borrowed each year. Whether you chose to make payments, and the level of those payments is your choice.
The alternative to a flexible Lifetime mortgage is a Home Reversion Plan which involves selling a share of your home or all your home in return for a cash lump sum. The benefit is that you do not have to make payments, and you will be able to live in your home for the rest of your lives.
Once you and your husband have passed away or entered long-term care, the provider will sell the property and if you have not sold all your home to them, the remaining equity will be returned to your estate.
As noted, Home Reversion plans represent a small percentage of equity release plans as customers inform me that they prefer to retain ownership of their home and the more flexible features with a lifetime mortgage.
Finally, a Retirement Interest Only mortgage (RIO) is exactly that, it is a mortgage designed to provide you with capital for the rest of your life and you pay the interest on a monthly basis to retain a capital balance. Unlike equity release, a RIO is based on your retirement income, and you are contracted to make interest only payments.
This plan is attractive to customers as it guarantees the same level mortgage balance as you are paying interest only. However, the payments are lifetime commitment where a flexible lifetime mortgage, payments are at your discretion.
As you have several options, my advice would be to contact one of expert advisers, and you, your husband and daughter can listen to their whole-of-market expert advice once they have assessed your circumstances and made a recommendation for the best plan for your circumstances.
Meet our expert…
Mark Gregory, founder and CEO of Equity Release Supermarket, is here to answer your questions. Mark is an adviser himself with over 20 years equity release experience.
He launched Equity Release Supermarket 10 years ago and it has grown to become one of the UK’s leading equity release specialists.
Email kate.saines@emap.com to ask Mark a question
