All posts by Derek Shaw

Should I tell my children about Equity Release?

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One of the reasons for the increasing popularity of equity release mortgages is the rising cost of living and the inadequacy of pensions as the only source of income during retirement. Equity release mortgages are increasingly being considered as an option for financial planning during retirement by homeowners who are sitting on valuable property but need additional cash flow.

As the demand for equity release loans has increased, companies have begun diversifying the type of equity release plans on offer. Equity release mortgages available today are much more flexible compared to their counterparts a few years ago. Interest rates are also generally lower than a few years back. As such, now may be a good time to explore the market and compare equity release options available, for those who are interested in this option, as well as those who already have an equity release mortgage.

As with any financial loan, there is both an upside as well as a downside to equity release mortgages. By taking a loan against the property, the equity in the property is effectively decreased. This has repercussions for the inheritance that you leave behind for your family. There is also the chance of negative equity, where the amount you owe exceeds the value of the home, although most lenders nowadays cancel out any negative equity owed.

Equity release does provide a good way to raise additional money during retirement, whether it is for a one off expense such as a holiday, a car or home refurbishment, or a regular supplementary income. However, an equity release mortgage potentially affects not just the claimant but the entire family. It is therefore important to take the family into your confidence before opting for such a big step.

You can read up information on equity release online, as well as compare equity release mortgages, but the best thing to do if you’re considering releasing the equity on your home is to talk to an independent financial adviser. This will enable you to get objective and impartial advice on equity release, and whether it is suitable for you. Depending on how much additional income you require, whether or not you want to leave an inheritance, and other factors, the adviser can also guide you about which equity release loan works best for you.

Financial issues are a common reason for family feuds. Things like inheritance are a sensitive matter and before taking any final step relating to your property, it is advisable to understand the consequences thoroughly. There may be other alternatives to raise money, and downsizing is always an option. Equity release mortgages may not be the right choice for some, and may be the perfect choice for others. But once it is opted for, it is difficult to opt out of equity release loans, so take your time to understand exactly what it entails.

Do I need insurance if I apply for an Equity Release Plan?

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As property prices have risen dramatically over the past two decades, thousands of homeowners find themselves in a position where they own valuable property but require additional cash flow to support them during retirement. This has led to equity release plans becoming increasingly popular in recent times. These loans allow homeowners to continue living in their property whilst freeing up some of the value of the house in the form of a cash lump sum, or monthly payments.

There are mainly two types of equity release schemes, lifetime mortgages and home reversion mortgage. A home reversion plan is where you sell a proportion of the property in terms of value, and this loan is repaid after the house is sold. A lifetime mortgage means that you mortgage the home against the loan, and make interest payments over your lifetime. In both the loans, the balance is recovered after the house is sold. This is usually after the owner has died or moved into long term care.

As the equity release market has matured, mortgages have become more flexible in their terms. Today there is a wide variety of loans available in terms of how you repay, period of repayment etc. There are equity release comparison sites that can help you get an idea of the different types of loans on offer.

Equity release plans essentially offer loans against the property as collateral. As such, most equity release lenders require the applicant to have a valid home insurance policy on the property. This is meant to protect the property from damage due to different causes, such as fire or flooding. Home insurance in this case means buildings insurance and not just home contents insurance.

An independent financial adviser can give you objective and sound advice on equity release in general and give you information about the different equity release plans available. Too much choice can be confusing and an adviser can help you choose the right loan for you. An adviser can also provide accurate guidance on the procedure of applying for an equity release mortgage and the type of insurance you are required to get etc.

Equity release loans do not suit everyone, but could be the perfect option for many. Whether you’re looking to raise extra cash for a specific goal, or boost your regular monthly income, freeing up some of the equity in your property without selling your home could be just the option you’re looking for.

Does Equity Release Affect Means Tested Benefits?

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An equity release loan is a loan taken against the equity or value of a property. Thousands of people around the UK are home owners but do not have a sufficient income to support them during their retirement. An equity release loan allows such people to free up some of the equity tied into their property and use it either to boost their regular income or for a one off financial boost.

