There are numerous ways in which you can release equity from your home, which we will cover in detail in this article. These fall into two main categories, traditional remortgage to release equity and then we have schemes which are popular with older homeowners.
With a traditional mortgage, you will still have monthly repayments, but with lifetime mortgages/home reversion schemes, there are no such payments.
So, what factors do lenders consider when looking at equity release applications?
Types of Equity Release
There are three basic reasons why you may find yourself with a significant degree of equity in your home:-
- An uplift in the value of your property
- A significant element of mortgage capital has been repaid
- A mixture of the two
While having equity in your property is obviously a welcome fallback in the event of financial distress, there is no guarantee it will continue to rise, and it is not creating a direct return.
Yes, you may see further capital growth in the value of your property which will increase your equity, but nothing is guaranteed.
There is a general misconception that a remortgage is somehow different from a mortgage when in the vast majority of cases, the application process is the same.
However, the authorities recently introduced what is known as a “modified affordability assessment” which we will also cover – this relates to specific circumstances.
So, when applying for a remortgage, a lender would consider:-
There seems to be a general drop-off in remortgage eligibility for those aged over 50. This is despite the fact that more and more people are working beyond the traditional retirement age on a full-time/part-time basis.
We have seen some niche remortgage lenders emerging to address the issues for those over 50, but very often they will attract higher interest rates/shorter mortgage terms.
As we touched on above, the vast majority of remortgage applications will need to go through an affordability test. Under normal circumstances, this process will stress test an applicant’s financial situation under different interest rates.
The idea is simple: if there was a significant increase in base rates and mortgage rates were to follow, could the borrower’s finances handle this?
In light of the 2008/9 US mortgage crisis, UK authorities under the leadership of the FCA introduced an array of strict criteria for mortgages and remortgages.
Under current regulations, the maximum funding is set at 4.5 times a borrower’s annual income or 4.5 times joint income for a joint mortgage. In reality, the 4.5 times multiple will not be available to the majority of applicants, only those with a robust financial status.
The lower the required LTV ratio, loan to value ratio, the less risk to the lender, which will often mean the application is looked at in a more favourable light.
As we have mentioned on numerous occasions, when you strip out the various elements, lending is based on the risk/reward ratio. High-risk applications will attract higher interest rates, and low-risk applications will attract low-interest rates.
The deposit on a property is directly linked to the LTV ratio in that an LTV of 80% equates to a deposit of 20%. While full remortgages can be looked on a little more favourably, they tend to abide by the natural split for a traditional mortgage.
If there is a significant equity content in your property, then you would simply partially remortgage your property which could negate the requirement for a deposit.
This is the basic criteria for a remortgage, but as we touched on above, there is a process called the “modified affordability assessment”.
What Is the Modified Affordability Assessment?
Unfortunately, many people are stuck on relatively expensive mortgages (often signed many years ago), and due to their financial situation, they are not able to remortgage.
This is not possible because they would not pass the traditional affordability test, which in theory leaves them on an expensive mortgage.
So, with a modified affordability assessment, which is an optional choice of the lender, it may be possible to remove certain factors from traditional affordability tests such as:-
- Verified income
- Consideration of future circumstances
- Interest rate stress test
This is certainly not the norm, but it is perfectly understandable if individuals/joint homeowners are locked into expensive mortgages.
The criteria to switch to a “modified affordability assessment” would need the borrower to fulfil all of the following conditions:-
- They have a current mortgage
- Up to date with mortgage payments
- No missed mortgage payments within 12 months
- No unpaid fees/charges
- Simple remortgage with no equity release
- Remortgage relates to an existing property
Strictly speaking, this is not an equity release; it is simply a remortgage to take advantage of current market rates.
It also ensures that borrowers are not stuck on expensive mortgages which would have a detrimental impact on their finances in the short, medium and longer-term.
Equity Release Lifetime Mortgage
The term lifetime mortgage is a little misleading because while it will need to be repaid, there are no monthly repayments.
Before we look at a lifetime mortgage in more detail, it is worth looking at the eligibility which is fairly basic:-
- Over 55 years of age
- Own a property in good condition
- No outstanding mortgage
This is a common scenario for many people heading towards retirement, significant equity in their property yet a reduction in their income in later years. As a consequence, lifetime mortgages are becoming more popular.
How Do Lifetime Mortgages Work?
As we mentioned above, the traditional LTV/deposit ratio for a remortgage is a maximum 80/20 in favour of the LTV ratio.
The situation is very different when it comes to lifetime mortgages because of the structure of the funding.
