The Mortgage Clinic: 'How should we free up our equity?'
Wednesday 11 April 2007
My husband and I have just turned 60, and intend to work for perhaps another year. We now own our house outright, and my husband is keen on an equity release scheme, which would free up some money for our retirement - but I'm worried that we'll end up no longer owning our home. What are the hidden catches?
A. Most people look at equity release schemes because they want to access some of the value of their property, but continue to live in it.
This is, though, quite different to releasing equity in a property, which many home owners do by taking out a larger mortgage. Equity release is designed for older home owners, and indeed some families use it, in part, for inheritance tax planning.
The two main types of equity release schemes on offer are lifetime mortgages and home reversion plans. From last week (6 April) home reversion plans became regulated by the Financial Services Authority.
Home reversion plans involve selling your property now to a financial provider, in return for a cash lump sum and the right to live in the property, rent-free, for life.
With a lifetime mortgage, you keep ownership of the property and take out a mortgage, but instead of paying the mortgage interest every month, it " rolls up" and is paid, with the capital, out of your estate or if you sell.
In neither case will you be paid the full market value of the property. Lifetime mortgages, in particular, have to limit the sum they advance to prevent home owners going into negative equity.
"The amount of equity that can be advanced will depend on your ages and at the age of 60 is likely to be around 20 per cent to 25 per cent of the property value," says David Hollingworth, a director at mortgage brokers London & Country. "In fact, 60 is pretty young for equity release and most products carry a minimum age of 60." Some providers only offer release schemes to those over 65.
If you do opt for equity release, Mr Hollingworth suggests that a lifetime mortgage might be more practical as you will still gain from any increase in the value of your property.
"Some schemes now also allow a drawdown facility to be set up so that an initial sum can be withdrawn but access is guaranteed to further funds as and when they are needed. This means the interest will roll up at a slower rate, as the funds need not be released all at once," he says.
Lastly, don't rule out selling your house and moving to a smaller property. Moving is the only way to unlock your property's maximum value, and stay debt-free.
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