Equity release lifetime mortgage

Higher property values has created the opportunity to release equity offering homeowners greater freedom to do the things they want to do and have the lifestyle for them and their family.

Now you can retain 100% ownership of your property using a lifetime mortgage to release equity and with greater competition from providers these plans are much more flexible with interest rates falling to as low as 2.5% pa.

The plans can be structured around your needs and there are many reasons for releasing cash from your home. You could be repaying an existing mortgage, downsizing to release cash, trading up a better home or taking tax free cash over time and here are some important benefits.

Some attractive benefits of equity release
Gives you access to tax-free cash
Use the money for anything you wish
Available for homeowners aged 55 to 95
Keep 100% ownership of your home
Remain in your home for your lifetime
No monthly interest payments to make
Never owe more than your property value
Access a reserve facility when needed
Repay 10% each year without penalty
Move home and take the plan with you

These are just some attractive benefits of equity release and you may want cash for a specific reason. To take the next step you need to look at the figures using the free equity release calculator such as the cost of a lifetime mortgage and how to protect equity in your property.

A less popular method to release cash is a home reversion plan where you do not retain full ownership and assign a proportion or all your property to a provider.

Equity release calculator

You may need to know the maximum equity you could release known as the loan to value and this is based on the age of the youngest person on the mortgage.

See what is the maximum equity you can release from your property or repay an existing mortgage using this link:
Free equity release calculator with instant results, charts and figures.

To start, the calculator assumes an interest rate of 3% and a timescale of 17 years which is an estimate of when the mortgage is repaid. You re-calculate and can change these figures.

House prices could rise in the future and the calculator assumes 1% per year and this is important to consider as it would offset the interest rollup in the future.

Enter your County or Borough and property type and the calculator can show you how average house prices have changed over the last 10-years in your area.

The calculator shows you the maximum you can release and the best buys from the leading providers if you take 20% of the property value in cash or repay a mortgage.

The results for the mortgage, property value and equity amounts are shown in two charts and for those that need to see the figures for every month, the last table gives you this comprehensive view.

Equity release quote

The providers have hundreds of different products and an equity release quote personalised to your needs ensures you receive actual offers with accurate interest rates.

Find out about the actual provider deals and offers when taking cash from your home or repaying a mortgage at this link:
Free equity release quote with accurate interest rates from providers.

Quotes include exclusive deals with preferential rates for lifetime mortgages from the whole market. Impartial advice from our experts can include comparisons with retirement interest only mortgages (RIO).

You may find it easier to speak to the expert equity release advisers at LCM on the phone to discuss the many features offered by the providers. We can check your property is acceptable for equity release and the products meet your needs if repaying an interest only mortgage, buying a dream home or releasing cash.

Provider loan to values

The maximum amount you can release using an equity release mortgage is related to the age of the youngest person and your life expectancy and this is referred to as loan to value (LTV).

This different for a retirement interest only mortgage (RIO) as the LTV is based on affordability and therefore the level of your income in retirement would determine the maximum loan.

At certain levels higher loan to values start to increase the provider fixed interest rates and you need to take this into account when rolling-up interest in the future as it increases the total mortgage to be repaid.

The minimum age offered by providers is 55 years and the LTV is currently about 26% of the value of the property. This increases for someone aged 60 year to 34% and if you are aged 65 the LTV is 39%.

The older you are the higher is the loan to value as there is less time before the provider will receive their money back and the risk s for lending more are lower.

For someone aged 70 years the LTV is 44% and if you are aged 75 this is higher at 49%. The maximum loan to value levels out after the age of 80 at about 55% of the property value and it is possible to review the lifetime mortgage as you get older to release more money.

If you or your partner has a medical condition and intend to take the maximum LTV for your property it is possible a higher amount can be offered by the provider if your life expectancy is reduced.

You have an interest only mortgage

Many people bought their homes with interest only mortgages where the original mortgage remains the same as there is no repayment vehicle. This means towards the end of the term or at the lenders maximum age which could be 75 years, you still have a loan which now needs to be repaid.

There are a number of options to consider such as retirement interest only mortgage (RIO) where you can continue to pay only the interest for your lifetime which are typically from 3.2% pa. These mortgages are subject to affordability tests which means you must have sufficient retirement income.

If the mortgage is joint, your partner’s income after your death is often used by the provider and this can significantly reduce the loan amount they are willing to offer with the RIO mortgage. If this is the case and the maximum loan is less than your interest only mortgage, you may have to consider downsizing to a smaller property.

You can repay an interest only mortgage with equity release using a lifetime mortgage as this is not based on affordability and there is no need to pay any interest which is rolled-up with rates from 2.5% pa. You can pay a proportion of the interest back if you are concerned about eroding the equity and want to leave something to your family.

