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Any homeowner who owns the majority of equity in the property has various options to secure financing - for any reason. When you review your options, it’s likely you’ll find out information about equity release, or as they’re more often becoming referred to as - Lifetime mortgages.
The question then becomes, is equity release a good idea? Because who’d willingly want to make a non-informed financial decision based on their biggest asset that takes decades to pay off?
Whether it’s a good idea or not, depends on a number of factors, so the most suitable answer is – it depends. Not the most helpful but stick around, and you’ll learn what it depends on.
You see, not many financial products suit everyone and it’s like that with equity release. For some people, equity release is a terrific idea. For others, it’s opening the can to a jack-in-the-box of financial turmoil for you and your family.
The good news is you cannot make an uninformed decision because equity release is a regulated financial product, overseen by the Equity Release Council controlling standards, codes of conduct from advisors and setting the bar for ethical practices. The FCA (Financial Conduct Authority) regulate the market, and you cannot buy an equity release mortgage product without getting advice from a qualified financial advisor. So that’s the first step.
The second step that isn’t insisted on, but highly advisable is to speak to your family because those are the people who will be affected if you decide to release equity from your property. If you’d like an idea of what’s going on the minds of your adult kids, read through this discussion on Mumsnet.com. It’s a post from a daughter who’s Dad released 100k in equity without talking things over with anyone (This was before you needed a financial advisor to access lifetime mortgages, but the discussion remains relevant as it’s the points you’ll want to talk with your family about).
At 1st UK, our team can help advise you and help facilitate family discussions by providing all the pertinent information related to your properties wealth and how you borrow through equity release will affect what’s left behind for your family in your Will.
To expand on explaining how equity release could be a good idea, take a read through our FAQs below to see how Lifetime Mortgages work and affect future financing.
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What’s Equity Release Anyway?
Always a good starting point is to know what exactly we’re talking about. Equity release schemes cover a few different financing options, each based on the amount of equity you own in your property. An Equity release mortgage will release some of the equity you own in the property.
Most companies offering lifetime mortgages will insist they have the only charge on your title deeds, meaning you and (if applicable on joint policies) your partner has no other secured loans tied to your property. Reason being, when both people are either in long-term care or deceased, the company to provide the loan can recuperate the loan amount with interest from the sale of your property.
Interest is charged as it usually is on any other type of secured loan, only you don’t need to pay it back. Your family will have to when they inherit the property.
Will your kids inherit your debt?
Not quite because all equity release products are backed by a no negative equity guarantee meaning your loan value with interest will never supersede what your home’s worth. So, your family are not going to owe anything.
How will a lifetime mortgage affect my kid’s inheritance?
The loan amount with interest that’s accumulated over the years will need to be repaid from your estate. Beneficiaries to your estate will only be inheriting the value of your estate after the loan plus interest is repaid.
How much are the interest rates for equity release?
Higher than most refinancing options as the lender is taking the risk of properties depreciating in value, and have to honour the no equity guarantee. Average rates in 2018 for Lifetime Mortgages are 5%. In comparison to standard financing rates, it’s roughly 2 to 3% higher.
Some lenders will apply accumulated interest annually rather than monthly helping to control the overall cost of finance. Others aren’t as competitive. Roughly 80% of equity release companies now give you the ability to further control the total cost of the loan by letting you pay all or part of the interest on the loan during the term without penalty and subject to additional terms. Some lenders will let you pay a minimum £25 monthly towards the interest, others will let you pay all the interest, so your family only pay back the loan amount, plus any interest payments you don’t/haven’t made.
While most providers let you voluntarily pay down the interest repayable at the end of the equity release terms, you can find caps in place, such as 10% of the total loan value.
As an example:
Taking a loan amount of £25,000 with a 5% APR would incur interest at £1,250 annually. To stay on top of that, you’d need to pay interest £1,250 each year for the rest of your life, or until both names on the loan are in long-term care and the property sold.
In terms of how the financing affects your kid’s inheritance, consider this example:
You take out £25,000 on a Fixed Interest Roll Up Lifetime Mortgage at 5.2% at the age of 55 on a single policy. Using a provider applying compounded interest annually, the loan amount would increase by £1,300 in the first year, then £1367.60 in the second year and so on. At the age of 55, providing you’re in good health, you could reasonably expect the interest to accumulate for at least another 30 years, potentially doubling the total repayable to around £50,000. If your property sells for £150,000, the loan plus interest of £50,000 would be taken from the sale of the property, reducing your estates’ value by £50,000 in this example, leaving your family with an inheritance of £100,000, assuming you have no other assets.
