For homeowners aged 55 and above, navigating the property market can present unique challenges and opportunities. There are many financial options and decisions on what type of mortgage finance suits your situation; that would be to support moving property, or even renovating an existing one. Therefore, whether you're remaining in situ, moving house to downsize, upsize, or simply relocate, understanding your financial options is crucial.
Dependent upon your circumstances, there are two potential mortgage products available outside of the traditional residential mortgage route that many homeowners are unaware of: Bridging finance and Equity release.
In this article, we'll delve into how each of these alternative lending solutions work, general criteria, regulation, pros and cons, and how they can complement each other in the pursuit of your new home or for making home improvements.
Bridging Finance and Equity Release: Explained
Bridging Loan: Think of bridging finance as a secured short-term loan designed to "bridge" the gap between the purchase of a new property and the sale of your current one. It's a financial solution that can be used in various scenarios, such as when the sale of your existing home takes longer than expected, or when you've found your dream home but haven't yet sold your current property.
For example, let's say you've found your perfect retirement property, but your current home hasn't sold yet. With bridging finance, you can secure the new property while waiting for the sale of your existing one to finalise. Therefore, bridging finance, as the name suggests is more of a short-term option.
Additionally, a bridging loan could help finance major home improvements where more traditional lending solutions couldn’t help - possibly on the grounds of affordability or age. There would need to be a repayment solution (exit strategy) in place, such as refinancing or investments. At a predetermined future date, the bridging company would require repayment of the bridging loan.
Equity Release: Is a type of later life mortgage that allows homeowners over the age of 55 to access the equity tied up in their property. It's particularly useful for older homeowners who have built substantial equity after seeing house price inflation soar over the decades. With their residential mortgage repaid, or almost repaid at this time in life, equity release products exist to help release this equity as a tax free cash lump sum to help support them financially prior to, or in retirement.
However, equity release (the most popular of which is a lifetime mortgage), doesn’t have to be taken on the house you currently reside in. Like any residential mortgage, equity release can also help towards the purchase a new property. Simply utilising the equity built up within the current home (the deposit), the shortfall needed to cover the difference between the sale and purchase price (the mortgage) can potentially be raised via an equity release plan.
For example, you may be looking to move into a new home, perhaps closer to family but can’t cover the cost of the new property assuming it more expensive than you have currently. This is where the difference between the purchase price of the more expensive property and the sale price of your own. As part of the purchase process, you could take out a lifetime mortgage on the new property to cover the shortfall between the two.
This could be particularly useful if you’re retired and have a limited income, because a lifetime mortgage (the main type of equity release) doesn’t require affordability checks, or mandatory monthly repayments. In fact, you can choose how much you wish to pay back to the equity release lender, to suit your budget, or to manage your future inheritance dependent on how much you wish to leave.
General Criteria
Bridging Loan: Dependent on what the funds are being used for, bridging loans can be either regulated or unregulated lending. They can be provided on a 1st or 2nd charge basis and usually the interest charged will be rolled up and repaid at the end of the bridge term – typically 12 months. Interest rates on bridging loans tend to be higher than traditional financing, more so if the loans are unregulated.
Lenders typically consider factors such as the value of your existing property, the purchase price of the new property, and your ability to repay the loan within the agreed timeframe. A solid exit strategy, such as the imminent sale of your current home, or potential future refinancing is essential. Credit checks and affordability will be assessed before being offered any type of bridging loan.
Equity Release: Eligibility for equity release often depends on your age – the minimum age is typically 55, the value of your property – the minimum is £70,000. The amount you can release on a lifetime mortgage is calculated based on the age of the youngest applicant and the property value. The higher the age, the greater the percentage of the property value you can release. Under FCA rules its compulsory to obtain financial advice from a qualified adviser before proceeding.
What are the different types of Equity Release and Bridging Finance?
There are two main types of equity release plans:
Lifetime Mortgage: Unlike a conventional mortgage, which runs for a fixed term, a lifetime mortgage is designed to run for the rest of your life. During this period, the property remains 100 per cent in your name, and you are free to live there until you die or move into long-term care. You have the option of allowing the interest to roll-up and compound over this period, or service the interest being charged by making ad-hoc or monthly payments.
