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Equity Release Myth Busting
David Pettitt joins the Mortgage and Protection Podcast to bust some myths surrounding Equity Release.
What exactly is Equity Release?
Equity Release is a product that is available to the general public over the age of 55, which allows you to unlock cash from the value of your home. It’s basically a form of borrowing against property, just like a regular mortgage. Whatever you’re looking for in life, financial freedom, renovating your home, helping your children to buy a property or just to supplement any income.
There are two types of Equity Release; Lifetime Mortgages and Home Reversion plans. A Lifetime mortgage is a long term loan on the value of your property, which is repaid, usually from the sale of your home after you (and your partner in the case of joint mortgages), either die or have to go into long term care, depending on terms and conditions of the lender.
Entering into a Lifetime Mortgage will also reduce the amount of inheritance you can leave behind to your family, and it might affect your tax position.
Is Equity Release regulated?
With Equity Release you are well protected as the Financial Conduct Authority, regulates both Lifetime Mortgage and Home Reversion Plans.
The Equity Release Council is the industry body for the UK Equity Release sector, and they promote very high standards of conduct and practice in the provision of advice in the Equity Release market, which safeguards consumers.
Does a Lifetime Mortgage mean that I have to stay in my property for the rest of my life?
A Lifetime Mortgage will be there until you pass away or you need to go into long term care, however, it doesn’t mean you have to stay in your property and it doesn’t restrict you from moving on later in your life.
With regards to the lifetime loan, you may be required to repay the outstanding loan and any accrued interest if you should move, or if your new property qualifies under lender’s criteria, there may be an opportunity to Port the loan, which means take the loan to the new home with you, but you’re certainly not made to stay in your home forever.
Can you end up owing more than your house is worth, leaving your family with debt?
This is one of the biggest worries for people who are thinking about Equity release schemes, that the interest accruing and the original loan amount will increase to an extent that the debt will be greater than the value of the house, leaving their family to settle the debt. Fortunately, if you take out Equity Release with a reputable provider, this won’t be an issue.
Most lenders have a ‘No Negative Equity Guarantee’, which is governed by the Equity release Council. However long interest is accrued or allowed to roll up over the term (your lifetime), the amount owed by the customer or their family will never exceed the value of the property that the plan is linked to. What that means is that you will never be in debt to the company for more than the value of your home and therefore your family or estate will not be chased for any extra money.
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ARE THERE WAYS TO MITIGATE THE INCREASE IN BALANCE?
Yes, Equity Release loans can be very flexible and there are a lot of ways that you can mitigate the increase in overall balance. First of all, plans allow you the ability to repay the monthly interest, meaning that there will be no increase in the debt over the term of the loan.
There are also ways of paying off lump sums, If you have that ability, and usually you’re able to pay up to 10% of the original loan off throughout the term, without incurring any charges. If you are in a position to be able to repay any money, contact an advisor, like IMS first, to see if it is the most beneficial thing for you to do.
WHAT ABOUT THE ROLL UP OF INTEREST?
If you want to stop that from happening, you have the opportunity to repay the monthly interest charges. This will be discussed in the early stages of deciding whether Equity Release is the right option for you. It’s very important that you fully discuss all matters with your financial adviser in order to obtain the correct solution.
HOW DO YOU REDUCE THE DEBT?
Discuss the ability to pay off lump sums with your advisor, in terms of where the funds are coming from, how they should be used, how they can be used, and whether or not you are in a position to reduce that debt. You should consider whether there are any charges involved and do be aware that there may be early redemption charges, should you exceed the limit that you’re able to repay.
ARE EQUITY RELEASE RATES VERY EXPENSIVE?
It’s very important that you’re in a position to understand how this will affect your Equity Release borrowing at the moment. Equity release rates are currently the cheapest and most competitive they have been in years, however, please remember that as low as rates are, it’s still an expensive way to release capital and there may be alternatives. Again, it’s essential that you discuss everything with your adviser, as they will be able to give you the most suitable advice if you tell them everything they need to know.
