Alternatives to equity release

In the past people requiring extra income during retirement could take out an equity release plan with rates as high as 8.0% pa and interest would roll-up quickly eroding the equity.

Rates of interest are no longer this high and the current competitive market means rates start at 2.5% pa although your need to have an acceptable property for equity release. Before considering equity release you can look at alternative ways of raising cash which may not require interest payments.

If your State pension no longer stretches as far the reason why you may need money would be to pay for daily expenses, clear debts, pay for an unexpected expense or to maintain your standard of living.

Ways of raising extra money

To generate cash for a specific reason without the need to pay interest, you could find you are entitled to claim state benefits or grants and it is worth contacting your local council of the Citizens Advice for more information.

Alternatively you could make a list of your costs and expenses and re-budget your finances which could reduce the level of income you need. The following table is several keyways you could raise extra money rather than equity release.

Ways to raise extra money
Downsize by selling your existing home
Use other savings or investments
Rent a room and take on tenants
Re-budget to live on less money
Your family could help with funds
Claiming grants or state benefits
Government rented homes
Move to live with family members

You could ask family members or friends if they could help contribute to your retirement income on a monthly basis or if you have a spare room in your home you could rent this out to a tenant to generate more income.

Rather than using equity in your home, if you have savings you could use these first although it is important to retain some cash as an emergency fund.

Another popular option is to downsize to a smaller property, such as from a three-bedroom house to a two-bedroom flat. This can release equity which you can use to provide extra income although you need to be aware you would incur costs such as legal fees, arrangement fees, moving costs and stamp duty land tax.

Many people are reluctant to move home especially if this was the family home, if can be difficult to more to a new and unfamiliar area, you may not see your close friends as much and you have the risk of having new neighbours.

You could move home to live with family members which would release equity allowing you more retirement income which you can contribute to your new home.

Retirement interest only mortgages (RIO)

With an aging population retirement interest only mortgages were introduced in March 2018 offering greater flexibility over traditional residential mortgages and are authorised under lifetime mortgages by the regulator the FCA.

Lenders of residential mortgages set upper age limits typically 70 and 75 years when the loan must be repaid and this can be difficult for older homeowners with an outstanding mortgage.

A retirement interest only mortgage can be used to release cash from your home and is similar to the residential mortgage, as you pay interest each month with the loan remaining the same until it is repaid. You are likely to have a preferential fixed rate for a limited period of time such as two or five years and interest can rise in the future.

Unlike a residential mortgage, for the RIO mortgage you must be aged 55 years and over to qualify and there is no end date for the mortgage, so it continues for your lifetime until death or entering long term care.

Provider fixed interest rates are higher than residential mortgages as the RIO mortgage has no term and is for your lifetime. For a two-year fixed mortgage, the interest rate is typically 3.2% pa and for five-year fixed this could be 3.6% pa.

You can borrow lump sum cash upfront up to 70% loan to value (LTV) although there is a requirement from the lender that you can afford the interest payments. For the RIO mortgage this is based on a stress test which assumes interest rates rise in the future.

You need to prove the level of your income for a single life and if this is a joint life the income of your partner after your death may be used for the application. All income sources can be considered including pensions, flexi-access drawdown and investments. This can often limit the loan to value making it difficult to borrow a large amount.

As with equity release plans, you can retain 100% ownership of your property and when finally sold the mortgage is repaid and equity balance paid to your estate.

The retirement interest only mortgage must be the first charge on a property and this means any existing mortgage must be repaid. It can also be used to access cash such as for home improvements, adding an extension, buying a new car, holiday of a lifetime or gifting to children and grandchildren to help them on the property ladder.

Home reversion plans

Home reversion plan have been around for a long time where you can sell all or a proportion of your property to a reversion provider that becomes a part owner of the property.

If you sell all the property you may receive a larger proportion of the property value as a lump sum compared to equity release using a lifetime mortgage. There is no interest accumulating as there is no interest in the property in the future.

In this case the ownership of the property transfers to reversion provider and you become a tenant with a right to occupy subject to the terms of the tenancy agreement but typically until death or entry to long term care.

In the event of early death some reversion plans include a minimum inheritance guarantee which can return a capital payment to the estate. Generally, homeowners want to retain 100% ownership giving them the opportunity to benefit from rising house prices in the future and to leave equity to their family.

Downsizing your home and release cash

To release equity many people downsize from their current house to a smaller property such as a flat. This can be a cost-effective way of generating surplus cash although you may incur expenses such as costs for moving, stamp duty land tax, legal fees and redecorating.

The risks of downsizing are you may have to move to a new area and unable to meet your friends as much as before, the area may not be as convenient for transport, shopping, recreation or entertainment facilities and you may not like your new neighbours.

If you have an existing interest only mortgage and downsize to repay the loan to the lender, you may find that the remaining equity is not sufficient. You cannot purchase the desired property you would like to maintain the standard of living and the equity will not provide any additional cash.

To buy a better property when you downsize, you can use equity release to repay your existing mortgage in full while the new lifetime mortgage gives you more equity for the property and cash.

