Has equity release jargon left you scratching your head? Don’t worry. Here at Equity Release Supermarket, we understand that confusing language isn’t helpful when it comes to financial planning.
That’s why our advisers explain everything in plain English – and at a pace that suits you. So, if there is a phrase or a sentence that leaves you stumped, we will always have someone on hand to clear things up.
To help you prepare, we’ve compiled an A-Z of some of the most commonly questioned terminology around equity release. We also have a comprehensive FAQs section on our website, where you can download all the answers.
- Compound interest
- Early repayment charges
- Lifetime mortgage
- Loan-to-value ratio
- No negative equity guarantee
- Tax-free lump sum
Compound interest can be thought of as interest on interest. It works by charging interest on the total amount of the loan, including the interest that has already built up. This, therefore, gains momentum as the years roll by.
Suppose you took out a lump sum lifetime mortgage of £40,000 at 5.0% interest. At the end of the first year, the total interest would be £2,000. This makes your outstanding balance £42,000. At the end of the second year, however, you will be charged 5.0% interest again, but this will be calculated on the closing balance of the previous year, which was £42,000. This makes the interest £2,100. Added to last year’s balance, this gives an outstanding balance of £44,100.
Equity release lenders can apply compound interest in one of two different ways: monthly interest (MER) and annual (AER). The most popular method is for the interest to be calculated daily and added to the balance once a year.
Still confused? Get in touch with our team of experienced advisers today and find out more about compound interest.
While strictly nothing to do with equity release, downsizing is an option for those who wish to bolster their pension pot without accumulating debt.
But selling your home and moving into a smaller and cheaper space isn’t without its disadvantages, and you should carefully consider the added cost of Stamp Duty, estate agent and solicitor fees, removals etc. We advise speaking to an experienced financial adviser at Equity Release Supermarket who will be able to help you consider all your options.
With drawdown lifetime mortgages, the lender offers you a ‘cash facility’. Let’s say that’s £100,000. Your facility is there to use whenever you need it and you only pay interest on the amount you borrow. So, if you only need £20,000 now – that’s all you pay interest on. If you need to tap into your remaining £80,000 facility, you can do, and you’ll only pay additional interest if and when you do.
This means you accrue less interest to repay over the lifetime of the mortgage. For those with health conditions, you may also be able to borrow more through an enhanced lifetime mortgage.
Early repayment charges
You are probably aware of early repayment charges (ERCs), as they are commonly applied to fixed-rate mortgages.
ERCs are also payable on lifetime mortgages as they are not designed to be repaid early but when you die or move into long-term care.
ERCs have changed for the better in recent years and there are now plans that offer ERCs that last for a specific number of years or taper and reduce over time. Plans also exist where ERCs aren’t payable if, for example, you need to sell your home following the death of your spouse or partner.
It’s always a good idea to speak to your Equity Release Supermarket adviser about your plans.
Equity is the value of a homeowner’s assets, minus any debts related to these assets. For instance, if you own a £200,000 property with a mortgage loan of £75,000, you have £125,000 equity in your property.
Moreover, ‘equity release' is the process of unlocking the value in a property by turning it into a cash lump sum or regular income. There are typically no monthly repayments to make and you continue to own and live in your home until you die or move into permanent care. Only then is your plan normally repaid from the sale proceeds of your property.
A lifetime mortgage is the most popular type of equity release, which gives homeowners access to money tied up in their property. They are often preferred by those who do not wish to downsize in retirement and wish to retain 100% of the ownership of their property.
As the name suggests, lifetime mortgages are designed to run for the rest of a homeowner’s life, ending only when the homeowner dies or moves into long-term care. Interest typically compounds or ‘rolls up’ on a lifetime mortgage, and, thus, increases over time. However, plans now do allow some forms of repayment, including Interest-Only and Voluntary Partial Repayment, which can help manage the future balance.
Loan-to-value (LTV) is the ratio (expressed as a percentage) between the value of a lender’s maximum loan and the value of a property. With lifetime mortgages, the maximum loan is typically around 54%. So, if your home is valued at £300,000, the maximum release will be in the region of £162,000.
No negative equity guarantee
The Equity Release Council, the governing body of the equity release industry, insists that all lenders that are members of the Council only offer lifetime mortgage plans with no negative equity guarantees.
This means that even if house prices were to fall in the future, your estate will never be left out of pocket when the time comes to sell your home and repay your plan.
At Equity Release Supermarket, we only advise on plans with no negative equity guarantees.
Tax-free lump sum
All the money you receive through a lifetime mortgage is tax-free. Whether you choose to take your money in one amount – as a lump sum – or several smaller drawdowns, you’ll never have to pay tax on the money you receive.
Dependent upon what you do with that money thereafter, may result in tax implications, however the cash put in the bank from your equity release provider is tax-free.
If you would like further advice on borrowing in later life, either through equity release or retirement mortgages, we advise speaking to one of our expert and impartial advisers. For more information about how we can help, contact the Equity Release Supermarket team on Freephone 0800 802 1051, or email [email protected]