Over-55s considering cashing out their homes with equity release will now need to look at their daily expenses before taking out a mortgage.
The Equity Release Council, the industry standards body, has updated its code of conduct to require its member advisers to cover income and expenses as part of the advice process.
This comes as retirement lending rates have risen to more than 9 per cent in some cases, reflecting broader increases in the cost of home borrowing across the market.
A word of advice: Those seeking equity release now should be questioned about their daily expenses in retirement.
Obtaining advice is a legal requirement for taking out an equity release mortgage.
Most equity release lenders, as well as many advisory firms, are members of the Equity Release Council, meaning they agree to abide by its rules and mission statement.
While no monthly payments are required on equity release mortgages, it is still important for homeowners to consider how borrowing money against their home would affect their finances in retirement.
Equity release can affect entitlement to certain state benefits, as well as what someone will pay for care if they need it. It can also affect the inheritance they can leave their family.
The Equity Release Council said income and expenses were already discussed during the advice process in many cases, but this would formalize the requirement and ensure it is “delivered consistently”.
The updated code also includes more protections for borrowers with lifetime payment mortgages, where homeowners agree to make payments until they reach a certain age. The changes will take effect from March.
Equity release loans, also known as lifetime mortgages, allow homeowners aged 55 and over to take out a tax-free loan worth up to 60 per cent of the value of their home, while remaining the sole owner.
It does not have to be repaid until the last borrower dies or enters long-term care, and is usually paid off with the sale of the home or your broader estate.
This means that the borrower’s income and expenses are not evaluated in the same way as if they were applying for a standard payment mortgage.
Interest will accrue on the outstanding balance each month and be added to the total loan amount so it increases over time.
While monthly payments are typically not required, some plans allow borrowers to choose to make them voluntarily to keep the interest they owe low.
For those who plan to make regular payments in retirement, discussing income and expenses would be even more important.
Later this year, the council will undertake a broader review of its standards.
Michelle Highman, chair of the Equity Release Council’s standards committee, said: “The Council’s standards have been vital to the development of a vibrant market, but it is important that we review them regularly and consider how we best serve customers and support innovation. “. within this sector.
‘The Council is therefore carrying out a comprehensive review in 2024 with input from members, stakeholders and other interested parties.
“Evolving our standards is key to helping the market continue to grow and ensuring the diverse customers who choose to access their real estate value can do so with confidence.”
Retirement Fund – Equity release loans allow homeowners aged 55 and over to take out a tax-free loan worth up to 60% of the value of their home, while remaining the sole owner.
Andrew Morris, senior equity release advisor at Age Partnership+, added: “While most equity release plans are not assessed in terms of affordability, at Age Partnership we have long believed that a robust conversation about income and expenditure It’s fundamental”.
‘Discussing income and expenses helps clients see if equity release is right for them and, if it is, helps them ensure the level of borrowing is appropriate.
‘As well as analyzing your current situation, it is also important to consider your future income and expenses. This advance planning helps identify any future needs.
“These include what would happen if a client stopped working or, in the case of joint parties, what the financial position would be if one died.”
“If there is additional income, then a personal loan, standard mortgage or interest-only mortgage may be a better option.”
What is happening with equity release rates?
Equity release rates have risen over the past year along with conventional mortgages, so borrowers taking out the plans today are paying more interest than they would have paid before 2022.
Interest rates on equity release products are higher than traditional mortgages and currently range between approximately 6.5 and 9 per cent.
You can research the cost of equity release plans and interest rates using the This is Money and Age Partnership+ comparison tool.
When looking at rates, the APR shows the annual cost of borrowing, including any additional costs, and the AER (annual equivalent rate) shows the total cost of borrowing when interest compounds each year.
It’s a good idea to opt for a plan where the interest rate is fixed for the life of the loan, as this gives you certainty about the amount you owe.
If the rate on a loan is variable, make sure it has a limit and that you can afford the higher amount.
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