Equity release schemes have proved to be very popular as an increasing number of people opt for them. However, it is important to understand all the equity release pros and cons before taking a loan against your property. In order to do this, it is important to seek the advice of an independent financial expert who can provide objective advice about whether equity release is the right option for you.

One of the reasons people hesitate to opt for an equity release loan is that it could affect their means tested benefits such as pension credits, council tax benefits, or help with costs of care. People opt for pension equity release to supplement their income during retirement, but if getting one means losing your pension credits, it sort of defeats the entire purpose of getting one!

Releasing equity from your home may affect some means tested benefits, especially council tax benefits and pension credits; however, this is very much a matter of individual circumstances. In any case, only means tested benefits could be affected by an equity release loan, and not other benefits such as disability allowance or carers’ allowance.

It is worth mentioning here that there are two types of equity release loans – the more common type which is taken in regular installments and one which is taken as a lump sum. Loans which are taken for one off goals such as a holiday, home improvement works, etc. do not affect means tested benefits as they do not affect the overall income of the claimant.

In order to check whether taking out an equity release loan will affect your eligibility to claim pension credits or other forms of means tested benefits, it is important to consult an independent financial adviser who has expertise in the field of equity release schemes. This will help you understand whether an equity release loan is the right choice for you.

What happens to my equity release if I want to move house?

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As property prices have soared in the past two decades, home owners have seen an unprecedented rise in the value of their homes. As the cost of living increases, it is not at all surprising that the concept of releasing equity from your home to supplement your income during retirement has caught on furiously. Home equity release is essentially a loan that you can take against the value of your home, while continuing to stay in your property. This loan is recovered after the property is sold.

Home equity release plans are designed for older people, especially pensioners, who own a home but do not have sufficient cash flow to maintain a comfortable lifestyle or perhaps require additional money for a particular goal. The loan can be secured as a lump sum or more commonly in monthly installments. Home equity release is available in two main types of loans, home reversion plans, and lifetime mortgages.

There are no shortage of equity release schemes available on the market. There are many different companies offering different types of equity release loans, all promising to provide the optimum solution between keeping your property and increasing your income. As equity release becomes more and more popular, more flexible products are introduced to meet this growing demand.

One of the most common questions asked when it comes to home equity release is whether you can continue to live in the house for as long as you wish. The answer is yes, as most equity release loans are recovered only after the house can be sold. This can only be done after the owner has died or moved into long term care. However, it is absolutely necessary to understand all the terms and conditions of the equity release mortgage before going ahead with it.

While equity release mortgages work beautifully for thousands of pensioners who require an additional income, it also has its own drawbacks which could make it a wrong option for some. Once you have taken a home equity release loan, it is very difficult to back out due to the complicated terms of the contract. It is therefore vital to seek independent financial advice before signing an equity release loan contract.

You can get equity release explained by the financial expert who can guide you on which type of mortgage will suit you best. Independent advisers can give objective and fair advice on the pros and cons of different home equity release schemes for your particular circumstances. A lot of information is also available on financial resources on the internet, as well as on comparison sites which allow you to compare equity release plans.

What are the early repayment charges on equity release schemes?

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Equity release mortgages are financial products, essentially loans, that allow you to free up the equity tied into your home. For those who own a real estate property and require a supplementary income, this type of loan can be the right option. This is especially true of pensioners who have a house but often require additional cash flow for a better lifestyle, medical expenses etc. There are many different types of equity release schemes, and choosing the right one requires proper understanding of the concept, as well as proper guidance.

As equity release mortgages have become more and more popular, they have also evolved and improved over time. Today, there are not only a greater number of equity release providers in the market but also a great variety in terms of the type of equity release plans. Equity release plans have also become more flexible to suit people in a wider variety of circumstances. Something that was not available a few years back may now have become accessible.

