One of the biggest concerns for those considering equity release is the worry that they will be unable to move home or downsize after taking out an equity release plan. Leaving them potentially stuck in their current property for the rest of their lives.
This may not be an issue at the moment, but things can change in the future and as an equity release plan can last for many years this could be a potential problem. However, whilst the worry of not being able to move may have been the case with the original type of equity release called a “Home Reversionary Plan”, the good news is that almost all modern equity release plans taken out today have a lot more flexibility around your home and moving home is certainly possible.
It’s important to first understand the difference between the two different types of Equity Release plans as they are very different in terms of the flexibility around moving home or selling your property. The original older type of equity release is called a “Home Reversionary Plan”. These still do exist but have largely been replaced with the newer modern more flexible “Lifetime Mortgage” type of equity release.
Both Home Reversionary Plans and Lifetime Mortgages come under the umbrella term of Equity Release (which can sometimes be confusing!), although most Equity Release Plans taken out these days are Lifetime Mortgages.
The original type of equity lease was called a Home Reversionary plan. Under this type of Equity Release plan you effectively sell your property at a discounted price to a home reversionary plan provider and would then become rent-free lifetime tenants of your own property. This allowed you to obtain money up front for the eventual sale of your property. However, one of the downsides with this type of equity release plan is the lack of flexibility or options should you decide you want to sell your property in the future, to move elsewhere, downsize, or to release more equity as cash.
As you are technically no longer the property owner, when you sell the property the Home Reversionary Equity Release plan ends and the property then reverts to the possession of the Home Reversionary plan provider and they would be the ones who would benefit from any additional equity or cash released from the property. Please note this would happen when the final applicant/plan holder enters long-term care or passes away.
With a Lifetime Mortgage, the new type of Equity Release which almost all plans these days are, there is a lot more flexibility when it comes to selling your property, moving or downsizing.
A Lifetime Mortgage Equity Release plan is essentially just a loan secured against your property, with the homeowner taking out the Lifetime Mortgage retaining the full ownership of the property. Just as is the case with a standard residential mortgage. As the ownership of the property is retained it is possible to sell the property and use the proceeds (after all loans and charges have been repaid) for whatever is required, such as purchasing a new property.
When the property is sold (please note this also happens when the final plan holder goes into long-term care or dies) then the Lifetime Mortgage / Equity Release loan is paid off out of the proceeds from the sale of the property. This would include the original Lifetime Mortgage loan taken out, plus all of the interest that may have built up (most lifetime mortgages allow you to roll up the interest and add it to the loan, rather than paying it monthly).
It’s important to understand that the loan could have both grown in size (likely if there were no monthly payments being made with the interest being rolled up) and it’s possible that the property value could have fallen or simply not risen as quickly as the rise in the loan amount.
If you have a Home Reversion type of Equity Release then it is unlikely that you will be able to move home, unless you have only “sold” a portion of your property and there is enough equity remaining after the sale.
With a Lifetime Mortgage (sometimes called Equity Release Mortgage), it is certainly possible to move house if you have an equity release plan in place and may be possible to take your equity release plan with you. Many equity release provider offers portable equity release schemes and although all providers have different criteria, in general:
The property you are moving to must meet the lender’s requirements (for example some do lend against flats or it may have to be freehold).
If the property you are moving to is worth less than your existing one, you may need to pay back some of the loan and accrued interest. This is to maintain the maximum “loan to value” of the original plan.
If the finances of the move or the property don’t meet the lender’s criteria, the loan and interest can be repaid in full with cash raised elsewhere. You may also have to pay an early repayment charge to the lender.
Some equity release providers offer downsizing protection, so you may be exempt from early repayment charges.
Even if you have a Lifetime Mortgage that allows a transfer/port to another property it may not always be possible. If the new property does not meet the lender’s criteria then it may not be possible to transfer your lifetime mortgage to the new property. Equity release lenders are becoming more and more flexible with their lending criteria although there are still some types of properties on which they will not lend. Reasons for the new property not meeting the lender’s criteria can include:
As such it’s vitally important to check on the requirements before looking for a new property to move to.
Almost all Lifetime Mortgages taken out these days come with a no negative equity guarantee. This means that no matter what happens to the size of the loan or the value of the property, the total amount of the loan to be paid back can never be more than the value of the property.
So for instance; if the loan plus all the accrued interest has risen over the years to more than the value of the property then the lender would only be able to claim back an amount equal to the value of the property and any loan above this amount the lender would have to forgive. This means that in the worst-case scenario, there may be no cash left after the sale but the dependants have a guarantee to never pay anything back on top of this amount.
As we have seen above it’s important to know which type of Equity Release plan you have or plan to take out to see how easy it is to move home or downsize with Equity Release.
A Home Reversionary type plan is rather inflexible and generally, it is very difficult to move or downsize with these older type plans.
However one of the big benefits of the modern type Lifetime Mortgage plans are their flexibility and the fact that the ownership of the property is retained by the homeowner taking out the Equity Release. There are restrictions on how easy it would be to move home or downsize and this will generally be dependent on factors such as the size of the loan at the time, the value of your current home and the price and type of the property you want to move to.
If you would like to discuss how easy it is to move home with Equity Release then please get in touch for a chat as we are always happy to have a no-obligation conversation and discuss whatever you wish.
Leaf Financial Advisers are Bristol-based Independent Equity Release Advisers and are fully regulated to give advice on Equity Release in the UK. Please get in touch on 01173 823 823 or at firstname.lastname@example.org.