Financial freedom for the over-55s
PUBLISHED: 13:34 18 March 2011 | UPDATED: 15:37 20 February 2013
Equity Release is now a real option for funding your future, says Financial Adviser Richard Smith...
Equity Release has previously been viewed as a last resort for those homeowners who are keen to take out lump sums or regular contributions from the equity in their property to help fund a variety of needs, but with current market conditions and improved product legislation it could be set to become a useful planning tool.
Equity Release has been misused in the past and this means, historically, it has been viewed by some people as an unnecessary product that would erode their inheritance.
However with the current credit crunch and the significant changes in the residential mortgage market, Equity Release could be the product of choice for all the right reasons.
For example, some over 55-year-olds could be better off moving to a lifetime mortgage, as the number of conventional mortgages and mortgage products dry up, and increasing prices, threaten homeowners' financial stability.
This year, some 2.76 million homeowners are coming off fixed-rate mortgages with an average rate of 4.8%, and are facing a move to significantly higher rates. Some of these customers will be over 55 and have a loan to value ratio low enough to consider a lifetime mortgage.
The lifetime mortgage interest rates, fixed for life, on certain Equity Release products start from a highly competitive 5.92%, including Interest Only options from 6.25%, where the client elects to pay the interest each month to avoid the roll-up of interest.
Some homeowners have found themselves in a dreadful trap of borrowing on credit cards with high interest rates because they live in fear of losing their home if they miss a payment.
Bank of England figures show that there was a significant increase in credit card debt last month, with industry commentators concluding many were borrowing on cards to meet mortgage payments out of fear of losing their homes.
Modern lump sum lifetime mortgage products can be used to pay off, for example, outstanding mortgage balances and debts, such as credit card debt, which are carrying increasingly high interest charges. Essentially these lump sum products can give homeowners access to funds to clear the debt, get out of the negative cycle and move into retirement with certainty and less stress.
In addition, Lifetime Mortgages approved by SHIP (Safe Home Income Plans), the industry body championing high standards of delivery from UK Equity Release providers, come with a number of important safeguards for homeowners which are not available on traditional mortgages. For example, a 'No Negative Equity Guarantee', so there is never a risk of the homeowner owing more than the value of their property.
Interest Only lifetime mortgages can also feature a specific safety net whereby, if the homeowner misses an interest payment, or opts not to make payments, the product converts to a conventional Lifetime Mortgage whereby the interest is added to the loan and rolls up, and the capital plus the rolled up interest is repaid when the homeowner either dies or moves into long term care. Thus, the provider will never repossess the property because the client cannot keep up repayments. With a traditional mortgage, interest has to be paid on the loan every month or the homeowner faces the risk of losing their home.
Today's Equity Release products are far better designed than previously: highly flexible, attractively priced with a wide range of guarantees for customers and are particularly well suited in current difficult market circumstances to meet the needs of older homeowners who are looking to re-finance an existing mortgage or who have other more expensive types of debt.
Equity Release is a specialist product, this means if you are looking for an adviser who may be able to explore this option with you they must have the correct qualifications to advise you.
Far from being a product of last resort, Equity Release should now be considered as a sensible option for many older homeowners to consider.
For more information contact Richard Smith on 07771 890425 or call pi financial on 01743 282222.