The equity release industry, which is dominated by remortgages, lifetime mortgages and home reversion schemes, has certainly grown in popularity in recent years. While this article will focus predominantly on lifetime mortgages and home reversion schemes, will also include information on remortgages.
As life expectancy in the UK continues to rise, medical treatments extend life, and the older generation grows as a percentage of the overall population, equity release will be very important for many people going forward.
Continue reading to get all the nitty-gritty details of the different equity release companies.
Why Choose a Lifetime Mortgage/Home Reversion Scheme Over a Remortgage?
It is fair to say that the emergence of the lifetime mortgage/home reversion scheme industry has been encouraged by limited access to remortgages for older homeowners.
The fact that in many ways lifetime mortgages/home reversion schemes are still in their relative infancy offers significant encouragement going forward.
As demand for equity release schemes continues to grow, we will see more companies joining the sector, improving competition and all to the benefit of borrowers.
So why are remortgages not more readily available to older homeowners?
There are a number of factors to take into consideration such as:-
- Traditional mortgage terms are between 20 and 25 years
- Many older homeowners will fail the traditional affordability test
- Limited traditional mortgages available for over 50s
The mortgage/remortgage industry is huge and takes in an array of different borrowers such as:-
- Traditional high street banks
- Private banks
- Niche lenders
While historically many older homeowners would see a large reduction in their regular income in later years, the reduction is not as severe for many today. When the UK government took away formal retirement dates, they encouraged older homeowners to work well into their “traditional retirement years” on either a full-time/part-time basis.
There’s also the fact that the cost of living continues to rise each year, and it can be difficult to make ends meet on a state pension.
It would be wrong to suggest there are no mortgage/remortgage facilities for the over 50s, but they are few and far between. Perhaps as the UK population as a whole grows older, with a greater percentage of those over 50, we can expect more choice and more services focused on those over 50.
There are specialist mortgage providers at the moment focusing on those over 50, but due to a general lack of competition, the rates are not always as competitive as you might expect.
So, in summary, the vast majority of older homeowners are directed towards lifetime mortgages and home reversion schemes generally because of a lack of choice in the main mortgage market.
Equity Release Options for the Over 50s
As we touched on above, there is a growing competition to provide mortgage/equity release services for the over 50s but progress has been slow in many quarters.
Many experts believe that the sector will become more competitive as we live longer and work longer.
This will, in turn, obviously open new alternative doors for those looking at equity release but for now, the main options for older homeowners seem to be lifetime mortgages and home reversion schemes.
Who Offers Equity Release?
Before we move into the finer detail regarding equity release schemes, it is worth noting some of the more prominent participants in this sector.
Using data from the Equity Release Council, you can see that there are some well-known names offering equity release for older homeowners – as well as some you may not have heard of, yet.
A provider is a firm which is authorised by the financial services regulator to provide regulated lifetime mortgages and/or home reversion plans
- Scottish Widows
- Retirement Bridge Group
- Canada Life
- Nationwide Building Society
- Responsible Lending
- Legal and General Home Finance
- Onefamily Lifetime Mortgages Ltd
- More 2 Life
- Retirement Plus
- Pure Retirement
This list is by no means exhaustive, but it does give you an idea of the kind of companies and the significant funding being invested into the sector.
One other factor to consider, which we will go into in more detail with later on, is that while the above companies offer regulated products, many will also offer additional non-regulated products.
Those homeowners who choose non-regulated products to release equity from their home will have less regulatory protection.
Criteria for Equity Release
There are two main equity release options for older homeowners which are known as:-
- Lifetime mortgages
- Home reversion schemes
Before we look at the criteria for these two options, it is worth reminding ourselves of the subtle differences between lifetime mortgages and home reversion schemes.
As the name suggests, a lifetime mortgage is a loan taken out using your property as collateral to effectively release equity. There is no interest payments, as these are rolled up to the end of the term, with both capital and interest repaid when the property is sold.
Therefore, lifetime mortgage companies have no direct interest in the property itself.
The situation is slightly different for home reversion schemes where the lender will purchase a direct stake in the homeowner’s property. As a consequence, they do have a direct interest in the property with approval required, for example, if the homeowner wanted to move properties.
So, this is the subtle difference; lifetime mortgages are a loan using the property as collateral while home reversion schemes involve the direct purchase of a share of the property.
Criteria for Lifetime Mortgages
The criteria for these two options can vary between different operators but with a slight degree of variation, the criteria for lifetime mortgages is as follows:-
- Minimum age between 50 and 60 (depending on individual lender’s criteria)
- Minimum property value £80,000
- Minimum borrowings £15,000
- Property must be mortgage-free (can vary in cases)
There will also be certain circumstances where a degree of additional guidance would be required such as:-
- Properties requiring essential repairs
- Properties where proposed building works have not yet begun
- Preconstruction properties
To give the broader picture the following scenarios would lead to an equity release application being rejected outright:-
- Property in general poor condition
- Property undergoing alterations, extensions or repairs of a substantial nature
- Poorly maintained properties at the time of inspection
Quite understandably, you will probably get the idea that lifetime mortgage companies want a hasslefree property and a “vanilla” equity release agreement.
