The average price of a UK home has climbed by more than £60,000 in the most recent three years*, swelling the nation’s ranks of equity-rich homeowners.
The housing market and the broader economy are now cooling, however. Annual growth in house prices has eased to 8.3% and economic output has slowed to a crawl.
The shift in conditions has left many homeowners considering whether now is the right time to release some of that property wealth, either to act as a buffer during the cost-of-living crisis, to repay other debts, pay for home improvements or help family members.
Older homeowners who decide this is right for them are increasingly making use of a modern form of equity release, called a lifetime mortgage. A total of 13,452 new plans were taken out between July and September this year, up 34% on a year ago.**
Many borrowers still have questions about how lifetime mortgages, the post popular form of Equity Release, differ from regular mortgages. After all, both can be used to purchase or refinance, both give the lender a charge against the property, and both are serviced by paying interest.
To answer the most common questions, here are five key differences between lifetime mortgages and regular mortgages:
Lifetime mortgages allow borrowers to roll up the interest on top of the loan. That means the debt gradually grows, but there are no monthly payments. Alternatively, borrowers can pay some or all of the interest each month, or make payments when they have surplus funds. The flexibility removes pressure to meet monthly payments, which can be useful for those approaching retirement or facing a drop in income.
- 2. Goodbye affordability hurdles
Normal mortgages have strict affordability assessments which are getting tougher as interest rates rise. The size of lifetime mortgages are assessed based on the age of the borrower and the value of the property. That allows those in, or approaching, retirement to borrow more than they could otherwise. This has helped many older homeowners find a solution when their existing mortgage has reached the end of its term and they find they no longer meet the requirements of a mainstream mortgage.
Ordinary mortgages have a fixed end date, but lifetime mortgages end when the last surviving borrower leaves the property. For a couple this might be when both have passed away or moved into long term care, but it might also be on moving home, perhaps to downsize to a more manageable property.
- 4. You control how you borrow
Lifetime mortgages enable borrowers to extract a lump sum or set aside a drawdown facility. The size of any drawdown facility is agreed at the outset and can be tapped in the future should borrowers need to top up their income or meet any unexpected costs. You don’t pay any interest on the facility until you draw funds from it, and even then you only pay interest on what you have drawn. Plus, you can make lots of small withdrawals as well as large sums.
Lifetime mortgages have two layers of protection. The Financial Conduct Authority sets rules to protect consumers taking out these products, including a requirement that all lifetime mortgages are recommended by a qualified adviser. You can’t buy these directly from a lender, unlike ordinary mortgages.
In addition, the Equity Release Council has 5 product standards designed to enhance consumer protection even further. These include a No Negative Equity Guarantee, which means regardless of movements in the property market, you can never owe more than the value of your home, and the right to remain in the property for the rest of your life.
There are risks with borrowing against your property. The products are strictly regulated and cannot be sold directly. They can only be recommended by a suitably qualified adviser who will help you understand the risks before you decide to go ahead
*Halifax House Price Index, October 2022.
** Equity Release Council Q3 report