There is several strict criteria equity release companies use to assess whether any individual is eligible to take out a lifetime mortgage, or home reversion plan. To qualify for an equity release mortgage the overriding criteria must be that the applicant must own their property, of which it must be their main residence.
Let’s look at the rest of the equity release qualifying rules individually: –
1. Location of Home – the property MUST be situation in the UK which includes England, Wales, Scotland and Northern Ireland. Following this, certain lenders can impose localised rulings as to whether extremes of the UK are included within their remit. For instance, some lenders do insist they will only lend on mainland Scotland, thus ruling out the Isles from their eligibility criteria. The Isle of Man is always excluded, whilst the Isle of Wight is acceptable lending to many lifetime mortgage providers.
Due to the recent flooding around the UK, certain lenders such as Aviva are more aware of the flood risks that properties in the UK can be subject to. Using Environmental Agency data, based on postcode a lender can reject any application where they feel that the risk for them is too great to lend. Always check with your adviser to ascertain beforehand whether eligibility may be an issue. Aviva do also now provide a postcode rating system for the equity release UK, therefore dependent upon postcode it could affect the interest rate allocated.
Based on location, certain lenders will impose varying degrees of loan-to-values should they wish to build their portfolio in a particular area of the UK. For example, some lenders will accept higher maximum loans for properties within the London Borough’s. These can sometimes just be a temporary measure whilst a lender either balances their mortgage book or wishes to invest in a particular area to strengthen its property portfolio.
2. Property Criteria – the minimum property value any lender will accept is £70,000. There theoretically is no upper property valuation, however certain lenders will impose maximum values to reduce their exposure & risk. You tend to find the bigger corporates such as Aviva, Legal & General and LV= will consider properties upwards of £1 million and in some cases Equity Release Supermarket have central London apartments accepted which have been valued in excess of £10 million. Hence, it is always better to check than to assume. These are not residential mortgages and the mechanics of lifetime mortgages are clearly different to their residential counterparts, hence they need to be considered independently.
Property type is equally important in ascertaining eligibility. Properties of non-standard construction should always be run by a lenders underwriter, providing them with as much information as possible. Therefore, construction types such as concrete block, timber frame, ex-council flats, high rise apartment blocks, listed buildings & properties with short term leases MUST always be brought to the attention of the Equity Release Supermarket adviser who will check with the lender before submitting a full application.
The condition of the property is something all lenders take seriously. Someone who neglects the upkeep of their property now, is maybe someone who could affect the future security for the lender. We are seeing more evidence of clutter these days and if this is evident in a surveyor’s report, then a lender will not even place a valuation on the property & decline.
3. Age of Homeowners – at present the youngest any person can take out a lifetime mortgage is 55, however most lenders will accept 60 year olds as the minimum age. The age of the youngest homeowner always forms the basis of the equity release calculation. Many lenders start at this higher age due to the potential risk of longevity & life expectancy.
Remember all these lifetime mortgage plans have the inclusion of a no negative equity guarantee which is mandatory under the Code of Conduct issued via the Equity Release Council. Therefore, they will not want to be exposing themselves to the risk of the loan compounding so much in the early years, that it will eventually be higher than the value of the house, thus employing the no negative equity guarantee.
Some lenders such as More2Life do have a minimum age of 60 on paper, however the More2Life Tailored Choice plan will accept someone as young as 55, as long as the medical terms enhancing the plan, make them equivalent to a 60+ year old. At the upper end of the age spectrum, lenders such as Aviva Equity Release will accept applications from homeowners over the age of 100.
4. Loan Amount – the minimum initial loan amount for a lifetime mortgage scheme is £10,000, however some lenders do impose £15,000 as their minimum. The basis for maximum borrowing for equity release schemes is the age of the youngest, property value & the health & lifestyle. The older the individual, the higher the maximum equity release loan can be taken. However, any loan amount within lending guidelines can be taken for any purpose.
Your equity release adviser should always only recommend the initial loan be sufficient to meet your planned expenditures. Taking too much equity & having this amount languishing in a low interest rate environment, is not best advice. Paying a much higher interest rate on an equity release scheme, than being received on savings can be detrimental to the amount of equity remaining for the beneficiaries. Amplifying this effect is the yearly compounding of interest, which exacerbates the issues of taking more equity than necessary.
Lifetime mortgages are flexibly designed to enable the release of home equity to fit with the homeowner’s requirements. Consequently, drawdown lifetime mortgages are now the most popular equity release scheme for this reason as they allow a smaller initial loan, with the creation of a cash reserve facility. This facilitates a smaller loan amount, with access to further loans as & when required in the future.
Before calculating how much equity can be released, any outstanding mortgage needs to be considered & repaid. The mortgage can either be redeemed before application stage, or more often than not, at the time of the release of equity by using these funds to clear the outstanding mortgage amount. Therefore, always consider whether an existing mortgage needs to be included into the equity release loan amount & whether this fits in with maximum loan-to-value limits with lenders. Use the Equity Release Supermarket Equity Release Calculator to establish the maximum loan available and whether sufficient can be raised.
Additional criteria that can affect the maximum loan amount is the type of property the loan is to be secured upon. Certain lenders such as Aviva and Legal & General will only accept 85% of any flat or apartment’s value as the basis of the maximum equity release calculation.
Mortgage & debt consolidation is becoming the most popular reasons for taking out a lifetime mortgage, with the most common being for home improvements. Gifting has risen in popularity over the past few years as first time buyers have struggled to get onto the housing ladder. Parents have therefore bestowed upon their children, or grandchildren an early inheritance present to get them off to a start into the property world.
5. Credit History – much confusion surrounds whether homeowners can still take out equity release should they have adverse credit history. The answer is yes…& no. The issue of whether poor credit will stop someone applying will be on the severity of the adverse credit & the lenders available for the homeowner. For some lifetime mortgage plans, starting from age 55, there are certain lenders that do not undertake any form of credit check.
However, equity release companies, due to the nature of their product which invariably requires no form of repayments, do take a more relaxed attitude to lending than residential mortgages. No lenders will accept an undischarged bankrupt, however on a case-by-case basis some will consider discharged bankrupts. CCJ’s can also be acceptable to some lenders depending on the size & age along with debt repayment programmes. Defaults and missed payments are usually permissible, but again on an individual case basis.
Equity Release Supermarket advisers in knowing this background information will ultimately know which lender would fit, whatever credit record a homeowner has. However, it’s important that full disclosure is made to your adviser in order to save much time & effort for both parties in finding a suitable equity release company.