The situation is a little different in the broader mortgage market where lenders are more flexible and more willing to go that extra mile. It is fair to say that not all lifetime mortgage companies will work on such specific criteria, but it does give you an idea of potentially what to expect.
Criteria for Home Reversion Schemes
The broad criteria used for home reversion schemes are in many ways similar to lifetime mortgages:-
- Minimum age between 55 and 65 (can vary between lenders)
- Minimum property value £80,000
- Minimum borrowings £10,000
- Conditions apply on type of property
It is also worth noting that some types of property (and those in a specific location) may lead to your application being rejected.
This grey area takes in property types such as:-
- Retirement homes
- Ex-local authority homes
- Timber frame buildings
- Listed buildings
There is no one size fits all for the home reversion industry, and therefore you may need to make further enquiries if your property is in the above list.
You will often find a bias towards the more buoyant property markets of the UK with some areas experiencing restricted access to home reversion schemes. The simple fact is that as the home reversion company is investing in a property, they want to ensure that when the time is right, the property can be sold – at the market value.
Less liquid/less buoyant property markets may not offer the same kind of returns as the likes of the south-west and London, for example.
Benefits of Using a Broker
As you will see from the above information, nothing is really cut and dried regarding lifetime mortgages and home reversion schemes. Some companies have a minimum age, some companies prefer a particular type of property, and some simply won’t entertain properties in a certain area of the country.
As a direct result of the uncertainty in the marketplace, we have seen many people employing the services of mortgage brokers to find the best equity release deals for their situation.
When you consider that in 2019 the equity release market amongst older homeowners was worth just shy of £4 billion, it is essential that you seek professional assistance/advice.
When you begin to research the use of mortgage brokers, you will come across two distinctly different types. These are independent mortgage brokers and tied mortgage brokers.
Independent Mortgage Brokers
As the name suggests, an independent mortgage broker is not tied to anyone or group of lenders. They are able to scour the whole market for the best equity release deal for your situation.
There are obviously huge benefits to this level of freedom, effectively allowing borrowers to tap into an independent mortgage broker’s contacts and get the best deal.
It is also worth noting that sometimes the best deals are not promoted in public, with the likes of private banks and niche lenders often taking a more personal approach.
Tied Mortgage Brokers
A tied mortgage broker will only be allowed to negotiate with a relatively small group of lenders, thereby, in theory, making them less competitive.
However, what you tend to find is that the more successful mortgage brokers are able to channel significant business to their lending partners.
As a consequence, they can very often negotiate terms which are on a par with the best independent mortgage brokers and sometimes better.
Mortgage Broker Fees
It won’t take long to find some controversy in years gone by with regard to mortgage broker fees and perceived conflicts of interest. Thankfully, those scenarios are now few and far between after a change in regulations and a more transparent approach to fees.
There are basically three different types of fees related to mortgage brokers:-
- Commission from lenders
- Commission from clients
- A mix of the two
So, whether an independent mortgage broker or a tied mortgage broker, these are the typical types of income stream they work on.
Everything is totally transparent and above board. Before any agreement is signed, relationships with particular lenders would be disclosed.
How Many People Use Equity Release per Year?
There is no doubt that the level of equity release amongst older homeowners is on an upward curve. The situation has been dampened to a certain extent over the last two years by political/economic uncertainty, but there is certainly more to come from this industry.
Some of the bullet point facts to consider include:-
- Equity release lending for 2019 totalled £3.92 billion
- This was a marginal reduction from the £3.94 billion in 2018 reflecting political/economic uncertainty
- The market has more than quadrupled since 2009 when the total equity release figure stood at circa £950 million
- More than £1 billion of equity release was unlocked during the final three months of 2019
- Customers using equity release services hit a peak of 85,497 in 2019
- The 2019 figure included 44,870 new plans compared to 46,297 in 2018
- Average equity release interest rates fell to a record low of 4.91% in 2019
While there is a temptation to take a lump sum upon approval of your equity release application, the most popular form is a drawdown. Indeed a recent survey shows that 64% of new customers prefer the drawdown option as opposed to a lump-sum.
The drawdown option is more common in the lifetime mortgage sector and means that interest is only charged as and when drawdowns are taken.
There is potential for significant interest savings when you consider the figures against a lump sum one-off payment on which interest will be charged in full from day one.
Average Equity Release Numbers
There has been a lot of research into equity release over the last few years with recent surveys highlighting the average drawdown facility and lump-sum payment:-
- Average drawdown £63,963
- Average lump-sum payment £97,282
We know that the drawdown option is more popular, but it is interesting to see that the lump-sum payment is significantly higher on average. This compares to the average retirement income for a couple (before housing costs) of £31,668 according to a DWP report in 2017/18.
