Our Equity Release and Retirement Interest Only (RIO) Mortgage Service
Equity release gives you access to some of the cash that's tied up in your home, without the stress of moving. You can release a tax-free lump sum or you could opt for a plan which will allow you to release funds in stages after an initial lump sum.
You can spend the cash however you wish. This money could boost your retirement finances - whether that means home improvements, pay for those one-off expenses such as buying a car or caravan, the holiday of a lifetime or help for your family and friends.
Lifetime mortgages are increasingly offering homeowners a common sense, tax-efficient way to:
- Improve day-to-day income to keep enjoying a fitter, healthier more active lifestyle
- Pay off mortgages, loans, credit cards etc
- Make home or garden improvements
- Help loved ones via a living inheritance, contribute to education costs or a leg up onto the property ladder
- Stay at home for longer or pay for care at home
- Secure the ownership of property following a divorce
- Move to a more expensive property in retirement ("upselling")
- Buying a holiday, car or other key piece of expenditure
How Much Can be Raised?
They are financial products that allow older homeowners to take cash out of the value of their home. In all cases they retain the right to continue living there for the rest of their lives. They also do not have to make any payments to a plan during their lifetime.
Equity release plans are designed for those over the minimum age of 55. The amount you can release depends broadly on two things: the age of the youngest applicant and the property value.
Many of those reaching pension age face the prospect of receiving lower than expected income from pension plans. We also have a state benefit system struggling to provide for those who need extra help to manage financially in retirement.
Others who retire may have something of an aspirational lifestyle, having been able to afford the nice things in life whilst they were working. This includes such things as foreign holidays, a new car every few years and other luxury goods. There is still a natural desire to live comfortably, but often the savings and pension lump sums on retirement will only last for a few years.
Retirees also have a great deal of money tied up in properties. Whilst it is nice to think that some of this can be left to family and beneficiaries when they die, for many people this asset could be used to provide a better retirement.
What is a Lifetime Mortgage?
A lifetime mortgage is similar to most other residential mortgages. However there are some very important differences:
- A lifetime mortgage does not have to be repaid within a certain term, it can literally run for your lifetime.
- You can choose whether to meet the interest charged each month on the loan, but you do not have to pay anything back on a monthly basis if you do not wish to or cannot afford to. Any interest you do not pay simply gets added on to the total loan each month, so the debt grows.
- You can start to pay the interest and switch to not paying the interest later if desired. However, you cannot then switch back again.
- You cannot fall into arrears as no repayments are required, and so you will never face repossession.
- The amount you can borrow is based on your age at the start of the plan, the property value, and in some cases your medical history.
- You do not have to borrow the maximum available. It is possible to take a lower amount initially (typically £10,000) and then take further ‘drawdowns’ at any time in the future, up to a pre-set limit.
- You can be sure of leaving something for beneficiaries by using an ‘inheritance guarantee’ option. In this way some of the property value is ring-fenced against being eaten away by the rising debt on a roll-up plan. However this would reduce the maximum facility available to you.
- The property is normally sold and the plan paid off if you die, enter long term care or move home.
How Much Can You Borrow?
The total loan amount available will depend on your age at the time of arranging the scheme, and in some cases, your health. The older you are then the less time there will be for the debt to rise significantly, and so you can borrow more.
There is usually no difference in the amount you can raise whether you are a man or a woman. If there are two of you, the loan is based on the age of the youngest.
In some cases, your state of health can be taken into account. If your life expectancy is shortened then some lenders may consider lending you more. This is because they can statistically expect the loan to be repaid more quickly than normal.
Can You Still Move Home?
You can always move, and take the balance of the plan to your next home on the same terms. If you trade down, you may need to pay some of the debt off. The next home will need to be acceptable to the lender.
Home Reversion Plans
An alternative to a lifetime mortgage is a Home Reversion Plan.
Home Reversion Plans are a type of equity release. They involve selling a proportion of your property to a specialist company, in return for an income or lump sum. You then have the right to live in your home for the rest of your life, rent free on a lifetime lease. You will continue to maintain and insure the property in the meantime.
How much money can you raise?
The amount you will receive from home reversion plans will depend on your age, state of health and the value of the property, but as you will not be paying any rent this will be substantially less than the actual market value – between 35% and 65% depending on age or combination of ages.
The purchasing company may have to wait many years before it can sell the property and realise its investment. For this reason home reversion providers will not normally consider applicants under the age of 60. For some, the minimum age is 65.
On the other hand, if you leave the property or die soon after selling your home in this way then the company can sell the property, take its profit and the scheme could prove to have been very expensive.
We Can Help!
A professional equity release adviser can help identify what might be the most suitable deal available to you, because finding the most appropriate type of equity release plan and the most competitive deals, from the wide range to choose from, can be tricky. Certainly at Chestnut we have a wealth of experience in giving our clients advice on equity release.
Trying to understand what the full range of deals are, never mind spending hours talking about and applying for different deals with different providers, is massively frustrating.
So our role is to advise on potential solutions that are right for your unique needs, and if you want us to help you with the paperwork, and negotiation with providers, then we are delighted to!
We visit you, at your convenience, to talk through the types and options you have, because doing equity release may not be your best option!
