At Equity Release Supermarket, we always aim to write articles for you that are helpful and answer any questions you may have about equity release and lifetime mortgages – the most popular type of equity release plan.
Over recent years, retirement apartments have become increasingly popular with older people and recent research from Knight Frank revealed that the private retirement market is forecast to reach a value of £44 billion by 2022 (a 50% increase) and the number of units is set to rise by almost 30%.
The research also highlighted that the supply of later living homes is dwarfed by the rate at which the British population is ageing as the number of people aged over 65 is forecast to increase by 20% to 12 million by 2027. The report calculates that there is a need for three million retirement living properties to house the number of people aged over 65 that would consider downsizing. (Based on the assumption that 25% of over-65s in their existing homes would consider downsizing into some form of specialist retirement living).
The reasons for this growth in popularity are simple. Retirement developments allow retirees to move into smaller properties that are easier to manage and maintain. Furthermore, many offer communal areas and events where residents can socialise with their neighbours and many also offer support services such as a live-in warden or medical services – all designed to make your retirement years as comfortable and enjoyable as possible.
As demand for these types of development are growing, we’re finding that we’re being asked if it’s possible to take out equity release on a retirement property. This is because property owners are struggling to find a lender that will consider their home because of the type of lease they have and the conditions that may accompany it. So, let’s answer that question for you.
Firstly, there are three scenario’s we come across here at Equity Release Supermarket.
1. Homeowners who aren’t ready to move into a retirement development just yet but wish to release equity now.
2. Customers who already have an equity release plan and are now planning to move into a retirement apartment.
3. Older homeowners who are looking at their next move into a retirement development.
Let’s look at each stage in turn…
1. When taking out equity release for the first time, it’s important that your equity release adviser not only discusses your immediate plans, but also those that could have an impact in the future. Therefore, if there any designs on moving home after taking equity release, then future plans MUST be discussed and considered in greater detail. Particularly so, if a retirement apartment could be a possibility.
Some existing lenders allow clients to transfer their equity release scheme from their existing home to a retirement property, but many DO NOT, especially older plans. Many lenders now offer to waive any early repayment charge should you sell your home and buy a Retirement/Sheltered accommodation property, usually after 5 years of taking a scheme out.
Lenders have been listening and addressing the issues of older lifetime mortgage plans as many now include an important feature within their schemes called ‘Downsizing protection’. Lenders can have different interpretations of this feature, however essentially it allows you to downsize to another property with NO early repayment charge - after a defined period.
Now, the variations within this feature are vital to ensure that your next move is covered by the downsizing protection of that particular lender. For instance, Hodge will allow you to downsize (even just sell up) from day 1 of inception of your plan. For example, if you decided to sell up and vacate your property permanently, they will waive the early repayment charge.
Other providers such as More2Life, will waive their early repayment charges if after 5 years from the date of your initial advance, you repay your loan as a result of selling your home and move to another property which does not meet their lending criteria.
Therefore, as you can see, it’s not just important you include downsizing protection if you intend to move property in the future, but essential it’s the correct lender and version of downsizing protection.
2. Here at Equity Release Supermarket, we’ve helped some clients who’ve had to repay an existing equity release scheme as the new, over 55 property didn’t meet their lending criteria. However, we managed to successfully find a new lender who will accept their new Retirement/Sheltered accommodation property. Being whole of market is important in such situations as we consider ALL lenders in the search to find the plan that fits such criteria.
Obvious considerations for clients with existing schemes looking to move into a retirement home would be whether it can be transferred initially and if so, then great, the scheme can be ‘ported’ to the new property.
If not, then we would need to establish the cost to settle any existing scheme including early repayment charges, the set-up costs of the new plan and who (if any) could be the best lender and plan for the client moving forward. This would involve considering the type of retirement property involved and the arrangements with the owner of the freeholder.
Checks would need to be made upon the type of lease that accompanies the retirement property. If it is an apartment within a ‘block’ of other apartments and the property is freehold, then equity release lenders won’t consider it in England & Wales. Different rules do apply in Scotland, so contact us for further details.
Other issues that can sometimes arise with retirement villages is any onerous conditions within the lease and service charges – including age restrictions, sinking funds and sell-on clauses. It is always best prior to any application that you provide a copy of the lease which we can run by the lenders and solicitors for approval.
There are lenders that will accept service charges, which can typically be up to 2.5% of the property value and some age restricted properties have a re-sale fee often referred to as a sinking fund. However, as lender criteria varies so significantly it’s always best to check with your Equity Release Supermarket specialist adviser.
Most apartments are sold leasehold in England & Wales and most equity release lenders are happy to lend on leasehold properties. Lenders will also check the length of the lease with usually a minimum of 75 years being required, however some are much higher than this.
We have also written an article about leasehold properties and equity release which you may find useful.
3. For property owners simply looking to move into a retirement apartment and downsize, then there should not be a need for equity release as there may be sufficient capital from the proceeds of the sale of the exiting home. However, Equity release can work in virtually the same way that any residential mortgage works when purchasing a property of greater value, commonly known as ‘up-sizing’, as it can make up the shortfall between any capital raised from the sale of the old property and the purchase price of the new one.
Whereas a conventional mortgage loan is based on income, equity release is determined by the age of the youngest applicant and the value of the property being bought. At age 55, the amount of equity that could be raised would be approximately 25% of the property value. Therefore, if you were buying a retirement apartment for £200,000 and you had £150,000 from the sale of your current home, then equity release of £50,000 could bridge the shortfall.
Again, for all the reasons noted above, it always pays to speak to an expert with properties that don’t fit the ‘norm’ and at Equity Release Supermarket we’ve successfully helped many customers who have leasehold properties.
So, if you are considering purchasing a retirement/sheltered apartment under any of the three scenario’s above and unsure whether it would be eligible for equity release, why not speak to your local adviser by calling us on 0800 802 1051 or emailing them using [email protected]