Please release me (some equity)
First published 08 April 2015 • Updated 25 July 2017
What is an equity release mortgage and how do they work? Why might you consider taking one out? Nick Walker, founding partner of FOCUS Independent Financial Advisers, explains a mortgage type that is seeing something of a rebirth.
Back in the early 1990s equity release became virtually taboo, due to mortgages being effected on a variable interest rate basis without any protection against negative equity. With rates of interest rising without any ceiling and with compounded interest charges eroding all the equity, borrowers found themselves in extremely precarious situations. Equity release mortgages were soon consigned to the mortgage dustbin, justifiably so.
Today things are very different. Competition and choice has seen many new providers enter the market, and with the majority of schemes now having fixed rates for the term of the mortgage, it is possible to calculate the exact future roll-up of interest. Coupled with this important protection, many lenders now offer a ‘no negative equity’ guarantee, meaning that the borrower will never face owing more than the property is worth. In addition, more innovative schemes available today mean that borrowers now have the choice as to whether or not they pay interest on a monthly basis, whether they take a lump sum or whether they choose a monthly income. Importantly, The Financial Conduct Authority has also insisted that all equity release mortgages can only ever be provided to borrowers with bespoke individual advice.
Given the gradual demise of interest-only mortgages to borrowers under the age of 65, equity release mortgages are often the only option available to some individuals if they wish remain in a particular property after normal retirement. Alternatives do exist of course (e.g. downsizing or moving to a less costly area) and these should always be considered, since equity release mortgages are not for everyone. However, such options may not be practicable, and in any case equity release can be a very effective way to provide cash for numerous purposes including home improvements, inheritance tax planning, medical or care costs, or simply a more comfortable retirement.
Common arguments against taking equity release mortgages include the potential roll-up of interest and the possible reduction in equity within the property. But against these valid points must be set the very appropriate and sensible reasons for considering equity release as a source of much-needed finance. In addition, with substantial equity in a property, the potential increase in equity due to price rises can well outweigh the increase in the balance of the equity release mortgage due to the roll-up of interest.
But remember, equity release mortgages are often complicated. It is therefore vital to seek independent financial advice when considering this type of mortgage. You should also ensure that other family members who might be affected are fully apprised of the planned arrangements.
Every equity release mortgage is unique and must be considered as such, along with all other appropriate options. The choice of products and options in this specialized field of mortgages allows borrowers far more flexibility in later life than ever before.
Brian became a widower at the age of 69, and decided to move from his home in Poole, Dorset and return to Oxford to be closer to his brother and sister (he has no children). His two-bedroom flat in Poole was valued at £225,000 and he had around £60,000 in savings. Similar properties in Oxford were priced at £375,000. Despite a good retirement income of £32,000 per annum, he was unable to obtain a traditional mortgage so decided to take out an equity release mortgage to make up the £100,000 shortfall. The mortgage was on an interest-only basis, where payments can be made to cover the cost of the interest to avoid compounding the interest charges, with the option to cease payments in the future if necessary in order to preserve cash flow. Brian is now able to enjoy life comfortably, in familiar surroundings close to his family, and has also been able to preserve the equity in his new home.
Nick Walker is a co-founder and partner of FOCUS Oxford LLP, Independent Financial Advisers & Independent Insurance Consultants. He has worked in the industry since 1976 and has personally arranged over 10,000 mortgages for clients ranging from multi-million pound bespoke arrangements to first time buyers and shared ownership schemes.
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