For example, if you are aged 75 years with a property worth £375,000 and residential mortgage of £150,000 you are now required to repay the lender. You can stay in your existing home and release additional cash, say £30,000, and the loan to value is more than 45% and interest rate is 4.35% pa.

The table shows how you can use equity release when you downsize to buy a more desirable property. This assumes that once you sell your home and repay your mortgage, you have equity of £225,000 which is not enough to buy the property you would like without any additional cash.

It assumes you intend to have a loan to value of 35% to keep the interest lower with a proportion added the mortgage and the remainder in cash.

Purchase value	35% LTV	Property	Cash
£275,000	£96,250	£50,000	£46,250
£280,000	£98,000	£55,000	£43,000
£285,000	£99,750	£60,000	£39,750
£290,000	£101,500	£65,000	£36,500
£295,000	£103,250	£70,000	£33,250
£300,000	£105,000	£75,000	£30,000
£305,000	£106,750	£80,000	£26,750
£310,000	£108,500	£85,000	£23,500

By using a lifetime mortgage you can add £50,000 increasing the property you can buy to £275,000 leaving you £46,250 of additional cash. This does not exceed the loan to value of 35% and with an interest rate of 2.95% pa it helps to reduce the cost of equity release.

At LCM we can help you when planning using equity release to downsize and repay an existing mortgage at this link:
Free equity release quote to downsize and release cash.

If you only need £30,000 as a lump sum or drawdown cash over time, this means you can add £75,000 for a property worth up to £300,000 and maintain the same 3.95% pa interest rate. You can have a higher loan to value although the rates will increase.

To see if downsizing and releasing equity is right for you, speak to our expert advisers for further calculations before you make an application through LCM and ensure you are informed before making a decision about the best option.

Buying a dream home in retirement

People in retirement may have enough income to meet their daily expenses and pay for holidays but not have sufficient capital to buy their dream home.

Your dream home could be to live in a larger property or improved quality of life such as warmer location, more sunshine, less traffic, cleaner air or different location such as moving to the coast or a national park.

Even though you do not have enough savings to add to your current property to buy your dream home, it is possible to relocate and buy a new property. You should be aware if you move home you would incur costs such as legal fees, moving costs and stamp duty land tax.

If you need large amounts of capital to trade-up you could approach family or friends to either lend you the money or invest in this new property taking a share of future proceeds when the property is sold.  You could consider a retirement interest only mortgage, however, this may not offer a large enough loan based on your income.

Equity release using a lifetime mortgage does not require proof of income and is based on the property you intend to buy giving you additional leverage to trade-up to a more expensive home. There are other features of lifetime mortgages that offer you greater flexibility when it comes to managing the loan in the future.

For example, if you are aged 75 and own your property valued at £375,000 with no mortgage you can sell this home and buy a more expensive property. You may intend to keep the interest rate low and limit the loan to value to 30% with the option of a mortgage with cash.

The table shows how you can use equity release to buy a larger property or one in a better location. This assumes you have capital of £375,000 from the sale of your property.

Purchase value	30% LTV	Property	Cash
£475,000	£142,500	£100,000	£42,250
£480,000	£144,000	£105,000	£39,000
£485,000	£145,500	£110,000	£35,500
£490,000	£147,000	£115,000	£32,000
£495,000	£148,500	£120,000	£28,500
£500,000	£150,000	£125,000	£25,000
£505,000	£151,500	£130,000	£21,500
£510,000	£153,000	£135,000	£18,000

If you intend to buy a property worth £475,000 with no more than a 30% LTV, you will use £100,000 towards the property allowing you to have cash of £42,250 and the interest rate is about 2.7% pa.

Find out what dream home you can afford to buy and the equity you can release using this link:
Free equity release calculator with instant results for your dream home.

If you only need £18,000 in cash for the cost of moving or a drawdown facility this would mean you can add £135,000 to the property with a value of up to £510,000.

Although you could have a higher loan to value, this would mean the interest rate would be higher, reducing equity available to your beneficiaries. If you think you may receive an inheritance and intend to repay the mortgage early, you need to take account of the early redemption charges for the different types of plans.

Selling your property for £375,000 you could consider a loan to value of 47.3% releasing £325,000 so you can buy a property worth £700,000. The interest rate would be higher at 3.96% pa.

It is important to realise that buying your dream home you can still leave equity for your beneficiaries. If you use savings to pay for your moving costs, when you sell your home the equity is £375,000 and with a 30% loan to value or £155,000 mortgage you can buy a home worth £530,000.

The mortgage interest rate is 2.7% pa or £349 pm and to preserve the original equity of £375,000, house prices would need to rise at 0.93% pa to cover the roll-up interest. The majority of UK location have exceeded this as an average in the last ten years.

After you have completed the lifetime mortgage to buy your dream home, other options available would be a reserve facility to take additional cash in the future if you have a drawdown plan or if not, you could get a further advance if house prices rise.

Equity Release

• Introduction
• Reasons for using Equity Release
• Lump Sum and Drawdown Mortgages
• Alternatives to Equity Release
• Steps you need to Release Capital