It seems everyone’s talking about Equity Release for older people. Before entering into any agreements, consumers may find our piece on Equity Release useful before consulting their IFA. It discusses other ways of looking at the overall cost of Equity Release other than the APR, and its potential future implications for borrowers.

Over 50s releasing equity to help family

Over 50 and thinking of releasing equity? Learn before you leap

Everyone knows that the economic fallout of COVID-19 is having a serious impact on people’s finances. And it’s not just affecting millennials.

According to this piece we saw in Mortgage Strategy, many older home owners are now borrowing money simply to help their younger relatives make ends meet. Insurers SunLife report that they have seen an increase in the number of equity release applicants looking to give money to their younger relatives. The so-called “Bank of Mum & Dad”.

At free2, we recognise and understand the seriousness of the situation for many people. But there are other options to equity release, and we’ve recently launched our free thinking alternative, the Over 55s Unsecured Loan which may be of assistance. It ticks a big box for people who do not want to encumber their homes with a lifetime mortgage and are concerned about the overall cost of equity release borrowing.

It’s true that Equity Release or Lifetime Mortgages allow you to borrow a large lump sum, as lenders enable you to borrow against your property without selling up. In essence, Equity Release is a mortgage-type loan that’s secured on your home. However, there are pros and cons to Equity Release, and depending on which type of Equity Release mortgage you choose, there will be a reduction in the value of your estate.

The two main types of equity release:

  • Roll up; no monthly repayments. Instead the interest is added to the loan and capital plus rolled-up interest is paid off when you die or go into long-term care, when the property is finally sold
  • Interest only; monthly interest is charged and paid, and the loan is repaid by selling the property when you die or if you go into long-term care

If we look at someone aged 60 with a life expectancy of a further 24 years wishing to borrow £50,000 through Equity Release Roll up or Interest only, the outcomes will likely be significantly different:

  • Borrowing £50,000 with an Equity Release Roll up mortgage at an assumed rate of 2.8%; the cost of borrowing would be £47,007 in interest rolled up and an overall cost of £97,007 to their estate, after the original capital has been repaid

  • Borrowing £50,000 with an Equity Release Interest only mortgage at an assumed rate of 2.8%; the cost of borrowing would be £33,600 in interest paid with a final cost to the estate of £50,000 to cover repayment of the original capital

In addition to the above scenarios, it’s also worth bearing in mind that lenders will usually lend only a maximum of 50% of the current value of your property. At ages 55-60, 25% is often the upper limit, (although some won’t lend until the borrower is 60), with the percentage offered then rising to a typical maximum of around 50% by age 75. Furthermore, early repayment fees on Equity Release can be expensive; and if you wish to move, the reduced amount of equity may limit your ability to fulfil your plans. Finally, in practice, Equity Release can sometimes limit your ability to pass your property on to your loved ones, as it’s often the main asset available to be used to clear the debts or pay inheritance taxes.

free2 understands that Equity Release meets customers’ needs in many scenarios. However, in our view it should not be rushed into and anyone considering entering into Equity Release should weigh up all the ramifications, and seek appropriate independent advice. We’re looking closely at ways to help people keep equity in their homes, keep hold of their savings and their pension, whilst improving their access to lump sums.

Important Note
Free2 Limited (trading as free2) is an Appointed Representative of RS Consumer Finance Limited (RSCF) which is authorised and regulated by the Financial Conduct Authority (the FCA). free2 is a credit broker, not a lender, and will only offer loans from RSCF – an offer of credit is subject to status and affordability. Example Loan: 60-year-old non-smoker, £30,000 over 10 years with fixed monthly payments of £344.56, interest rate 6.73% and an APR of 6.97%. Terms & Conditions apply.

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