Equity release in later life: the pitfalls and benefits of lifetime mortgages

Older homeowners keen to benefit from the equity in their properties are increasingly seeing lifetime mortgages as a way to free up capital. For some, this offers a welcome opportunity to access the funds to enjoy life, but there can be considerable risks involved, warns leading London law firm Hodge Jones & Allen.

Technically, a lifetime mortgage is a secured consumer credit loan with security over property, which does not require you to make repayments until your house is sold. It is possible, for example, to borrow £550K on a £3 million house and not be required to pay the money and accumulated interest back until you sell. Assuming house prices rise during the course of the loan, some part of the interest element will likely be covered by that increase. In a sense, therefore, you are borrowing against present and future equity.

Rates have fallen dramatically over the past year, with the average rate now at 5.53 per cent compared to 6.25 per cent 12 months ago, according to research by Moneyfacts.co.uk.

There are a number of reasons why older home owners might choose to borrow against the value of their home explains Ian Lane, private client  lawyer at London law firm Hodge Jones & Allen:  “Clients come to us looking to take on an equity release mortgage for a range of reasons. The most obvious is to free up cash for themselves, to improve their quality of life, enjoy cruises and holidays abroad or to spend more time on leisure activities.  Alternatively, we see parents who want to help their children financially, perhaps in order to get on the property ladder. Others are seeking to gift money to loved ones in order to avoid them paying inheritance tax on their estate later on.

“These are very good reasons for considering an equity release mortgage, however it is important to understand they are not for everyone and can be a considerable gamble.”

Ian says anyone thinking of taking out an equity release mortgage should consider:

  • Equity release mortgages can be very expensive.  Whilst it is possible to borrow large sums in this way, arrangement fees and interest rates are very high compared to standard mortgage rates.  Releasing equity will come at a significant cost. Over a period of say 15 years the original loan will likely double.
  • Children will miss out on an inheritance they may have been expecting. Rightly or wrongly many people assume they will inherit property from their parents and factor this into their financial planning.  If a significant chunk of the value of your home will be owed to the bank on your death, it may be wise to forewarn those who might have expected to inherit from you.
  • Selling your house if circumstances change will come at a cost.  Most equity release mortgages have a five-year minimum term which means you will be forced to pay considerable financial penalties if you sell before then.  It’s important to consider whether there is a chance you will need to move in the future, perhaps because your property becomes unsuitable due to ill health.
  • Consider what funds you may need in the future. We don’t know how long we will live for and therefore it isn’t easy to plan for the level of savings we will need to put by. You need to be confident that you won’t need the equity in your house later on, perhaps to cover the potential cost of care in later life.

Ian Lane says: “For some, these mortgages are a great way of unlocking the value of their houses to better enjoy later life or help out their children. The lender can’t force you to sell your house, they simply expect the money plus interest to be repaid on the sale of your property, which may well be after your death.  It is important however that those who enter into these arrangements do so with their eyes wide open to the potential pitfalls and ensure that it is the right thing for them.”

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