If you are ready to enjoy later life with an Equity Release, we are on hand to help you through the process.
Equity release schemes involve a lender releasing a lump sum of cash from your home, in exchange for a share of the proceeds from the sale of your property later down the line. Unlike a traditional mortgage, an equity release is not settled until after you leave your home, rather than requiring a monthly repayment. This is the major difference between equity release and a remortgage to free up equity. With a remortgage to free up equity, you will have to make monthly repayments to cover the cost of the interest and potentially the capital. Equity release schemes are popular as they release a lump sum or an income from your home yet allow you to continue living there.
To ensure that you are protected when looking for an equity release scheme ensure that the provider is a member of the Equity Release Council. By doing so, it ensures that you can live in your home until your death or move into permanent care, as well as ensuring that you never owe more than the total sale price of your home, even if the sales value drops. We only use Lenders that are members of the Equity Release Council, and have a No Negative Equity Guarantee.
What are the different types of equity release schemes available?
The most popular form of equity release, a lifetime mortgage allows you to borrow a lump sum in the form of a mortgage that is eventually repaid upon the sale of your home following either your move into long-term care or death. The older you are the more you can release, with the amount you can borrow typically between 18-50% of the property’s total value. You will have to be at least 55 to take out a lifetime mortgage.
The amount you owe will grow with interest. If you choose not to pay off the interest as you go, the interest will compound over time and you will end up repaying more overall. You can sometimes reduce the interest by paying it as you go, so that it doesn’t compound. Many lenders will also allow you to make overpayments.
Many lenders now offer a no-negative-equity guarantee, ensuring that the amount you owe will never be more than the sale value of the property, however it does not protect against the full property value being used to pay off the equity release mortgage. As previously stated, we only use Lenders who are part of the Equity Release Council and offer a No Negative Equity Guarantee.
PLEASE NOTE: WE DO NOT ADVISE ON HOME REVERSION PLANS
Home reversion schemes enable you to sell part or all of your property, but retain the legal right to remain living in the property until you die or move into long-term care. The money released from a home reversion scheme can either be paid to you as a lump sum or released as a regular income.
Some providers require you to be over 60 to be eligible for a home reversion scheme. It is worth bearing in mind that you will not receive the full market value whether you sell all or part of your home.
What are the benefits of equity release?
The most obvious benefit of equity release is that it provides you with a lump sum or income to spend now, rather than leaving it locked away in your home. The continued property price rises over recent years means that for many homeowners, a large proportion of their wealth is sunk into their property and therefore inaccessible. Through equity release, the homeowner can gain access to some of that money.
What are the potential risks associated with equity release?
The main disadvantage of equity release schemes is that Equity Release is a long-term product, and if customers have not considered all other avenues first, their plans might change and they may have to pay it back including any applicable early repayment charges.
Another downside of equity release is that it will reduce the amount of inheritance you pass down to your beneficiaries, especially when the interest has compounded under a lifetime mortgage. The potential risks for equity release vary between the different schemes:
Risks associated with lifetime mortgages
Lifetime mortgages charge compound interest, so you run the risk of owing far more than you initially borrowed, potentially the full value of your home once sold. If you are planning on passing an inheritance to your beneficiaries, be wary of lifetime mortgages. To minimise this, you can pay off the interest at regular intervals to stop the whole amount from compounding. Alternatively, you could take out a series of smaller lifetime mortgages so that you will not be paying interest on the whole sum for the whole duration of time. You could take a product that enables you to have a specific amount upfront, then a cash reserve held until you require it.
If you do not pay off the interest, then a 5 percent interest will approximately double the amount owed every 15 years.
Usually, money is better off invested in your home than in your bank account. Not only is it more likely to grow given current property price growth, but having a large quantity of money in your bank account may reduce the benefits you are entitled to, especially with regards to the cost of care. The value of your home is not considered when means testing, whereas cash in the bank will be. Obviously there are no guarantees regarding future property process, they can down as well as up.
If you choose to end your lifetime mortgage early, this can cost you significantly, so it is important to fully research your options before committing to a lifetime mortgage.
Risks associated with home reversion schemes
PLEASE NOTE: WE DO NOT ADVISE ON THESE TYPES OF SCHEMES
The primary disadvantage of home reversion schemes is that you will not receive the full market value of your home, sometimes as little as 30% of the full value.
With every home reversion scheme it is vital to check the contract to make sure that you are allowed to move home if necessary. Asking a solicitor to check the contract is highly recommended to ensure that it is in your best interest.
Choosing between porting your lifetime mortgage or taking a new lifetime mortgage
There are a couple of notable differences in obligations and costs between porting an existing lifetime mortgage and applying for a new lifetime mortgage.
You will likely have to pay for a valuation upfront if you are planning on porting your existing lifetime mortgage, which will almost certainly be non-refundable. However, if you take out a new lifetime mortgage, often these come with a free property valuation, but you would likely have to pay an Early Repayment Charge in respect of your existing plan.
You are under no obligation to seek further legal advice when porting your existing lifetime mortgage. However, if you choose to take a new plan, you are required to obtain legal advice which will come at an additional cost.
Early Repayment Charge:
If you choose to pursue a new lifetime mortgage, you might incur an Early Repayment Charge from your existing lender for repaying in full before the planned term ends. However, a new lifetime mortgage means you can access the best rates on the market, which could save you in the long term.
Which properties aren’t eligible to transfer a lifetime mortgage to?
Every lender has different criteria for eligible properties. Whilst lenders are on the whole becoming more flexible, there are still a few types of properties that lenders are reluctant to lend against, including:
- Non-standard construction material properties, including some sorts of concrete
- Leasehold properties with a short term remaining
- Properties with a high flooding risk
- Age-restricted properties, primarily retirement homes
- Properties in need of renovation or full modernisation
There aren’t black and white guidelines when it comes to which properties are and aren’t eligible for equity release, so we recommend asking your advisor.
What happens to your equity release plan if you move to a cheaper property?
If you are downsizing, you may need to repay a portion of the equity release money to the lender. This is because the lender will have less security on your new home as it is a lower value. Again, the best way to find out the specifics about any amount owed is to speak to an adviser who can advise you of the different options available on the market.
Start your equity release process with us
As we are not tied to any specific lender, we can make sure that we help you to select the right equity release for you and your property. Call us for an initial, free of charge consultation. There is no obligation to use our services and you can meet in one of our offices in Horsham and Southwater.
Equity Release Council
The Equity Release Council are the industry body responsible for the UK Equity Release sector. They represent the providers, qualified financial advisers, solicitors and intermediaries, all of whom have agreed to abide by the Council rules and have signed up to the Statement of Principles. The purpose of the Equity Release Council is to promote and ensure the high standards of conduct in the provision of, and advice regarding equity release. The values of the Equity Release Council are to be Authoritative, Progressive, Inclusive and Trustworthy. As part of our safeguarding here at About Mortgages, we only use lenders who are members of the Equity Release Council and offer a no negative equity guarantee.
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