Should I apply for a bank loan or Equity Release?
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I am a widow and have only a small private pension on top of my state pension. I would like to make some minor changes to my bungalow to make it easier for me to get around with my walker – I struggle a little with mobility these days – but will need to borrow the money to do so. I could get a bank loan, I suppose, but I wonder if I could get Equity Release on my bungalow and take a bit more than I need so I have a rainy day fund?
Diane Fish of Smith & Pinching responds:
You have a number of options if you are looking to borrow in retirement. These might include a retirement interest-only mortgage, a home improvement loan or an Equity Release arrangement.
The key factor, in your case, may be your ability to afford any repayments. Equity Release borrowing is based on your age and the value of the property, whereas other borrowing would be based on income and affordability. It would be useful, I’m sure, for you to talk to an independent financial adviser who specialises in mortgages and other borrowing.
Equity Release, in the form of a lifetime mortgage, may well be the right solution for you – particularly if you would like the facility to draw more money if you need it at a later date. A lifetime mortgage can be set up with a pre-arranged drawdown facility – essentially a maximum amount that you can take in total – and you can draw against that as and when needed. The advantages of this type of arrangement are that you don’t need to anticipate in advance what your future needs might be and that you will only pay interest on the amount you have actually borrowed.
There will be costs involved in setting up any Lifetime Mortgage arrangement as well as any interest payable. Interest is usually 'rolled up' to be paid when your home is sold – perhaps after your death or when you move into long-term care. In all cases, there will be a requirement to fully repay the outstanding debt when the house is finally sold.
What you must remember is that taking out an Equity Release/Lifetime Mortgage arrangement will mean that the value of the estate you leave to your family when you die will be reduced. It may also affect your entitlement to any means-tested benefits both now and in the future. Equity Release can be more expensive when compared to a normal residential mortgage. In addition, you will still be responsible for maintaining the property.
This is a lifetime mortgage. To understand the features and risks, ask for a personalised illustration. There will be a fee for the mortgage advice. The precise amount will depend upon your circumstances, but we estimate that it will be a minimum of £700. Any opinions expressed in this article do not constitute advice.
For more information, please visit www.smith-pinching.co.uk
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