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A Video Introduction To Equity Release
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Lets Get Started: Equity Release And The Various Alternatives
Equity release is a regulated financial product, accessible through financial advisors and specialist mortgage products. It’s only suitable for those aged 55 and over.
There are two types to choose from. A home reversion plan and a lifetime mortgage. The majority of equity release providers offer lifetime mortgages, with a few finance houses focusing on home reversion plans. With a home reversion plan, you sell some or all of your home equity to a finance company, while retaining the right to live in your home for the rest of your days rent-free.
With a lifetime mortgage, you don’t sell the equity but instead, borrow against it.
In both cases, taking out an equity release product will reduce the value of your estate. All lenders providing equity release products are members of the Equity Release Council. This is the watchdog for the equity release sector, and there’s further protection with FCA (Financial Conduct Authority) regulations requiring lenders to ensure customers are fully informed of potential pain points and that financial advisors explore alternatives to equity release schemes ensuring the product is the best match for your particular circumstances.
Possible Alternatives to Equity Release Schemes
The list below outlines the main avenues worth exploring for raising capital in later life. Some you may already be familiar; others are lesser known ways to borrow or release equity from your home without having to use an equity release plan.
- Downsizing your property
- Taking out a remortgage
- Renting a spare room (or two)
- Taking out a refinance product on a second home
- Various types of secured loans
- Personal loans
- Credit cards
Many of the options will be subject to an affordability assessment so for longer-term borrowing of large amounts; it may be the case you’d need to have sufficient retirement income guaranteed to be accepted for certain types of finance.
All secured products will have different lending conditions specified by the lender, and they’re all going to provide different loan-to-values (LTVs) based on your property value and take into consideration your age and current health at the time of your application.
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Explore Equity Release Alternatives In More Detail
Downsizing Vs. Equity Release
Downsizing just means selling your home to buy another property that’s cheaper, then paying for your new home (likely smaller in size with fewer bedrooms) in full using the proceeds from the sale of your current home and pocketing the difference.
If you aren’t sentimentally attached to your property, this could be an option, but it’s not without its expenses. The UK Property Price Index for 2019 estimates the price of moving home is £3317, consisting of a mortgage valuation fee, property surveyors, stamp duty, conveyancing fees, estate agent fees and home removals. Then there’s the hassle of sorting through items to keep and things you may not be able to take with you due to having perhaps no more spare bedrooms or a guest room, which can force you into altering your lifestyle as well.
Apart from costs involved in moving to a smaller sized property, there’s still the question of is it a good choice for your circumstances, because other factors could influence cost, including the ability to take out a new mortgage on your new home, if you need to raise finance before your old property sells.
The upside is that if you have already paid your mortgage and have a buyer lined up, it’s possible to be in an advantageous position as a cash buyer, which is more attractive to sellers as it means you’re a chain free buyer so there’s less risk of the sale falling through at the last minute. If you do need to take a new mortgage for your new property though, upper age limits may be an issue.
Transferring Equity Release
If you’ve already entered into an equity release plan using your current home as security, it’s still possible to downsize as a requirement of the Equity Release Council is for lenders to make their products portable so you can downsize, take your current plan with you without having to pay an early repayment fee. However, this is usually subject to the plan being in place for five years.
If you do have an existing plan, transferring your equity release is a similar process to transferring your mortgage. Straightforward, but it’s also an opportunity to re-assess your financial situation and the rate of interest you’re accruing as the interest rates today are more favourable than they were a few years back so you could save on compounded interest charges by transferring an existing equity release plan by downsizing to a smaller property and moving your plan to a better alternative.
Equity Release Vs. a Standard Remortgage
It’s possible to use a remortgage product to release some of the equity tied up in your home by taking out a new mortgage that’s higher than you’re existing one. However, a standard remortgage requires you to meet the affordability criteria, which can be a problem for those without a fixed income in retirement.
Most lenders providing remortgages also have upper age limits, some of which are 70 years of age. This would mean that remortgaging at 60 years of age; you’d only be suitable for a 10-year mortgage, rather than 20 or 25-year terms. The upper age limit can reduce the term the loan needs to be repaid in, which will increase the monthly repayments, sometimes beyond your means in which case, the lender will need to reject your application.
Where remortgages are of most value is when your property value has risen. If, for example, you bought your home for £120,000 and it’s now worth £170,000, you’d have £50,000 positive equity, plus the capital you’ve already repaid, therefore a remortgage could be an option to let you take out a new mortgage to release some of the equity. It should be noted that there are sometimes restrictions on what you can do with the money raised from a remortgage, as the lender will have a financial interest in your home and may stipulate that the funds released can’t be used for business purposes. With equity release plans, the funds you receive can be spent any way you choose.
Retirement Interest Only (RIO) Mortgages
A retirement interest-only mortgage is an alternative to equity release, and more lenders are starting to offer these products. They work similar to equity release, in that the loan lasts for life with the balance paid when you die, but the key difference is that you will be making monthly repayments on the interest, preventing interest compounding and reducing the value of your estate.
