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Residential buy-to-Let

Is equity release a good option for older homeowners?

Author: Luke

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In these tough financial times, it seems as if more and more people are looking to release equity from their properties.

According to the latest industry figures from the Equity Release Council, the total value of lending reached nearly £1.4bn – the largest annual figure since records started in 1992.

While the demographic that opts for equity release products tends to be the over fifties, many customers are getting younger. Lawsons and Daughters, an estate agents covering Hammersmith and Fulham said this is because house prices have risen extraordinarily over the last few years, with the average house price in England and Wales now standing at £180,252. The average house price in London is £514,000, meaning that those lucky enough to live in the city will have a lot of cash to play with if they’re looking to release some of their equity. The total is a 29% increase from 2013, bringing the equity release market back up above pre-recession levels.

However, is equity release a good option? The February edition of Which? Thinks not, saying that lifetime mortgages are too expensive and claims that the interest rates on offer with fixed rates available on “standard” mortgages don’t compare. Higher interest rates for longer borrowing periods are nothing new though – five and ten year fixed rates tend to be higher than two year fixed, for example. In many ways, equity release could be seen as a great option for older borrowers who can’t access normal mortgages due to the impact of the Mortgage Market Review (MMR) regulations.

The aim of the Financial Conduct Authority (FCA) was not to have a negative affect on those who can clearly afford mortgages – many older borrowers have low Loan-To-Value (LVT) and can clearly pay off interest-only loans they’re looking for. Many mainstream lenders fear that they must proceed with caution, which means that this does affect older borrowers.

The reality is that the two main regulatory requirements for an interest-only mortgage is that it’s affordable and that there’s a robust repayment strategy. The problem is that some lenders calculate affordability on a repayment basis, meaning that even if a borrower in their sixties wants a short interest only term, the lender says it’s not affordable. Considering lenders know that the property will be sold when the last borrower dies or goes into care, it’s a sure bet that lenders will get their money back.

It seems that the MMR’s main problem is that it’s applying the same rules to a first-time buyer looking for a 95% mortgage as it is to an older would-be borrower with lots of equity!

However, one option that is perhaps safer for older borrowers looking to free up large amounts of cash from their properties, is to sell up. Ok, it’s not always ideal, but it’s safer in many ways.

For example, downsizing to a smaller property and using the lump sum to invest in another property, would in many ways be a simpler option. This is particularly the case if you can buy something suitable outright – no banks needed. Perhaps children could benefit by living in the property and they could get a mortgage in their name, meaning all the hassles of the MMR are avoided (provided everyone involved has a decent income and can afford their mortgage that is!)

The most important step you can take is to do your research and get a second opinion. There are pros and cons to lifetime mortgages, sometimes it can be easier to just take the plunge and sell up.

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