Anyone over 55 living in the Big Smoke is currently benefiting from the exceptionally rising London housing prices. Figures in 2014 have shown that yet again it was UK’s capital seeing the focus of where prices showing the greatest increase. London property values on average soared by 17.7% in February 2014 compared to the year earlier. So how can this growth in London’s equity benefit the over 55’s, or those already in their retirement?
Well, equity release schemes are not new products, but they have suffered their ups and downs, particularly over the last seven years. In 2007, 30,000 borrowers benefited from equity releases, while only 16,000 took advantage of these financial products in 2011. In 2013 the numbers were back up to 19,000 borrowers in which a total of 1 billion GBP was released to customers. With housing prices on the rise, more and more retirees are scrambling to find an equity release calculator that will help them determine how much equity they can release and advice on whether it’s wise to withdraw funds now in the current economic situation.
Withdrawing Funds as London Housing Prices Recover
Almost all the London equity release products available are lifetime mortgages. These form of home equity loans are designed to run for a “lifetime” rather than a set term. No repayments are needed to the lender until death, long term care, or the person decides to move out of their current home. Interest is applied to the loan, accumulating with compound interest, until the capital sum and all accrued interest has been paid upon one of the aforementioned events. For London homeowners now seems like the perfect time to take advantage of possible retirement funds.
From the financial view point, particularly looking at the equity release lender, there is much more to consider for whether taking equity from the home is a good idea right now. When London housing prices increase, this provides greater equity in the home. It goes back to the concept of loan-to-value (LTV) that any mortgage is based on.
For example; a retiree owning their own home valued at £300,000. They have a mortgage on this London property of £100,000. The London property boom starts and the market value increases to £400,000, then the equity in the home has grown by £100,000. This extra £100,000 growth can then be utilised for equity release purposes and for someone aged 65, this could represent an extra £30,000 in tax-free cash at their disposal! Even more so, if there is no mortgage then there is an untapped potential for London homeowners to gain further significant funds for their retirement.
The Halifax House Price Index believes a long term growth of 4 per cent that has existed for the last 30 years will continue. Even if this growth rate is only 2 per cent per year there is still a significant chance for housing prices to continue to increase. In relation to equity release schemes, just 2% growth on their property value will cover any roll-up of interest on their equity release schemes, which ultimately will benefit their heirs.
With an equity release concept the interest rate is fixed for the lifetime of the borrower. If the loan APR is 6%, the property value is £250,000 and the owner from London decides to take £50,000 of that out in a lifetime mortgage; the loan in 20 years would have rolled up to be £160,000 total. Obviously the equity left in the home goes from 80% at the beginning, to 36 per cent at the end. However, this is based on the London property value staying the same. If the home value increased to £400,000 over the 20 year term, then the percentage of equity left for inheritance purposes also increases accordingly.
To determine what might happen in your situation and to determine how much equity you could release at the beginning, you should make use of a London equity release calculator. This calculator looks at the potential maximum equity release you are able to borrow based on age, current equity release interest rates and possible inflation choices for housing prices rising.
Why do you want the Equity?
The reason you wish to take out equity from your home is largely going to determine how much equity release funds you will need. Equity release schemes are now something that allows you to choose how you use the money, thus the appeal too. The most common reason to borrow from a London lifetime mortgage in retirement is to repay a standard mortgage.
The second is to make home improvements, particularly if it can be shown this extra investment in the London home, now benefitting from rising house prices, could significantly add further value to it. Additionally, you may wish to release extra funds to conduct essential maintenance, thus preserving the value of the property.
The third most common reason of late is to help homeowner’s children purchase their first home in London or the surrounding commuter area dependent upon affordability. Parents can release equity of their own London home, gift this amount to the children, which they in turn can use this equity released as a down payment on their new home. It provides two investment properties over the one.
Restrictions on the Release
Most companies supplying equity releases to healthy Londoners, even to those in their late 60s, will allow no more than 35 per cent of the total value in the home. For most London homeowners this is not a problem as the typical amount taken out is three-quarters of the amount available. In other words, if a borrower is able to take up to £70,000 they usually take only £45,000.
The remaining funds however can be left in a cash reserve and then taken in the future as & when required. This form of equity release loan is called a drawdown lifetime mortgage & by not taking the whole amount upfront, conserves the future balance. This works as the initial loan taken attracts interest immediately, whilst funds left in the cash reserve facility are not charged any interest whatsoever. Only when additional funds are taken will interest then start being charged on the cash withdrawn. Drawdown lifetime mortgages are now the most popular form of London equity release schemes.
Possible to Reduce Borrower Risk
There is an option to reduce the borrower’s risk. As mentioned above, while most lifetime mortgages are lump sum in nature, the London drawdown lifetime mortgage allows the homeowner to take money as they need it. It helps to limit the amount of interest that accrues overtime. Furthermore, now with the likes of Aviva now allowing 10% repayment of the original capital borrowed each year, it can be used as a form of equity release repayment mortgage, essentially repaying the scheme over a 16 year period!
However, even better is for those people living in London with a good disposable income. The more recently designed equity release schemes can come in the form of an interest only lifetime mortgage, in which a monthly payment is made to repay just the interest element charged. By repaying the interest will help keep a level balance & protect your loved one’s inheritance.
Check out our London Equity Release calculator to determine how much you can borrow and calculate whether the maximum equity release can provide sufficient funds for your purposes & is the really right choice for you.