Question: My partner and I recently applied for equity release, via a lifetime mortgage, to assist my brother in meeting the cost of his carers, only to be told that it was not granted in respect of a freehold flat, which surprised us and our financial adviser. Is this normally the case?
Answer: For those who are unfamiliar, equity release is a way of extracting cash from the value of your property. It is aimed at those aged 55 and above as a means of borrowing money in the run up to and after your retirement, using your home as security.
It is used for a variety of reasons – sometimes to pay off an interest-only mortgage or other debts, to fund home improvements, or to supplement retirement income. And, as you’ve done, it can be used to meet the cost of later life care.
Equity release has surged in popularity in recent years. According to the Equity Release Council, the body that represents this industry, close to £4 billion was unlocked from properties in 2018, an increase of 29 per cent on the previous year. Almost 83,000 people used equity release last year.
So, how does it work? There are a few options. A lifetime mortgage, the one that you told me you applied for, sees you borrowing a proportion of the value of your property. You’re charged interest on this amount, but you don’t have to pay anything back until you die or you sell your property.
With a lifetime mortgage, you can take a lump sum, or draw down cash as and when you need it. Some deals allow you to repay some or all of the interest you’re being charged.
Alternatively, a home reversion plan sees you selling a share of your property to an equity release lender. You can remain living in the property, and when the property is sold, your provider gets the share of the proceeds it bought from you.
Equity release can offer a solution for people to cash in on their home while still living there, but the debt you take on can quickly escalate. If you borrowed £75,000 with a lifetime mortgage, for example, with a typical annual interest rate of 5.5 per cent, you’d owe around £128,000 after a decade. After 25 years, your debt would be around £286,000.
Depending on the growth of your property’s value, this could wipe out a significant part of the equity you hold, and how much you can pass on to your heirs when you die. Fortunately, you cannot get into negative equity (where your debt exceeds the value of your home) with equity release.
Therefore, it’s vital you take professional advice with someone who has specialist qualifications for advising on this product, and thoroughly explore the alternatives – from looking at unsecured loans to traditional mortgage extensions or even downsizing.
It’s great to hear that you’ve sought advice, so why were you rejected for the product? Well, the property you’re looking to cash in on is the issue. Your property is used as security for the loan, and the lender needs to be confident that it can re-sell your property in the future in order to see that loan repaid.
As the Equity Release Council states on its website, lenders will ask about the age of your property and how it was built, as this could have an impact on its willingness to lend. If there are features that could affect its future prospects for sale, the lender may not want to take that property on.
The Council cites studio or basement flats, local authority housing blocks and retirement properties as those that are “unlikely to be acceptable to equity release providers.” I checked further with some equity release providers.
Aviva, one of the best-known equity release providers, refuses to lend on freehold flats. A spokesperson for the company told me that this because there is no “legal provision of responsibility” if there are structural issues with communal areas or shared walls and roofs, unless there is an agreement with the owners of adjacent properties. This could put the property “at risk” and is why the insurer does not offer equity release on freehold flats.
In its terms and conditions, equity release provider Hodge Lifetime may consider freehold flats, but only where the “freehold is over the whole building and is subject to leases on other flats.” OneFamily, another lender, has a similar clause.
To find out more about equity release, visit which.co.uk/equityrelease.
Gareth Shaw is Head of Money at Which?.