Here are some bullet point factors relating to lifetime mortgages:-
- The average LTV is around 50%
- There are no monthly interest payments
- There are no monthly capital repayments
- Interest is rolled over for the duration of the mortgage
- Total interest and capital are repaid on death/when the homeowner moves into full-time care
- Capital can be drawn down in instalments (saving interest charges)
- Capital can also be taken as a lump sum
The whole idea behind a lifetime mortgage is to provide a lump sum with no ongoing payments and the rolling up of interest is the only way to do this. So, in theory, the rolled-up interest on a relatively long lifetime mortgage could be substantial.
However, at the same time, all things being equal, you’d expect the value of the underlying property to have also increased.
While the LTV ratio for a traditional mortgage/remortgage can be significantly higher, with a lifetime mortgage there needs to be consideration of not only the capital repayment but also the rolled-up interest.
So, a lower LTV creates a larger buffer between lump-sum payments/ongoing rolled-up interest and the value of the property. It is also worth noting that with a lifetime mortgage, the homeowner will enjoy rent-free accommodation until their situation changes.
It is also helpful to clarify that a lifetime mortgage provider cannot demand any interest payments or capital repayments unless the above conditions are met.
So, if homeowners are fit and well and do not require full-time care, then they can live in their home stress-free.
Advantages of a lifetime mortgage:-
- No regular payments
- No upper age restrictions
- Immediate lump-sum payment/regular income
- Rent-free accommodation while in property
Disadvantages of a lifetime mortgage:-
- Likely premium on mortgage interest rate
- Interest rolled up leading to additional interest charges
- Rolled up interest and capital repayment can be significant
Home Reversion Scheme
It is fair to say that home reversion schemes have attracted their fair share of controversy in recent times. While a very useful means of raising capital against a debt-free/equity-rich home we have seen a tightening of regulations of late.
The basic eligibility terms for a home reversion scheme are as follows:-
- Minimum age 65 (or in some cases 55)
- Minimum property value circa £80,000
- Minimum release circa £10,000
- Living in an eligible geographical area
- Traditional style property
The eligibility criteria may change from lender to lender, but you tend to find they are broadly similar.
Assuming in theory that you are eligible for a home reversion scheme the process is as follows:-
The first thing to do is obtain an up-to-date property valuation by an independent third party. In the past, some home reversion companies used their own third-party valuation companies which created the potential for a conflict-of-interest.
Calculate the Required Funding
As we touched on above, there is a minimum release of circa £10,000, but this will vary from company to company. However, before even approaching a home reversion company, you need to calculate the funding you require.
Take Independent Advice
Many homeowners looking towards home reversion schemes are taking the advice of mortgage brokers who have access to numerous lenders. Whether using an independent or tied mortgage broker, they should be able to scour the market for the best deals for your scenario.
There may be alternative funding opportunities for you to consider – your mortgage broker can also help in this area.
Approach Home Reversion Company
The vast majority of home reversion lenders will have set criteria which they will use on each application. It may be possible to negotiate various elements of a deal, but on the whole, they will have standard terms.
Selling a Share of Your Property
The basic concept of a home reversion scheme is that the lender will directly acquire a percentage of your property – potentially up to 100%. The problem is that they will only pay a percentage of the open market value which can vary between 20% and 60%.
So for example:-
- Property value: £150,000
- Property percentage for sale: 50%
You would normally assume that (give or take some expenses) selling a 50% stake in your property would realise circa £75,000.
However, on the basis that the home reversion company will only pay between 20% and 60% of the market value, you could receive anywhere between £15,000 and £45,000 for a 50% share of your property – valued at £75,000 in the open market. Herein lays the controversy for many people.
Let us assume that you sold a 50% stake in your property for £45,000. Within one month, you were forced to move into full-time care, and your property is sold. It raises the full market value of £150,000 with the home reversion company receiving 50% of the value – according to their investment stake.
Therefore, they will have received £75,000 as their share of proceeds despite the fact they only paid £45,000 for 50% of the property.
If the property doubled in value to £300,000, then the home reversion company’s stake in your property would be worth £150,000.
There will be some carrying costs because the investment cannot be realised until either the borrower moves into full-time care/dies or sells the property.
Also, as a condition of the agreement, the borrower would have rent-free accommodation until any of the above conditions materialised.
Advantages of a home reversion plan:-
- No repayments
- No upper age limit
- The option of lump sum/regular income
- Rent-free accommodation while living in the property
Disadvantages of home reversion plan:-
- Share in the property sold at sub-market value
- Share in property repaid at market value
Equity Release With a Bad Credit History
When looking at a traditional equity release, i.e. a remortgage, a bad credit history will at best lead to an increased interest rate and at worst an outright rejection.
However, the situation is very different when it comes to lifetime mortgages and home reversion schemes
No Repayments, No Credit History Review
At a glance, you may well assume that you would need a good credit history to be considered for a lifetime mortgage or a home reversion scheme. In reality, as neither of these schemes involves any regular repayments, there is no need for a lender to even review your credit history.