Equity release used to have a deservedly poor reputation. Now there’s lots to be reassured about;
- the industry is regulated by the Financial Conduct Authority (FCA),
- we only advise on equity release providers who are members of the Equity Release Council,
- you will use a solicitor of your choice to make the legal arrangements,
- information is always given to enable you to make a full and freely informed choice,
- all plans are backed by a ‘no negative equity’ guarantee so you will never owe more than the property is worth, no matter what happens to house prices or the size of the debt, and
- you will have the right to occupy their property for the rest of your life if you choose to do so (we can also discuss moving and care home options).
Before you think about equity release, you should also consider your other options, such as moving to a smaller property or one of a lower value will give you the maximum value from your home. You may also have other savings and assets that could help fund your retirement.
Wanting to Move But Not Quite Affordable? This was Tom and Vera’s story...
Tom and Vera had both recently retired. They wanted to relocate from Lincolnshire to be nearer their daughter, who lives in Surrey. Everyone, including the grandchildren looked forward to spending more time together in retirement. We were asked to advise on how they might finance the move.
Their Lincolnshire home was valued at £327,000 and had found a home in Surrey on the market for £429,000. They had £10,000 in savings and both released the 25% tax free lump sum from their pension pots to a total value of £25,000. With the sale of their home, savings and lump sum from their pensions, they have a total amount of £362,000. So that left them £67,000 short of the amount needed to purchase their new home.
Tom and Vera were able to be advised, with the agreement of the equity release provider concerned, to use the £362,000 on the new home, topped up by an equity release plan of £67,000 to cover the remaining balance.
Tom and Vera had one further concern, they wanted to be able to leave an inheritance for their daughter. We were able to advise in their case that they could protect roughly 50% of the equity release amount available; this means that they can protect 50% of the future value of their home to leave as an inheritance.
Wanting to Extend and Refurbish Your Home? This was Cathy’s story...
Cathy recently asked for our advice to help her pay off her mortgage, extend her kitchen, install a wet-room, and have a new garage built.
By looking carefully at Cathy’s circumstances, we were able to advise on the right deal, raising just enough money to cover the works but not using money unnecessarily. Our expertise to approach a number of potential lenders enabled a fantastic solution to be recommended, despite Cathy being classified as living near commercial premises by the first equity release provider.
Want to Pay Off Debts? This was David’s story...
Facing debts is very difficult when approaching our elderly years. David approached us to help advise on his second equity release, to pay off some additional loans that had been taken out over the last few years. We were able to reassess David’s situation and give the best advice.
Retirement Interest Only (RIO) mortgages are a relatively new option for borrowing money in later life which have similarities to both lifetime mortgages and existing interest only mortgage plans, but can run until the borrowers die.
Borrowers will pay the monthly interest on loans, for life, and the debt is only repayable when a specified ‘life event’ occurs. These events are mainly the death of the borrower(s) or they go into long-term care.
RIO and Lifetime Mortgages – what are the differences?
The minimum age for a RIO mortgage will typically be 55, the same as lifetime mortgages. However, some lenders have higher minimum ages.
RIO mortgages require monthly payments of interest throughout the term; lifetime mortgages don’t. Some lifetime mortgages do allow interest payments, or ad-hoc partial repayments, but they are not a requirement.
The interest due on a lifetime mortgage can be rolled-up onto the debt and is only repaid when the property is sold. However, RIO mortgage interest charges must be paid monthly. Therefore, RIO mortgages require an affordability check to be completed to make sure that payments are affordable throughout the term. This is not the case with lifetime mortgages.
For joint borrowers, an individual income assessment is made on each person. This is to ensure the loan remains affordable if either dies. Therefore, a lender will also look at the amount of any widow or widowers pension that could be payable if the partner dies. The total pension income must be enough to afford the loan in a sole name.
Lenders will not consider employment or self employment income, as the borrower could stop working and retire at any time. These checks will need to be carried out even if you switch to a RIO mortgage with your current lender.
Other reasons for applications failing are that the maximum loans can be capped at around 50% – 55% of the property value, although some lenders offer slightly more.
Who Might RIO Mortgages Appeal To?
A large number of interest only mortgage customers are coming to the end of their term with no means of paying the loan. Despite not having funds available, they often want to stay in their home instead of ‘downsizing’ at retirement. Therefore, as long as there is enough retirement income to afford the interest payments, they can remain in their homes.
RIO mortgages are also available to those who are currently mortgage-free. The money raised can be used for a variety or purposes. including gifts to family. This can sometimes be helpful for children who need a deposit to buy their own home. Funding the purchase of a holiday home could be another use..
It is also possible to use a RIO mortgage to buy a property, it does not have to be on a property you already own. This could bridge the gap between the value of the home you sell, and a higher priced new home.
The interest rate you are offered on a RIO mortgage will not be ‘fixed for life’ as it can be with a lifetime mortgage. You may be offered a fixed rate for a fixed period, but will be at the mercy of the market rates when it ends.
The ‘Safe Home Income Plans guarantees‘ available on lifetime mortgages do not apply to RIO mortgages. This is because payments of interest must be made each month. You will go into arrears if you default on payments meaning your home could be at risk of repossession. So the risk factors for a RIO are broadly the same as for any ‘normal’ residential mortgage.
Taking out a mortgage could affect your eligibility to any state means tested benefits and it can also affect your tax position.
Chestnut have the necessary qualifications and experience to advise on RIO and equity release lifetime mortgages. This will allow us to consider all options for you and not be restricted to just RIO mortgages.
A MORTGAGE IS A LOAN SECURED AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
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Equity release could reduce your eligibility to means-tested benefits and could affect your tax position.
Your home may be repossessed if you do not keep up repayments on your mortgage.