Can I use Equity Release to buy a new home?
David Forsdyke, Equity Release expert at Knight Frank Finance, explains how Equity Release is not only for raising money against your current home. It can also really help you when you move home
So can you use Equity Release to buy a new home? The simple answer is yes. Many people are surprised by this, as Equity Release is typically thought of as a way of releasing wealth that you have built up in your current home. However, it can also be a useful tool for the over 55s who want to move. To illustrate this, here’s a couple of scenarios I have come across recently:
Relocating to a more expensive area
A retired couple in their 70s wanted to relocate from the Midlands to the South East, to be closer to their children and grandchildren. They owned a home worth £700,000 and wanted to move to a similar property in the more expensive London commuter belt. Although a sideways move in terms of the property type, the new home costs £1million, £300,000 more than their existing property. They had enough savings to cover all the costs and could put the whole £700,000 from the sale of their existing home towards the purchase.
A Lifetime Mortgage allowed them to raise the extra £300,000 they needed to complete the purchase. By allowing interest to roll up they won’t have any monthly payments to worry about, and they only need property values to increase in value by 1% each year, for the £700,000 of equity to remain the same for at least the next 10 years (based on the current low interest rates available). In other words, if their new home increases in value to £1.1million in 10 years’ time, the loan will have increased to around £400,000 over the same period, leaving the same £700,000 of equity in the property.
Downsizing to a home in need of improvements
A couple in their later 60s recently retired and wanted to move out of Greater London. They still have a mortgage but would like to get rid of it, as the monthly payments are a bit of a burden on their new pension income. Their current home should sell for £1.6million and they found a country cottage for £1.2million. The £400,000 difference is enough to repay their mortgage, cover the stamp duty and absorb all the moving costs. But, the cottage could do with some modernisation and some new wiring.
A Lifetime Mortgage allows them to raise money for some immediate improvements without having to worry about monthly repayments. It also provides them with a ‘Reserve’ they can draw down in the future if they find other things that need doing.
For those not familiar with a Lifetime Mortgage, it is the most common form of Equity Release. A Lifetime Mortgage is a loan secured against your property. The loan has an indefinite term, which means you still own your home. Interest can "roll up" on top of the loan, so that you don't have to make any monthly payments. The interest and loan are both paid off when the last surviving borrower passes away or moves into permanent care, at which point the property is normally sold. You can pay the interest each month if you prefer.
If you would like to know more about what Equity Release and the increasing range of financial products available to older homeowners can do for you, please contact our Later Life Finance team. All our Later Life advisers are qualified in Equity Release and will take the time to explain how everything works. An initial meeting is completely free and without obligation. You can contact the team on 0203 918 7259 or visit the Borrowing Into Retirement webpages.