Both the RIO and equity release are lifetime mortgages and typically ends when the second life dies, moves into long term care or the property is sold. Any equity remaining is available to the family or beneficiaries.

Buying a new house with equity release

You can use equity release to relocate and buy a new property whether you are downsizing to a smaller home or trading-up to a more expensive property.

You can consider downsizing your home if you need to repay an interest only mortgage as the lender require you to repay the loan. If your interest only mortgage is a high loan to value, the equity you receive may limit the property you can buy when you downsize, it could be too small or not the right location.

A retirement interest only mortgage (RIO) could provide additional equity, however, if the loan you need is not affordable you can access equity release using a lifetime mortgage. The advantage of this mortgage is you can choose a loan to value that keeps the interest rate at an affordable level from 2.5% pa.

The mortgage is flexible and allows you to use part of the equity released to add to buying a higher valued property. It can also give you additional cash you can use for the cost of moving, buying new furnishings and any other purchases you need.

Many people may believe they would be unable to trade-up and buy a dream home in retirement as their income is too low. Your dream home could be a larger property, more expensive area or moving to a coastal town or national park.

Although a RIO mortgage may not offer a sufficient loan based on your affordability, you could use equity release selecting a loan to value (LTV) with a lower interest rate.

The LTV would be based on the property you are buying, not your current home thereby giving you additional leverage. For example, if you are aged 75 and your current home is worth £400,000, a 30% LTV would represent a mortgage of £120,000 and the interest rate is 2.69% pa.

If you buy a new property for £520,000 with the same 30% LTV the mortgage is £156,000 giving you additional cash of £36,000 for moving costs. At the age of 75 years you could have a higher loan to value and the interest would be higher.

Buying a new property requires specialist legal advice and we can recommend solicitors we already work that are experts in equity release with and can arrange the service on a local basis.

Reducing the cost of equity release

Planning ahead can give you the opportunity to reduce the cost of equity release in the long term as there are a number of approaches to take.

The higher the interest rate, the higher is the equity erosion in the property as interest will roll-up over time and make it less likely you can return for a further advance in the future. Here are some of the measures you can take to reduce costs in the future.

Reducing the cost of equity release
Select a smaller initial mortgage
Start with interest only payments
Making regular overpayments
Set-up a future drawdown reserve
Access the provider cashback
Qualify for green energy rating
Have qualifying medical conditions
Replace your equity release plan

Taking the maximum lump sum cash upfront using equity release is expensive as the interest rate would be 6.0% pa due to the high loan to value and you can make adjustments that greatly reduce this costs.

For example, if you are aged 75 with a property value of £375,000, you take the maximum of 50% LTV releasing £193,000 with a high interest rate of 6.0% pa or £965 pm. You are paying proportionally more interest on a larger sum and this will erode capital at a faster rate.

Reducing this LTV to 48.5% releases £182,000 and the interest rate drops to 4.5% pa or £682 pm which is a significant saving each month and improves the opportunity to preserve equity in the future.

By selecting an even smaller initial lifetime mortgage using equity release the interest rate is lower and the amount rolling-up is also lower. With a 30% loan to value this releases £105,000 and an interest rate of 2.7% pa or £236 pm.

You can start the lifetime mortgage making interest only payments as low as 25% of the total and some providers offer a discount of 0.2% pa off the interest rate on the whole mortgage. This will help to reduce equity erosion during the term of the loan.

Providers allow you to make overpayments of up to 10% of the mortgage each year free of the early redemption charge. This would reduce the outstanding mortgage and could reduce the size of the mortgage lowering the interest amount paid each month.

Rather than take a large single lump sum you can set-up a future drawdown reserve and spread the lifetime mortgage over time. Interest is paid on the equity released not the reserve which is a facility you can access in the future.

From the example above, a homeowner aged 75 years releases 20% LTV on a property worth £375,000. The initial release is £75,000 and selects a reserve of 13.2% or £49,500 with a fixed interest rate of 2.99% pa or £186 pm. You can return to drawdown cash over time for any amount (usually subject to a small minimum) up to the reserve in the future with an interest rate that applies at that time on the additional cash.

Selecting a higher reserve of 22.4% or £84,000 would increase the interest rate on the initial release to 3.17% pa or £198 pm offering 70% bigger facility to access cash for a slightly higher monthly interest cost, which you can leave to roll-up.

Providers can offer cashback where you do not pay interest and does not need to be repaid. If this does not increase the mortgage interest rate it would be worth taking this option as it lowers the cost of equity release.

