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Equity release schemes offer homeowners monthly salary in retirement

Lifetime mortgages now available with rates from 3.4%

Equity release is continuing to increase in popularity, with an increasing number of deals allowing borrowers to opt for a regular monthly income rather than a cash lump sum.

A range of innovations, coupled with lower interest rates, led to a 29% increase in the amount borrowed by homeowners in 2018, according to data from the Equity Release Council.

Here, we explain the key changes happening in the equity release market and take a look at current rates on lifetime mortgages.

 


Equity release: the basics

Equity release products allow homeowners to unlock some of the cash in their home while continuing to live in it. For some, equity release represents an alternative to downsizing, while for others it can fund a shortfall in a pension pot or help pay for care in later life.

Lifetime mortgages are the most popular form of equity release. These schemes involve taking a loan out on your property, which is then repaid when you sell the home or die.

Some borrowers choose to unlock a lump sum through equity release while others take a ‘drawdown’ policy, which provides a smaller sum up front with the option of drawing further loans at a later date.

Innovations in equity release

While equity release has many critics (more on the downsides later), the most recent report from the Equity Release Council shows a significant growth in popularity and the number of products available to borrowers.

In 2018, the number of deals meeting the council’s equity release criteria increased dramatically, from 86 to 221.

Date Number of products
January 2018 86
August 2018 139
January 2019 221

This increase is in part down to lenders becoming more innovative in their offerings.

One of the biggest changes has been the introduction of regular income deals in the second half of 2018. These products provide borrowers with monthly payments rather than lump sums.

One of the most well-known deals in this space is from Saga, which launched its ‘Regular Drawdown Lifetime Mortgage’ last October, allowing homeowners to set how much they would like to receive each month, with a minimum payment of £200.

Three key innovations

  • Regular income lifetime mortgages: these products provide monthly payments to the customer’s bank account, rather than releasing cash as a lump sum.
  • Regular interest payments: 20% of deals now allow regular interest payments, up from just 9% last year. This feature allows customers to make payments to reduce costs in the long term. Unlike retirement interest-only mortgages, payments can be stopped at any point. This means you won’t face the risk of repossession if you miss payments.
  • Downsizing protection: 52% of products now offer this, compared with 42% a year ago. Downsizing protection allows borrowers to repay their loan if they move to a smaller property without facing early repayment charges.

Equity release product features

Feature Number of deals offering this Percentage of deals
Voluntary repayments with no early repayment charge 127 57%
Downsizing repayment options 114 52%
Fixed early repayment charges 89 40%
Inheritance guarantee* 83 38%
Available on sheltered/age-restricted accommodation 77 35%
Drawdown facilities 61 28%
Allows regular interest payments 45 20%
Offers regular income payments 32 14%

Source: Equity Release Council. *Enables a fixed percentage of the property value to be ring-fenced as a minimum inheritance.

While the above table shows the amount of deals offering key features, it doesn’t necessarily reflect how popular each feature is with homeowners.

Indeed, while only 57% of equity release mortgages allow voluntary payments with no early repayment charges, 87% of the loans taken out in the second half of 2018 offered this feature.

Best rates on lifetime mortgages

If you’re thinking of taking out a lifetime mortgage, the good news is that rates are getting lower.

In the last month, Legal & General has cut its rates by as much as 0.32%, resulting in a market-leading rate of 3.4%.

The rate you’ll pay depends on two key things: the amount you need to borrow (the best rates may require you to borrow at least £100,000), and the loan-to-value (LTV) you’re borrowing at.

Below, you can find the lowest rates at four different LTV levels.

Max LTV Lender Monthly rate AER Min/max borrowing
38% Legal & General 3.4% 3.45% £100,000/£2m
42% Legal & General 3.49% 3.55% £10,000/£750,000
45% LV 3.52% 3.58% £10,000+
50% LV 3.61% 3.67% £10,000+

Source: Money.co.uk, 10 April.

Where are people taking out equity release products?

Data from the Equity Release Council shows that around one in 32 mortgages is a lifetime mortgage, although this could be set to increase.

The report shows double-digit growth in every region of the UK in 2018, with the Midlands seeing some of the biggest increases in uptake.

Region Year-on-year growth Five-year growth
East Midlands 26% 100%
Northern Ireland 21% 112%
West Midlands 20% 80%
Yorkshire and the Humber 18% 66%
Wales 17% 64%
North East 16% 67%
East of England 15% 158%
South East 14% 143%
South West 14% 99%
London 12% 138%
Scotland 12% 62%

Source: Equity Release Council

Why are homeowners taking out equity release products?

Looking at the table above, you might be wondering why there’s been such an increase in equity release products and uptake over the last few years.

Largely, this is down to the culmination of years of rising property prices, which have meant many older people have a significant amount of wealth tied up in their homes.

And with people living longer than before, this has led an increasing number of people to turn to their properties for retirement income.

The drawbacks of equity release

Equity release schemes might be getting more popular, but they’re not the right choice for everyone.

One of the biggest issues with equity release is that interest compounds quickly and can drain away any inheritance you’re planning to leave. For example, a lifetime mortgage over 20 years could end up costing you more than three times the amount you initially borrowed.

And while some lenders are innovating, some products still come with high early repayment charges, meaning that switching to a cheaper deal can be very costly.

Alternatives to equity release

Of course, equity release isn’t your only option.

For some borrowers, remortgaging may be possible, and those who aren’t looking to release a significant sum could consider a personal loan.

There’s also the possibility of downsizing, although moving to a smaller home can be very expensive in the current market.

That’s because of two issues. First of all, there’s a lack of quality smaller homes for older people to move to. This is especially the case with bungalows, which can be few and far between. This scarcity results in higher prices.

Then, there’s the various costs of moving home, including the need to pay stamp duty.

Retirement interest-only (RIO) mortgages

Right now, the market for so-called RIO mortgages is growing, with an increasing number of lenders offering deals.

RIO mortgages are a kind of cross between interest-only mortgages and equity release. Most of them involve paying interest on a monthly basis for an indefinite term, with the mortgage being repaid when you die or go in to care.

One of the stumbling blocks of these products is that you’ll need to pass affordability checks to prove you can meet the monthly repayments.

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