If you already have an equity release mortgage, it may be worth your while to explore the market and see whether there are better options available for you. Switching to a new lender may have several advantages, from lower interest rates to more flexible terms of lending. However, switching your equity release is not always a straightforward process. Before applying for a new loan, it is important to understand all the equity release risks associated with your existing mortgage.

Many lenders charge an early repayment penalty on their equity release mortgages. This changes from lender to lender and also varies with different mortgages. But it could be as low as 5% to as high as 25% of the total amount that is borrowed. These penalties are put in place to protect the lender from losses made on interest when a debt is repaid ahead of term. While ERCs were common until a few years ago, a more competitive market has led to many lenders scrapping this policy.

Sometimes an equity release remortgage with an alternate lender could help make huge savings, however, high early repayment penalties could cancel out any saving and make it economically unviable. In other cases it could still be viable notwithstanding a seemingly high ERC! As always, it is useful to consult a financial adviser, with expertise in the field of equity release mortgages, to help you make the right choice.

How Much Does it Cost To Set Up an Equity Release Mortgage?

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As with any type of mortgage application, there are fixed costs attributed with the setting up of the scheme. These are mandatory expenditures which are necessary in ensuring the equity release deals are legally watertight.

Firstly, before any legal work starts we need a professional assessment of the property to ensure it is adequate lending & to ascertain the properties true market value, assuming a reasonably quick sale. There is a cost to employing the services of a surveyor to prepare a valuation report on behalf of the equity release company. The fees borne on valuation depend on the properties market value & can range on a £250,000 property from a FREE valuation upto over £400. This valuation fee is paid on application, usually by cheque & payable to the lender concerned.

Secondly, the lender themselves will charge their own application fee & is usually deducted from the loan on completion. However, some lenders such as Just Retirement will actually allow you to add this to the loan. Please bear in mind, if this is the case you will pay compounded interest on this small charge too, for the rest of your life. To mitigate this, some applicants will deduct this from the equity release mortgage application. Again application fees can vary & range from no fee at all, upto £695 with LV=.

Thirdly, you will need the services of a solicitor to carry out the legal work & checks on your behalf. This must be a separate lawyer to that of the equity release provider as laid down by the SHIP rules. Some solicitors have formed ERSA (Equity Release Solicitors Alliance) & they themselves have set standards for equity release solicitors to meet. Practices such as Goldsmith Williams & Equilaw adopt these virtues.

Currently, companies such as Equity Release Supermarket have a fixed fee of £395+VAT & disbursements with a no completion, no fee, arrangement with both legal firms.

The solicitor is also responsible for checking title, obtaining signed documentation from the application & the liaising with the lenders solicitor to a satisfactory completion. The final job of the solicitor is to sign a SHIP certificate to confirm they have met the standards required & the client is fully aware of the contract they are entering into.

Finally, your independent equity release adviser will usually charge an advice fee upon completion. Some brokerages will try and charge you upfront for their service. Don’t. As with any service provided or goods bought, you should only pay upon successful completion.

Costs for equity release advisers can vary. The better brokers will assess the situation as they will receive commission from the lender they have placed your business with. Therefore, sometimes in lieu of commissions received this can be offset & sometimes even waived should commissions be sufficient in their own right. Nevertheless, fees can rise from £395 upto unfavourable rates of £1500 which should be avoided as the same service can be offered by companies such as Equity Release Supermarket who are more experienced & on a fixed cost basis of £695 for their recognised quality of client service.

Are Equity Release Schemes Safe and Could I lose My Home?

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Equity release schemes have been around in some format since the 1960’s. However, they have undergone significant changes to ensure that today’s equity release mortgages are complaint & trustworthy in the eyes of the over 55 marketplace.

