Over-55s own properties worth around £1.8trn – and a new product from Nationwide may let them to tap into that wealth. But how does it work – and is it a good strategy for you?
Nationwide today announced the launch of a ‘lifetime mortgage’ for people aged between 55 and 85, which would allow them to borrow against the equity in their home.
The deal is the only equity release product from a major, high street lender. Which? looks at how it works and what older homeowners need to consider before taking out a lifetime mortgage.
Nationwide launches lifetime mortgage
The new lifetime mortgage from Nationwide allows homeowners aged between 55 and 85 to take out a loan against the value of their home. This loan is interest-only and does not need to be repaid until the owner dies or goes into care.
Interest is added to the sum of the loan each month – so borrowers have nothing to pay on a monthly basis, though they will face a larger bill at the end.
Loans can range between £10,000 and £460,000, though you cannot borrow more than 55% of the value of your home. The interest rate will depend on how risky the loan is considered to be.
Early repayment fees also apply. Borrowers will pay a penalty of 6% if they repay in the first 5 years, 3% between 5 and 10 years, and 1% between 10 and 15 years. But customers can avoid early repayment charges if they choose to downsize to a less valuable property after 5 years.
- Find out more: Lifetime mortgages – everything you need to know
What is a lifetime mortgage?
As house prices rise over time, many homeowners build up significant equity in their property. If, for example, you bought a house in Manchester in 1995 for £35,000, it could be worth over £170,000 today – an equity increase of £135,000, provided your mortgage is fully repaid.
Older people may want to take advantage of that growth – for example, to finance their retirement or their care – by borrowing against the value of their home, a process known as equity release.
In addition, some borrowers who took out interest-only mortgages will soon be seeing their deals come to an end. When an interest-only loan matures, borrowers must repay the full value of the loan – and hundreds of thousands of Brits have no means of doing so.
If the borrower does not qualify for a new repayment loan – whether due to age, or affordability factors – they’re in a financial bind. An equity release loan may give them an option to re-finance their property, provided its value has grown enough to meet the minimum threshold.
- Find out more: What is equity release? – our guide to borrowing against your home
Is equity release a good idea?
For some borrowers, equity release may be the right option. But before taking out a lifetime mortgage, you should carefully consider the terms being offered.
Nationwide aside, most equity release products are from specialist lenders.
Interest charges are often quite high, meaning the final amount owing could be huge – in some cases, large enough to wipe out any remaining equity in the home. This is particularly a concern in areas where prices aren’t growing much.
If house prices fall, borrowers – or their estate – may owe the bank money even after the property has been sold. Some lenders offer a ‘no negative equity guarantee’, which protects you in such cases, so check whether this is part of your agreement.
Some equity release products don’t allow the mortgage to be ported and impose hefty early repayment charges – locking borrowers into agreements well into retirement, even if their circumstances change.
In the right situation, equity release can be a way for borrowers to unlock the wealth tied up in their property. But it’s vital to consult a professional for advice before going down this path.
To find out more, read our guide on whether equity release is right for you.
Push for fairer equity release products
In recent times, lenders and regulators have been exploring ways to make equity release a fairer option. The FCA has launched a consultation into this market, looking at whether retirement interest-only loans should be introduced more broadly and under what conditions.
Nationwide director of mortgages Henry Jordan said its new product would target ‘under-served’ older borrowers ‘who have not been well catered for by mainstream mortgage lenders.’
The move by Nationwide was welcomed by Which? chief executive Peter Vicary-Smith: ‘For some people equity release could be an important plank in their financial strategy, so we’re delighted to see responsible players bringing new and fairer products to the market.
‘As with any big financial decision, people should take professional advice and look at a range of options before making a choice.’