They may do it as a matter of course to check identification, etc. but your credit history plays no role in either fundraising. The simple fact is that with a lifetime mortgage, your interest is rolled up and repaid at the end and with the home reversion scheme you are literally selling a stake in your property.
Due to the fact that lifetime mortgages and home reversion schemes do not involve your credit history, they can also be a useful means of reorganising finances in later years.
You may have outstanding personal loans, credit cards or overdrafts. Therefore, raising finance against the equity in your property could allow you to reduce high-interest debts.
Due to the fact that lifetime mortgages do attract a higher interest rate, and home reversion schemes sub-market values, this would not be the preferred means of tackling high-interest debt.
However, as we touched on above, many remortgage companies are reluctant to entertain anyone over the age of 50.
Moving Home Under an Equity Release Scheme
Whether you have a lifetime mortgage or a home reversion scheme, you can still move to a different property. There would be certain conditions such as:-
- Approval of the lender/home reversion company would be required
- Similar collateral must be put in place (normally another property)
- Preferred movement on a like-for-like basis regarding location and type of property
There are no restrictions as such when it comes to moving property, but this is a discussion you would need to have with the lender/home reversion company.
What Happens When I Die?
This is one of the more common questions when it comes to lifetime mortgages and home reversion schemes. Well, under the lifetime mortgage scheme the property would be sold and the lifetime mortgage capital repaid with rolled-up interest.
When it comes to a home reversion scheme, the property would be sold with the home reversion company receiving their share of net sale proceeds.
In both situations, any surplus funds from the property sale would be returned to the homeowner’s estate.
Making Discretionary Payments
The whole concept of a lifetime mortgage/home reversion scheme is the fact that no repayments are required for the duration of the agreement. It is simply a means of releasing equity in a property to fund the homeowner’s future lifestyle, debt repayments, living expenses and plans for the future, etc.
However, there will be occasions where homeowners are in receipt of additional capital further down the line. Can they make discretionary payments?
Under the terms of a lifetime mortgage, there is nothing stopping the homeowner from making an additional payment to reduce the mortgage debt. When it comes to home reversion schemes, the situation is a little different.
Even though there is no loan as such, the homeowner is entitled to buy back all or part of the property owned by the home reversion company. The downside is that they will need to pay the market price for any purchase.
When you consider that the home reversion company acquired their stake at a fraction of the market price is this a sensible move?
Using Mortgage Brokers
Whether you are looking at a traditional remortgage/equity release or a lifetime mortgage/home reversion scheme, it is essential that you take advice as soon as possible.
There are specialists in all of these fields who will be able to help you make the right choice, assist with paperwork and negotiate the best rates for you.
When you research this area, you will come across independent mortgage brokers and tied mortgage brokers, which do you choose?
Independent Mortgage Brokers
As the term suggests, independent mortgage brokers have no formal ties to any lenders and therefore have access to the whole market.
They can provide what is known as a “whole market quote” which is basically a sweep of the market to find the best rates and terms/conditions for your situation.
Even though the home reversion market is relatively small at the moment, the lifetime mortgage market a little bigger, there are numerous experts out there who can assist you.
Tied Mortgage Brokers
It is only natural to think that a tied mortgage broker would be less competitive than their independent counterpart, effectively having their “hands tied”.
In reality, this is not always the case because while tied mortgage brokers will only be able to deal with a select number of lenders, they will likely have extremely close relationships with these parties.
As a consequence, assuming they have contacts that specialise in equity release, there is no reason why they can’t at least match an independent broker and even better their negotiated terms.
Don’t automatically assume that tied mortgage brokers are naturally uncompetitive!
Cost of Advice
The cost of mortgage broker advice has been a bone of contention in years gone by due to a relative lack of transparency.
The situation has changed dramatically in recent years, and all mortgage brokers are obliged to make you aware of their income/commission structure and involvement with certain parties.
This ensures that there are no hidden agendas whether the commission is received from lenders, customers or a mixture of the two. When you consider that mortgage brokers live and die by their advice, many will go above and beyond the basic level of transparency.
The subject of equity release is a very interesting one which is often misunderstood. It is all good and well-retaining equity in your property, but it is not income-producing, and there is no guarantee it will continue to rise in the future (or even maintain value).
When you consider this in relation to potentially high-interest personal debts which may include overdrafts, credit cards, store cards and personal loans, could the equity in your home be better used elsewhere?
The lack of options for homeowners over 50 looking to remortgage/release equity is somewhat surprising, even though it has improved in recent times.
Let’s not forget, many people are now working well into their retirement, and it would appear to a certain extent that the mortgage industry is a little behind the curve.
The structure of lifetime mortgages and home reversion schemes has changed dramatically of late, and for many homeowners approaching/in retirement, they are the only viable options to release equity.
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.