Therefore the average drawdown is around twice annual income rising to just over three times for the lump-sum option. It’s probably safe to assume that those looking at the lump-sum payment option require funds at relatively short notice.
This could be for an array of different reasons such as:-
- Debt management
- Pay off an existing mortgage
- Property renovations
Slowly but surely, these figures give us a greater understanding of why people use equity release and the level of funds taken. The average UK property is worth circa £250,000, which gives us an idea of the level of equity removed from homes.
It is fair to assume that many older homeowners prefer to retain a significant element of equity in their home to pass on to their families.
Equity Release Calculator
As the equity release industry continues to grow, so you will notice, there are more equity calculators available online. These are extremely useful tools, even if they are indicative, and will give you an idea of the general terms and conditions for the relevant options.
The ability to compare and contrast different withdrawal figures over different terms is extremely useful. There is also the ability to compare and contrast the distinct differences between lifetime mortgages and home reversion schemes.
While many people aged over 50 have been subtly directed away from traditional remortgages, this is not always the case. However, depending upon the terms of a remortgage and a lifetime mortgage/home reversion scheme, slowly but surely there may be more options emerging.
We know that the equity release industry is changing, competition is growing, and the number of participants continues to rise. Going forward, this can only be beneficial to the borrowers of tomorrow looking to release equity from their main asset.
Equity Release Interest Rates
Unlike traditional mortgages/remortgages, companies operating in this sector do not need to carry out a credit check on their customers. The simple fact is that the main benefit of these schemes is not only the release of capital from their home but the fact that there are no monthly repayments.
On the one hand with home reversion schemes the third party will take a stake in the property, and on the other, lifetime mortgages, interest is rolled up and paid off together with capital when the property is sold. In recent times there has been a premium on the interest rates charged compared to traditional mortgages/remortgages.
However, the above statistics show that the average rate fell to 4.91% in 2019, which is a new low for this type of funding.
The chances are that competition will increase in the short, medium and longer-term, and there will be more demand for equity release from older homeowners.
This will create greater competition with regards to interest rates/profit margins, but obviously, the headline interest rate will depend on underlying UK base rates. It will be interesting to see whether there is any further short-term softening in average equity release rates bearing in mind the historic low level of UK base rates at the moment.
How Are British Equity Release Companies Regulated?
When you consider the sometimes controversial reputation of equity release companies in years gone by, potential borrowers will be pleased to learn of significant changes in recent times.
The main products provided by lifetime mortgage/home reversion companies are fully regulated. This ensures that not only are the lenders under the FCA umbrella, but this also applies to advisers.
There are a number of regulatory issues to take into consideration such as:-
- Personalised advice
- Detailed record-keeping
- Challenging often incorrect customer assumptions
- Appropriate funding terms/conditions
- Transparency on broker/lender relationships
- Transparency on fees/commission
While these are standard regulatory issues, you’d expect to be associated with such a growing industry; it is refreshing to see them integrated into law in a formal manner.
As a side note, quite legitimately, you will come across unregulated products offered by regulated companies in the field of equity release. You should be advised that they are unregulated and not afforded the same level of regulatory protection as regulated products.
In some circumstances, unregulated products may be more appropriate for those with complex finances. This is why many people are turning to mortgage brokers to find the best deals.
Is Equity Release Safe?
As the industry continues to grow so the regulatory burden has been increased and consumer protection expanded. This increased level of protection also brings the equity release industry under the FCA complaints banner and associated legal protections.
If you requested a lump sum payment on completion of the funding agreement, then your future financial exposure is removed. If you requested a drawdown arrangement then in the event that the lender was to go out of business, your original agreement would still be honoured.
The likelihood is that the company’s loan book would be sold to a solvent vendor who would honour all future payments. It is important to all participants that the integrity of the market is maintained at all times.
Once you begin to delve a little deeper into the equity release industry, there is a lot to take on board. Where do you start, what is a fair deal, and what can you expect for the future? This is why the vast majority of those looking to release equity in later years are first looking towards the services of mortgage brokers.
Whether using an independent broker or a tied broker, you will receive guidance and potential alternative solutions for your funding requirements. It pays to take a step back and look at the broader picture because there may be opportunities to incorporate different elements of your financial setup into a more rounded package.
Once an appropriate path has been chosen, then it is in the hands of equity release specialists to negotiate the best deal for your situation. You will often find that some of the more competitive deals they are able to negotiate are not available to the general public.
Their mix of specialist knowledge and relationships with lenders is very important – benefiting borrowers.
How Can Equity Tree Help?
Here at Equity Tree, we have partnered with some of the UK’s leading Equity Release broker companies.
They have already helped thousands of people release equity already, and they can do the same for you.
Choosing an independent adviser means they won’t recommend a scheme unless they are sure it is in your best interests. Their advice is also regulated by the FCA, which gives you an additional layer of protection.
If you would like to speak to one of these equity release companies, click on the below and answer the questions.