Home Reversion: A home reversion plan is the oldest form of equity release. It is a type of equity release scheme where part, or all the homeowners property, is sold to the plan provider in exchange for a tax-free lump sum. A lifetime tenancy is then created, protecting the homeowners residency allowing the freedom to live in their home until the 2nd person has died or moved into care. Home reversion plans guarantee the percentage of the final sale price that is passed onto the beneficiaries.
There are also generally two main types of bridging loan:
Open Bridging Loan: Is characterised by its absence of a fixed repayment date. This flexibility allows borrowers to repay the loan whenever their funds become available.
Closed Bridging Loan: Comes with a predetermined repayment date. This date is typically aligned with when the borrower knows they'll have funds available, such as when a property sale is set to finalise.
Pros and cons of Bridging Loans
Pros of Bridging Loans:
- Provides flexibility: Bridging finance allows you to act quickly in securing your new home without being dependent on the sale of your existing property.
- Minimal impact on lifestyle: Since bridging finance is typically short-term, you won't have to adjust your living arrangements significantly.
Cons of Bridging Loans:
- Higher costs: Bridging loans often come with higher interest rates and fees compared to a traditional mortgage.
- Financial risk: If your existing property fails to sell within the agreed-upon timeframe, you may face hefty interest charges or even risk losing your home if you can't repay the bridging loan.
Pros and cons of Equity Release
Pros of Equity Release:
- No monthly repayments: With lifetime mortgages, you typically don't make any monthly repayments, giving you greater financial flexibility.
- Retain 100% home ownership: You can continue living in your home for as long as you wish. There is no risk of repossession with a lifetime mortgage (equity release) as no mandatory payments are needed. The loan is paid back upon death or moving into long term care.
- Voluntary repayments: All lifetime mortgage plans allow up to 10%pa flexible voluntary repayments based on the original loan. This helps control the interest accruing and provides the homeowner with control over their future balance without affordability checks.
Cons of Equity Release:
- Reduced inheritance: If no payments are made, the interest charged with compound over the lifetime of the loan. Under this scenario equity release will therefore erode the value of your estate, potentially leaving less, or nothing for your heirs.
- Long-term commitment: Once you enter an equity release agreement it will run over the rest of your lifetime and incur a fixed rate of interest during this period
- Impact on means-tested benefits: Releasing equity from your home could affect your eligibility for certain means-tested benefits or local authority funding.
Using Equity Release to Pay Off a Bridging Loan
For homeowners who initially opt for bridging finance, but later wish to transition to a more permanent financial solution, equity release could offer a viable exit strategy.
Our specialist advisers at Equity Release Supermarket have experienced many clients who have used a lifetime mortgage as a repayment vehicle for a bridging loan.
However, equity release should never be relied upon as the only solution to repay a bridging loan, as circumstances could change during the bridge period. For instance house values could fall, equity release loan-to-values reduce, thereby making the equity release solution unviable.
However, if lifetime mortgage criteria aligns in accessing the equity in their current property, homeowners can use the proceeds to repay the bridging loan, thus avoiding the potentially high ongoing interest costs and risks associated with prolonged bridging finance.
Summary
Bridging loans and equity release are available tools that can assist homeowners to navigate the property market with confidence and flexibility. Bridging finance offers short-term relief, allowing you to secure your dream home swiftly, while equity release provides a long-term solution for unlocking the value of your property, or future property.
By understanding the criteria, pros, and cons of each option, you can make informed decisions tailored to your individual circumstances. And remember, seeking expert financial advice is essential ensure you're making the best choices for your future. If you would like to compare equity release products based on your circumstances please visit smartER™ today.
Our whole of market independent equity release advice relates to Lifetime Mortgages, Home Reversion Plans, & Retirement Mortgages. Our advice fee of £1,495 is payable on completion. Equity Release may affect your entitlement to means tested benefits and will reduce, or leave no property equity.
Bridging loan details provided in the article, are purely for information purposes only. We do not advise on bridging finance and would always recommend getting advice from a bridging loan specialist.