The first steps towards recognition of the need for consumer protection came in 1991 with the launch of SHIP (Safe Home Income Plan). SHIP brought about a voluntary code of practice that must be implemented within any equity release scheme in order to achieve SHIP status: –

  • The flexibility to still be able to move house. Therefore the equity release plan must be portable
  • You can repay the equity release mortgage at any time, subject to potential early repayment charges
  • All plans must have the inclusion of a ‘no-negative equity guarantee‘ option

The no-negative equity guarantee provides the protection in an ‘over’ roll-up situation, where the equity release balance supercedes the value of the property in the future.

If this does occur the lender will invoke the no-negative equity guarantee and only ask for the property value on eventual sale. This provides the reassurance that no debt can be transferred onto the beneficiaries.

Since then, the FSA (Financial Services Authority) has become involved in the equity release market & taken all schemes under its wing.

Therefore in 2004, lifetime mortgages became fully regulated by the FSA & provided greater consumer protection. This led to only qualified equity release advisers being able provide recommendations to the general public.

Three years later in 2007, home reversions plans were amalgamated with lifetime mortgages resulting in both types of plans becoming regulated by the FSA.

With recent developments in the industry & SHIP now reforming itself into the Equity Release Council to have a stronger presence & stance within the post retirement market, then greater changes are to follow. This in turn will lead to greater consumer awareness of equity release schemes & their benefits to the over 55’s.

What is the Maximum Equity Release I Can Borrow?

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This will depend on the type of scheme you are applying for. For instance the maximum releases are usually available on the lifetime mortgage schemes such as the AVIVA lump sum max. For example a single male aged 65 can release a maximum amount of 30% of the property value on standard terms.

However, there are now three enhanced lifetime mortgage providers; Partnership, AVIVA & more2life. They will offer a higher release should answers from a health & lifestyle questionnaire be in your favour.

Therefore, if there are such issues with diabetes, heart attack, cancer, on medication or even a smoker, then a single male may qualify for an enhanced lifetime mortgage plan of upto 38.5%.

On a £200,000 property valuation this could mean an extra £17,000 tax free lump sum from the equity release company. So if you are looking for as much as possible the first port of call would be check medical history & see whether you qualify for the new enhanced equity release schemes.

Do I Sell My Property To The Home Equity Lenders

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The answer to this question lies with the type of equity release mortgage has been recommended. For instance with lifetime mortgage, drawdown lifetime mortgage, enhanced lifetime mortgage and interest only lifetime mortgage schemes you will retain 100% ownership of the title to the property.

In these cases the lender, like any residential mortgage lender they will merely place a first legal charge on the property. This protects the equity release provider, in that once the property is sold on death or moving into long term care, the lifetime mortgage provider will have first call on any of the sale proceeds.

However, a different set of rules apply for a home reversion plans.

Due to the mechanics of these schemes, effectively you will only own a fixed percentage of your property. The reason being in that in exchange for the tax free lump sum you require, a portion of the property ownership is transferred to the home reversion company. Therefore, should the provider require 40% ownership in exchange for the tax free lump sum, then you will retain 60% ownership which is guaranteed for your heirs once the house is sold.

All of these plans, however, allow you to remain in your property until you and your partner pass away or move into long term care.

Am I Eligible for an Equity Release Plan?

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There are various qualifying criteria required to meet eligibility for an equity release application.

The main aspect is age. This can vary between lenders, however the lowest acceptable age is 55 with a lifetime mortgage plan, albeit some lenders will only start from age 60. Furthermore, the alternative to a lifetime mortgage which is the home reversion plan, will only accept a minimum age of 65 to qualify.

The property itself is then next to be analysed. The home must be the applicants main residence, in the UK & be worth a minimum of £60,000. It should usually be of standard construction, however alternative structures, depending on type can be acceptable. Check with an independent equity release adviser first.

To find your equity release adviser companies such as Equity Release Supermarket have nationwide advisers that can facilitate your equity release application. This can be completed by either arranging an appointment in the comfort of your own home, or over the telephone, which suits you best. Their interactive UK map enables you to make the necessary equity release enquiry to prompt a call from your local adviser.

Alternatively, call Equity Release Supermarket on 0800 678 5159 who can advise where your local independent financial adviser is located.