Most lenders have minimum age requirements of either 55 or 60 for retirement interest only products. For those concerned about estate protection, this may be an option worth exploring. There are equity release providers that let you pay some or all of the interest; however, the repayments of interest are voluntary. On a retirement interest only product, the interest repayments need to be made each month and will be subject to affordability requirements. For those with a lower fixed income in retirement that fails to meet the threshold for a remortgage or other type of finance, the lower monthly repayments with interest only could mean you’d be able to afford the loan, however, the longer you live, the more interest you’d pay.
Renting out a spare room
If you have the space, you could raise finance by renting out a room letting you earn up to £7,500 tax-free through the Rent a Room scheme. Two options you have here is to advertise a room to rent on platforms such as Airbnb and other sites catering to room rentals booked by the night. Some guests may be in town for a meeting, others a concert, some a week to two weeks stay to explore the area, benefiting from home comforts for less than the price of a hotel room. The second option is to essentially become a lodger landlord, where you rent the room to a short or long-term tenant rather than pricing by the night. If you are considering renting a room out and still have a mortgage, it’s best to check with your existing mortgage lender as technically, it is using your home for business purposes. You’d also need to notify your home insurance provider as you may need to switch to a commercial policy.
Secured Loans and Second Charge Mortgages
Secured loans only require some type of asset to be used as security. This is usually the case with vehicle finance. When you buy a new car on finance, the security is the car. If you fail to make repayments, the loan provider has the right to repossess the vehicle. It is possible to take out a secured loan using the equity you own in your home as the security asset. As an example, if your home is valued at £200,000 and your existing mortgage has £50,000 remaining to be paid, the equity you own would be £150,000.
That would be the maximum you could borrow, subject to lending criteria. The original mortgage would stay the same, and you’d need to make repayments each month on the second mortgage too. Where this can be beneficial is if you’re needing to remortgage to a lower interest rate but find your credit rating is pushing you into a higher risk bracket pushing interest rates higher. Instead of remortgaging at a higher interest rate on your whole mortgage, you could take out a second charge loan against some of the equity you own in your home, paying the higher interest only on the extra capital you release. Second mortgages are also a way for self-employed homeowners to raise capital as a lot of lenders won’t lend to some people in self-employment, or who have a limited trading history.
Unsecured Loans / Personal Loans
Personal loans don’t require any security and let you borrow up to a maximum of £25,000 in most cases, although there are some lenders such as First Direct willing to go up to £30,000 without any security. The maximum repayment term for personal loans is ten years. As there’s no security required, you are going to need to have a good credit rating and meet the lender’s criteria to secure a decent interest rate. Interest rates are higher on unsecured loans due to the increased risk. The advantage of using this type of loan is you don’t put your home up as collateral against the loan, but that’s reflected in the interest rate you pay.
Credit Card Finance
Credit cards are convenient but can quickly get out of control due to high interest fees. Managed properly though and with careful planning, you could use balance transfers at lower introductory fees - often interest-free for the first six or nine months - letting you spread the cost of finance out for longer. If you find yourself facing a large unexpected expense that’s led you to look for ways to release equity from your home, it may be worth considering using a credit card for paying a deposit or a lump sum towards work you need to have done, essentially buying yourself time to explore alternative finance options. In that respect, you could think of the credit card as bridge finance for homeowners.
A bridging loan is used by businesses when they run into cash flow problems. These are usually high interest and very short term, ranging from weeks to months, but rarely years. With any type of finance, it’s going to take a few weeks to a few months from your application date before funds are released. Using a credit card could give you a line of credit until funds are released.
As you can see from above, there are various alternatives to equity release plans, and the best way to find out which option would suit your particular circumstances is to speak to a financial advisor knowledgeable on equity release. This is because they also need to know every other alternative available to be able to advise on appropriate products tailored to your needs.
In all cases, when you’re applying for finance, a credit check will be completed by the lender you apply with. If at first you don’t succeed, do not try again. Credit checks leave a footprint when you apply for a loan of any type. They don’t when you enquire though. Once a credit check fails, the next lender to search your credit file will be able to see another lender has recently turned you down.
Seeing someone else decline raises the question of why they rejected your application. It’s easier just to say no. That’s usually the case with larger lenders. If your credit files are sub-par, a specialist lender may be required. It’s important to channel your application towards a lender who’s most likely to approve for your circumstances as best practice after having a loan rejected is to wait at least three months before re-applying with another lender.
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Our broker service can compare the whole of market and put you in touch with a qualified advisor with expert knowledge on equity release and alternative means of borrowing, who’ll be able to advise you on the most cost-effective method suited to your needs. In all cases, the terms attached to any offers are explained jargon-free, ensuring you’re aware of everything involved and understand the nature of the agreement you’re entering into.
Equity release is not suitable for everyone, but that’s the case with every type of finance product as they’re based on your personal circumstances at the time of application. What’s a good fit for you now, may not be the same five years down the road, which is why it’s important to consider all the alternatives to equity release before deciding to take out a lifetime mortgage or a home reversion plan.
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