Using Equity Release to Buy a Property
If you’re over 55 and considering moving home, you might be wondering how to bridge the gap between what you sell your current property for and the cost of your new one.
For many people in later life, income may no longer be sufficient to qualify for a traditional mortgage. This is where later life lending such as equity release for purchases can offer a solution to the right borrowers.
Equity release for purchases allows you to use the value in your home to buy a new property without taking on regular mortgage repayments. It is not for everyone and important to note that the interest will roll up, eroding equity in your home.
What is Equity Release for Purchases?
Equity release for purchases involves using a lifetime mortgage to help fund the purchase of a new property.
It’s not a separate mortgage product but a way of using equity release in conjunction with the sale of your current home.
Here’s how it typically works:
- You sell your existing property and use the sale proceeds to pay off any existing mortgage.
- You then use the remaining funds from that sale, combined with money released from a new lifetime mortgage secured against your new home, to complete the purchase.
The lifetime mortgage lets you borrow a portion of your new property’s value. There are no mandatory monthly repayments unless you choose to make them.
Instead, interest can roll up and is repaid when you pass away or move into long-term care.
The new property must be your main residence and meet the lender’s criteria.
Eligibility generally starts from age 55, and the amount you can borrow depends on your age, property value, and sometimes health or lifestyle factors.
Why Use Equity Release to Buy a Home?
Many homeowners use equity release for purchases when they want to move but cannot or prefer not to take on a traditional mortgage. Reasons include:
- You want to move to a more suitable property but your retirement income doesn’t meet mortgage affordability checks.
- You want to clear your existing mortgage and still afford a new home.
- You wish to move closer to family or into a single-storey home that’s easier to manage.
- You want to release funds for lifestyle purposes without affecting your new home purchase.
This route allows you to own your new home outright while freeing up money to support your lifestyle or help family members financially.
Find out Your Options
Benefits of Equity Release for Purchases
Equity release for purchases can make moving later in life easier and more flexible.
No mandatory repayments
You don’t need to make monthly repayments, though you can choose to make voluntary interest payments to manage the balance, effectively like an interest only mortgage without the obligation.
Stay in control of your home
You remain the legal owner of your new home, and you can continue living there for life or until you move into long-term care.
Move to a more suitable property
It helps you move to a home that suits your changing needs, whether that means a bungalow, a property closer to family, or somewhere with more amenities.
Flexibility in your finances
Some plans allow you to make partial repayments or draw down further funds later if needed, giving you control over your finances in retirement.
No negative equity guarantee
All plans approved by the Equity Release Council ensure that you’ll never owe more than the value of your home when it’s sold, provided it’s sold at the best possible price.
Things to Consider
While equity release for purchases can be very helpful, it’s important to be aware of the implications.
- Reduced inheritance – The amount borrowed, plus interest, will reduce the value of your estate.
- Impact on benefits – Releasing cash could affect eligibility for certain means-tested benefits.
- Property suitability – The new property must meet lender criteria, so certain types, like retirement complexes or listed buildings, may not qualify.
- Costs and fees – There will be arrangement, valuation, and legal fees involved.
Example of How It Works
Imagine you’re 63 and your current home is worth £280,000 with a small remaining mortgage of £40,000. You want to buy a new home priced at £375,000 that’s closer to family.
- You sell your current property and, after repaying the mortgage, have £240,000 remaining.
- You then take a lifetime mortgage of £135,000 secured against your new home to cover the balance.
- You move into your new home without monthly repayments, and the interest on your lifetime mortgage rolls up over time.
You’ve successfully moved without needing a traditional mortgage or dipping into savings, keeping your finances comfortable in retirement. You do now have a mortgage which is rolling up, so significant thought should always be taken when considering this route.
Using Equity Release to Buy a Holiday Home
It’s also possible to use equity release from your main home to buy a holiday property. This allows you to enjoy time away without selling your existing home. However, you’ll need to meet the lender’s residency criteria and may face additional costs such as stamp duty and legal fees.
You should always seek advice before taking this route, as using equity release for a second property can affect your financial position and inheritance planning.
Kerr & Watson can explain how this works and help you assess whether it’s right for you.
Who is Eligible?
To qualify for equity release for purchases, you usually need to:
- Be at least 55 years old
- Own your current home and use it as your main residence.
- Be buying a new home that meets lender standards.
- Have sufficient equity in your current property.
Health and lifestyle factors can influence how much you can borrow. Some lenders offer higher loan amounts if you have certain medical conditions or lifestyle risks, as this can affect life expectancy.
Alternatives to Equity Release
Before proceeding, it’s worth exploring other routes. You could:
- Downsize to a cheaper property without releasing equity.
- Take out a retirement interest-only mortgage, where you pay monthly interest but not the capital. This is based on affordability so not all borrowers will qualify.
- Use savings, pensions, or family assistance if available.
Conclusion
Equity release for purchases can open the door to a more suitable property without the strain of monthly mortgage payments.
It can be flexible and practical way to fund your next home, but it’s also a decision that deserves careful planning and expert advice. Your decision will affect what you leave behind for your family when you pass away, as rolled up interest erodes the equity within your property.
At Kerr & Watson, we take the time to understand your goals and find the right path forward.
Contact Kerr & Watson today for friendly, professional advice.
EQUITY RELEASE WILL INVOLVE A HOME REVERSION PLAN OR A LIFETIME MORTGAGE, WHICH IS SECURED AGAINST YOUR PROPERTY AND WILL REDUCE THE VALUE OF YOUR ESTATE AND IMPACT FUNDING LONG-TERM CARE.