Can I repay the entire amount when I can?
You can pay back the loan plus interest at any time, but it’s rarely going to be a good idea due to early repayment charges. These are often high on lifetime mortgage products. To give an example using Aviva’s advisory document for the Aviva Lifetime Mortgage, they state you’ll “never pay more than 25% of your initial loan amount”. The minimum you can borrow is £10,000 so based on 25%; you’d pay at least £2,500 to exit the agreement, plus the accumulated interest, such as if you’ve chosen not to pay any payments towards the interest.
Circumstances will change for both you and your family’s future, so it’s best to factor in how much it would cost if your circumstances changed and you needed to get the loan repaid to move property or refinance with another method.
1st UK has financial advisors experienced in working with families and equity release companies and know how important it is to be clear with our advice ensuring you make the decision that’s right for your family.
Will my home qualify?
Most lenders will require your property to worth at least £100,000 to meet their security criteria. The reason for the minimum home valuation is because the loan term can run for decades as they’re designed to remain in place for the rest of your life. There are providers with lower minimum home valuations, but it’s rarely going to be less than £70,000.
Will I/We be eligible for a Lifetime Mortgage?
Personal circumstances are considered at the application stage. Instead of basing the loan amount on income as is required on other products, you need to own the majority of equity in your home. If a mortgage exists, that’ll need to be repaid in its entirety from the money you apply for. Age will be a factor too, but that’s mostly going to affect the interest rate you’re offered as it’ll be lower on someone aged 55 years old (minimum age requirement) than it would be for someone aged 77 years old. Most applicants with full home ownership (100% equity and no additional secured financing in place) are eligible for lifetime mortgages.
How much can I borrow?
Equity release mortgage providers often have a minimum borrowing amount of £10,000. The maximum borrowing permitted differs by each lender, some will arrange up to 50% of your current home valuation, with other lenders having lower limits. It’s rare you’ll be able to arrange for more than 50% of your home’s worth as the lender needs to make sure they don’t lose money if your home loses market value.
Will I still own my home?
Yes, provided you take out a Lifetime Mortgage and not a Home Reversion Plan. With a lifetime mortgage, funds are released based on using your home as security just as you’d do with other types of secured financing. Another type of equity release is home reversion schemes. With these, you’d sell off some (or all) of your home equity to a holding company. If you sell all your equity through a home reversion scheme, you’d essentially be selling your home but keeping the right of tenure so you could live in your property rent free as a tenant instead of a homeowner.
Are there any spending restrictions on what the money can be used for?
No. The money released from a lifetime mortgage is entirely yours to do as you like. No lender will ask what you intend to do. Your financial advisor should be though because if you plan to release money from property to invest, such as starting a business, there may be other funding options better suited to what you’re planning to do with the money raised.
Most lump-sum payments from lifetime mortgages are used for one-off life expenses like paying for your kids’ wedding, financing a new car, luxury holiday, home improvements or landscaping the garden. The lump sum option is best for those who know they’ll need to raise a lot of money for an expensive life event.
The other option is the drawdown lifetime mortgage, which is more suited to smaller loans with the option to borrow more in the future. With a drawdown lifetime mortgage, you can borrow the minimum £10,000, take out what you need under that, such as £5,000 to buy a used car paying interest only on the money released, which would be lower interest rates than most unsecured loans. The remaining funds would be left on reserve serving as a buffer you can withdraw in the future without having to go through another application process.
Is the application process difficult?
No, because you can only access these through an advisor, who’ll do all the form filling for you. The most time-consuming part of the process for applicants is gathering documentation. Like all financial products, you need to provide documents. Mostly legal documents pertaining to your property and providing identity verification documents such as a passport or driving licence. The lender you’re applying to will want to arrange for a home valuation report as they need to know the properties worth what you say it is. Zoopla valuations don’t count.
How can I make sure I don’t get ripped off?
Use a verified financial advisor qualified and experienced with equity release. You can use Unbiased.co.uk to find a trusted advisor near you.
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There are two key components to making equity release work for you and your family:
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