IS IT TRUE THAT I’LL LOSE CONTROL AND OWNERSHIP OVER MY HOME?
No. Many people view Equity release as a form of selling their home with the right to remain in it. However, a Lifetime mortgage is just a form of borrowing against the property, like a normal mortgage, you will retain ownership, you will retain full control and nobody will be taking your home away from you so long as criteria and conditions are met.
I haven’t completely paid off my existing mortgage, can I look at Equity Release?
Anyone over the age of 55 would have probably been expecting to have paid off their mortgage, however we know that in reality, that’s not always the case. Equity Release can be considered, even if you have an outstanding mortgage.
WHAT ARE THE COMMON USES OF EQUITY RELEASE?
Equity Release is a very popular way of releasing the funds from your property for numerous reasons. Here are just a few of them: You can repay your outstanding mortgage, home improvements, supplementary income as you enter retirement, buying additional properties, or maybe even to pay for that long term care that’s needed.
WHAT IF MY CIRCUMSTANCES CHANGE DURING THE APPLICATION PROCESS?
We keep in touch with our clients throughout the entire process and will have numerous conversations before the Equity Release is decided upon. If circumstances change to a point where it’s no longer the correct transaction, we will recommend an alternative. We will never put anybody in a position where the advice would not be appropriate.
WHAT CRITERIA IS LOOKED AT FOR EQUITY RELEASE?
You need to be over 55 and the lender will look at your health. There may be ways of enhancing the rates or borrowing more if there are certain health conditions. What they don’t look at is the income of the client, whereas a regular mortgage is mainly focused upon that. The property is the main part of this transaction, and the main concern for the lender, who will have the property valued by a professional to make sure it’s adequate security for the purpose and the term of the loan.
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HOW LONG DOES IT TAKE TO SET UP?
The process will vary for each client. At IMS we find out what their requirements are, what they are trying to achieve and obtain a snapshot of their financial position. It’s not a speedy process because we have to make sure that Equity Release is the right transaction for you. We may look at whether you are able to obtain a regular mortgage, as interest rates are very low on that at the moment. We may look at retirement Interest-only mortgages and then we will look at the options of Equity Release.
There’s no set time scale, but if you’re looking at getting things done urgently, we can prioritise and get these things done. I would always ensure, however, that the client fully understands what they’re getting involved with. The regulators will ensure that that is done as well.
WHAT ABOUT BENEFICIARIES CONCERNED ABOUT THEIR INHERITANCE?
If clients want to involve their family, we will always suggest a third party be present in order to avoid any misunderstandings and to ensure that everybody is happy with what is being done. It’s very important that everyone is aware of what’s going on with regards to inheritance. We will go through the figures, look at the interest, the accruing of interest over the term and the possibilities of there being no capital growth within the property itself.
Families do need to be aware that if their interest accrues, and house prices tumble, there may be no inheritance left. It’s not a common occurrence, but it is a possibility that people need to be made aware of. If it is a concern for the owners, there is an inheritance protection guarantee which allows you to protect a percentage of your home’s future value, and ensure you’ve got something to pass on to your loved ones.
CAN I SET THAT AS A FIGURE TO RING FENCE OR DOES IT HAVE TO BE A PERCENTAGE?
It can be either, it depends on the lender’s criteria. If you want to leave a specific amount, we can discuss that, and if you want to leave a percentage, we can also look at that for you.
Speak to IMS for Equity Release advice
It’s important to speak to a qualified adviser like ourselves. Feel free to call Independent Mortgage Solutions to speak to the Equity Release guy and I’ll be more than happy to discuss matters with you, and find an appropriate solution for you.
An Equity Release product will reduce the value of your estate, will not be suitable for everyone and may affect your entitlement to state benefits. To understand the features and risks please ask for a personalised illustration.
The Broker Fee for the Equity Release will be a charge of between £0 and £895. The level of the fee will be determined by the complexity of the enquiry and the duration of the research required to assess the needs and provide a suitable recommendation.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE