Why lifetime mortgages are growing in popularity…
Stagnant wage increases, jumps in property values and an aging working population have all contributed to a rise in popularity of lifetime mortgages; that is mortgages for the over 55’s.
Lifetime mortgages explained…
In the last quarter of 2016 lifetime mortgage applications, also known as equity release applications, hit a record high in total lending of £571.6m. It is expected by the Equity Release Council (ERC) that total lending for the 2016 tax year will finish at £2bn – the highest on record. Lifetime mortgages can be used by over 55’s to unlock house wealth. There are three plan types that can be used to release equity to over 55 mortgagees:
- Drawdown plans allow mortgagees to release house wealth in installments which; can help to fund smaller costs and to boost retirement income. Drawdowns remain the most popular plans accounting for 62% of all new lifetime mortgage plans in the last quarter of 2016.
- Lump sum plans are often used to liberate large sums of money to eg clear an outstanding mortgage or other debt; or to fund home improvements, living inheritance, or travel. These plans have increased in popularity and reached 2008 demand levels in the last quarter of 2016.
- Home reversion plans are where the mortgagee sells all or part of their property at less than its market value in return for a tax-free lump sum, a regular income, or both. The mortgagee remains in his or her own home as a tenant, without having to pay rent. These are the least popular equity release plans, according to the ERC, accounting for less than 1% of all lifetime mortgages agreed in the last quarter of 2016.
The first industry Standards were introduced for equity release 25 years’ ago. The recent lifetime mortgage record lending figures, highlight the appeal of using housing wealth to partly fund later life.
According to the Chairman of the Equity Release Council Nigel Waterson: “Product innovation has played a huge role in the growing appeal of equity release to a range of customers, including the growing number of homeowners with interest-only mortgages due for repayment. The range of features available now give people the option to choose inheritance protection, downsizing protection, monthly interest repayments or voluntary capital repayments when they opt for a lifetime mortgage.”
Lifetime mortgages have also benefited from low interest rates a typical mortgage rate having fallen from 6.15% to 5.66% since the Bank of England cut rates in August 2016.
How lifetime mortgage equity release funds can be used
- House equity can be used for home improvements. Homeowners in later life do not always have the means to carry out extensive repairs to their home. This is because they may not have the capital as a lump sum, or they may not have sufficient income to secure a loan. By using equity released from their homes they can afford home improvements.
- There is a need for some retired people to supplement their pension income due to low annuity rates. By releasing equity in a property, pension income can be supplemented through pre-planned staged payments, or drawdowns via a lifetime mortgage product.
- Some later life homeowners use equity release to provide a Living Inheritance. By placing a debt on the house and gifting the money to their children, later life homeowners enable their children to receive part of their inheritance early. And subject to UK Inheritance Tax (IHT) regulations, can potentially reduce IHT liability for both the estate and for their offspring.
- In other cases house wealth can fund domiciliary care in the mortgagee’s own home. More people in need of care are now choosing to stay in their own home, rather than selling their house and moving into a care home.
Increased competition in the lifetime mortgage market place has meant that over 55’s can benefit from low interest rates, or cash back offers. There are now 75 different lifetime mortgage equity release deals available, which cover a range of options and loan-to-values (LTVs). Also, if we take a closer look at inheritance tax and probate fees we can see that rising house wealth is driving changes in legislation with the introduction of…
- Higher probate fees for properties valued at over £2million – from £215 to £20,000 and
- Significant increases in Inheritance Tax payments – up 21% from £3.8billion (tax year 2014/15) to £4.6 billion (tax year 2015/16)
Growing numbers of retirees are planning for high housing value and protecting their nest and its eggs through inheritance tax planning, and also investment products such as Investment Savings Accounts (ISAs) and Enterprise Investments Schemes (EISs).
There has been a 63% increase in available equity release schemes over the past three years; we would urge anyone considering a lifetime mortgage to consult their IFA. In our experience, obtaining specialist independent financial advice including an illustration of the finance plan enables the client to make the best long-term decision. Please remember that equity release may not be the most suitable finance option for you.