Equity release: things to consider
Increasing numbers of homeowners who are retired, or approaching retirement, are looking to discover the facts about equity release; Is it safe? What obligations will I have? Can I guarantee some inheritance for my children? These are just some of the questions our advisers receive on a daily basis at Equity Release Supermarket.
The reality is that there are a host of considerations to be made before choosing a lifetime mortgage or home reversion plan. Here we have compiled some of the things to think about before you decide to go-ahead with any equity release plan.
However, this list is by no means exhaustive and we advise speaking to one of our expert Equity Release Supermarket advisers as your next step.
How much do you want to borrow?
How much you can borrow is determined by your age (you must be at least 55 years old), your property value (you must be a UK homeowner) and any health conditions that you may have.
Drawdown, income or lump sum?
Lifetime mortgages are the most popular type of equity release plan and can be taken out either as a single lump sum, a regular income or via ‘drawdown’.
A lump sum may be right for you if you have a significant one-off expense, such as repaying an interest-only mortgage or major home improvements.
If you need additional revenue to cover your monthly outgoings, then a fixed income lifetime mortgage could help.
However, if you only need a small initial amount of money now and smaller amounts in the future, then a drawdown plan could be the better option. This is because you only pay interest on the amount borrowed.
Lifetime mortgages work differently from traditional mortgages, and thus, the interest rates do tend to be higher, although the majority do provide the security of a fixed rate for life. Interest is ‘rolled up’ (or compounded) and accrues over the lifetime of the loan. Many plans now allow you to make flexible, voluntary payments back to the lender, however there is no obligation to do so.
The amount borrowed, and the interest are typically repaid when the plan ends (i.e. when you die or go into long-term care).
No negative equity guarantee
All Equity Release Council members can give advice on plans that come with no negative equity guarantees. This means that when your beneficiaries repay your plan, they will never be told to repay more than the value of your property and therefore never be out of pocket.
Equity Release Supermarket is a long-standing member of the Equity Release Council.
Because equity release reduces the value of your estate, it could mean a reduced inheritance for your loved ones. That said, it is now possible to add an inheritance protection guarantee to some lifetime mortgages to provide that peace of mind.
Inheritance protection can ensure that even after taking a release of equity, you can guarantee that some equity in your property can be passed to your chosen heirs.
If leaving an inheritance is important, make sure you talk it through with your Equity Release Supermarket adviser.
Your right to move home
After you have taken out a lifetime mortgage, you may want to move home in the future. This could be for any number of reasons, such as an unforeseen change in your circumstance, or you may want to move closer to your family, for mobility reasons or to downsize.
Because the Equity Release Council approve all lifetime mortgages, you have the freedom to transfer your equity release plan to a new acceptable property, without incurring an early repayment charge: as long as the new property meets the lender’s specific terms and conditions.
Your right to stay in your home
With equity release plans, you have the right to stay in your home for life, or until you move into permanent care. This protection will give you the peace of mind of knowing that your home cannot be repossessed and that you will never be left homeless.
Early repayment charges
As its name suggests, a lifetime mortgage is designed to be held for life – and not repaid early.
If you decide later on that you want to sell your house and pay off your lifetime mortgage you can, however lenders could make you pay an early redemption charge (ERC). There are two types of penalty: fixed and variable.
If repaying your plan early is likely, then make sure that you discuss this with your Equity Release Supermarket adviser. Penalties can vary and the right option for you is dependent on your circumstances.
The costs involved
The costs involved include the fee for the financial advice you receive, the lender’s application fee, having your property valued and your solicitor’s fees.
Please speak to your Equity Release Supermarket adviser about the costs involved, as some deals come with incentives, such as free valuations, no application fee and cashbacks, which could reduce the overall costs involved.