New product features of lifetime mortgages can offer 0.2% pa discount on the interest rate if your property qualifies for a green energy rating with some providers offering a 0.2% pa discount if you have certain medical conditions.

If you have taken out a plan many years ago with an interest rate of 6.0% pa or more, you could consider replacing an existing equity release plan with a new one to reduce the cost if the interest rate is significantly lower.

Rising house prices

With an equity release mortgage you can roll-up interest which erodes equity over time. This can be offset by rising house price and over the last 10-year period this has exceeded 1.0% pa for the majority of regions in the UK.

The following table shows average house price growth each year for terraced properties from the Office of National Statistics for November 2021. Property prices have been strong for the South West up 12.9% pa, East of England rising 12.3% pa and Wales up 12.1% pa.

Regions	Average (pa)
London	5.1%
East of England	12.3%
South East	9.6%
West Midlands	9.8%
East Midlands	10.7%
South West	12.9%
North West	10.8%
Yorkshire & Humber	7.2%
Scotland	11.4%
North East	8.7%
Wales	12.1%

Interest rates for equity release have reduced considerably over the three years and this means it is more likely that a rise in house prices can preserve equity. There may be variations throughout the regions for different types of homes such as, detached, semi-detached, terraced or flats.

For example, for someone aged 75 years with a property worth £400,000 you can release £80,000 in cash with a 20% loan to value and interest rate of 2.5% pa or £167 pm. To cover the roll-up interest cost house prices must rise 0.59% pa.

For a 30% LTV or £120,000 mortgage, interest rates are 2.8% pa or £280 pm requiring house prices to rise by 0.99% pa and with 40% LTV or £160,000 mortgage interest rates are 3.2% pa or £427 pm requiring house prices to rise by 1.50% pa.

If you release 30% loan to value, then house prices rising by 1.0% pa on average can preserve property equity. If you release more than this amount you can consider making an overpayment to reduce roll-up interest. For 40% LTV if you pay £120 pm this would mean house prices only have to rise by 1.0% pa to preserve equity.

Repaying the mortgage early

Homeowners taking out an equity release are unlikely to repay the lifetime mortgage early unless they received an inheritance. You can repay up to 10% of the loan in any year without paying an early redemption charge (ERC), however, if you do intend to repay more than this in the future you need to consider the types of plan structures.

The fixed penalty type applies a reducing percentage usually from 10% in year one down to zero after year eleven. You know where you stand with this type and the percentage used for the year of encashment is applied to the amount repaid at than time, above the 10% penalty free amount.

There are products that offer 40% penalty free and this means you can repay the whole loan in about three years. The last 10% of these lifetime mortgages would attract an exit charge which would be 8% or less so the costs are very low.

An alternative is the gilt based penalty using the 15-year gilt yields at that time as the benchmark. Changes in the yield mean a fall of 0.5% would result in charge of 20% of the mortgage, if it remains level the charge is 6% and a rise of 0.2% would be a zero charge.

This is the most unpredictable option and you will either pay nothing or a considerable amount as a penalty to the extent that your are unlikely to repay the mortgage until gilt yields rise above the benchmark.

Leaving equity for beneficiaries

Leaving property equity to your family is important for many homeowners and if you have a retirement interest only mortgage or equity release paying the interest each month will ensure the loan does not increase in size.

By selecting equity release and not paying the interest you must balance the amount you release as cash and the interest rate on the mortgage to prevent equity erosion in the future.

If you take the maximum Loan to value and interest rate of 6.0% pa it is very likely the equity will be eroded by the end of the term when the property is sold.

The older you are the larger the cash release you can take as the interest rate will still be manageable. For example, for someone aged 75 years with a 40% LTV the interest rate is 3.2% pa whereas someone aged 60 years would be limited to 28% LTV and an interest rate of 3.3% pa.

To reduce the risk of equity erosion your beneficiaries can contribute to a proportion of the interest such as paying you £100-£150 pm. Property values in your area may also rise in the future and you can target 1.00% to 1.25% pa house price growth to preserve equity.

The equity release advisers at LCM are experts at calculating the impact of roll-up interest and can help you select the right combination of cash to release, lowest mortgage rates, overpayments to be made in relation to potential house price rise to help preserve equity to your beneficiaries.

When the property is sold, you can appoint any executor that you wish and you should talk to your family when you set-up equity release. The executors are responsible for selling the property and dispersing the equity in accordance with your will.

If the mortgage is joint, on second death the providers typically allow executors twelve months for the repayment of the mortgage by sale of the property or repayment by other assets. During this time the interest will continue to roll-up until the mortgage is repaid. If it takes longer to repay the mortgage the provider can assist in the sale of the property.