Q I would be interested in your opinion on a proposal my wife and I are considering. We wish to move house to live closer to one of our children but, unfortunately, they live in a more expensive area than we do. We’d prefer not to downsize but a comparable property would cost up to £100,000 more than our current house, which is worth about £360,000 and is mortgage free.
We are thinking about using equity release to raise the extra £100,000 we need. I’m 76 and my wife is almost seven years younger, so on the assumption women live two years longer than men, we anticipate my wife will outlast me by about nine years. While I’m alive we should be able to pay the interest on the loan but if I die then the interest would have to come out of the equity of the property. I have calculated the interest over nine years to be about £45,000.
Our children are comfortably off and not dependant on inheritance and are happy for us to proceed.
A I’m not sure what the relevance is of your and your wife’s life expectancies as there was no mention of it in the very helpful guide to equity release written by Andy Vickery, a qualified equity release and mortgage adviser at Money Release who specialises in over-55s finance, but maybe I’m missing something. But you are right in thinking that your age matters when looking into equity release.
If you are interested in taking out a lifetime mortgage – which is what I assume you are considering – you have to be at least 55, while the minimum age for a home reversion scheme (where you sell part of your home to release equity rather than taking out a loan on it) is 60. Your age also determines the maximum you can borrow with a lifetime mortgage. At 55, the most you can release from your property is 31% of its value, while at 70, it is 48%, rising to 58% at 80.
You are also right in thinking that it would be a good idea to pay interest on the loan even though you are not required to. If you choose not to pay interest, the interest due is added to the amount you originally borrowed, so the amount you owe rises each year. So does the interest charged. The rate of interest doesn’t change, however, as it is fixed at the outset.
According to Vickery, using equity release to buy a new home “allows you to clear your outstanding mortgage [not necessary in your case] while also obtaining additional funds with which to purchase your new property. The property sale, mortgage repayment and new property purchase are all finalised at the same time. Cash from your current property along with the equity you release from the new home will give you enough to purchase your new home.”
Using the Money Release equity release purchase calculator – and assuming you put down a deposit of £350,000 to allow £10,000 for stamp duty land tax and legal and other fees – it turns out that you could buy a house costing just under £670,000 if you wanted to. However, the interest you would pay would be a pretty steep 6.6%. Restricting the loan to £110,000 would bring the interest rate to a more reasonable 3.73%.
Finally, Vickery advises you to steer clear of any equity release scheme that is not approved by the Equity Release Council. Those that are approved carry a negative equity guarantee, which means that if the mortgage amount exceeds the sale proceeds, you will not have to make up the shortfall.
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