Are you 55+ and could do with some extra cash for home improvements, family expenses, or simply to boost your pension?
If yes, equity release might be the answer you’ve been looking for. The highly sought-after financial plan allows homeowners aged 55 and above to unlock the cash tied up in their home while retaining ownership of the house.
If you have no clue about what it offers, though, here are some critical facts about equity release:
#1. You Can’t Pass On the Debt
One of the main things that most equity release clients worry about is that if they claim equity release, they might pass on the debt to their kids or leave no inheritance.
It’s not true. Even in the rarest of cases where the value of your home depreciates to cater to the mortgage expenses, the remaining loan will be written off. In most cases, there’s always a guarantee for negative equity.
So, there’s no need to worry and let anxiety prevent you from enjoying your retirement. Apply for equity release and make your dreams come true.
#2. You Must Get Both Financial and Legal Advice Before Taking Out a Plan
According to the Equity Release Council and Financial Services Authority, you need to ensure that you always seek professional advice before embarking on taking out an equity release plan. A financial adviser will help you navigate through the various processes and also assist in evaluating your property.
They’ll also guide you on the various charges you might incur in the process and the early repayment charges. They can also advise you on alternatives like downsizing or using other assets to raise funds.
A solicitor will guide you on the legal needs of equity release and walk you through your rights after claiming equity release. You should, however, remember to seek professional advice from persons and companies approved by the ERC1 and FCA.2
#3. There Are Certain Guidelines to Moving Homes
You want to move homes but don’t know if you can since you took out an equity release plan. Well, this is one of the greatest fears of any homeowner with an equity release plan at hand, but that shouldn’t be the case.
You can always move homes provided that the house you’re moving to meets all the contractual requirements of the plan provider. So, before you embark on looking for another place, make sure you find out from your lender what their basic needs are. That way, you can be sure that you’re getting value for your money.
#4. You Don’t Have to Pay Back the Cash
Unlike traditional mortgages, equity release allows you to continue living in your home until you pass away or move into residential care. Only then is the loan customarily paid from the sale of your home.
However, there are some plans like the voluntary repayment plan that allows you to pay equity release early.
#5. Interest Rates are Fixed
Since 2015, interest rates on equity release have dropped significantly – and that can be the agreed value for the life of your loan.
The amount of interest you pay3 at the end of the plan depends on how long the scheme will run and the type of equity release scheme you choose. It’s essential to remember that the equity release plan ends when you die or move into permanent care.
With a limited lifetime mortgage plan, for instance, since you don’t make any monthly reimbursements, the interests mount up quickly. Every year the amount of interest due will be added to your overall loan, and from then on, it’ll accrue.
It’s, therefore, crucial to remember to sign up for a plan with a “no negative equity”4 guarantee since it’ll ensure that you and your family don’t owe the equity release company more than the value of your property.
#6. Look out for State Benefits
Taking an equity release plan can affect your eligibility for means-tested benefits. So, if you receive these, having money in the bank can have an impact on them, so you need to check with your plan provider before proceeding.
Moreover, by taking cash out of your estate, there’ll be less left later when you want to leave some money in your will. So, make sure that you try to find a balance between what you want now and what you want to leave.
#7. It’s Regulated
Not only are lenders and financial advisers governed by the FCA (Financial Authority), but the financial products themselves give you some assurance.
It’s also a law that all equity release plan providers sign up to be members of the Equity Release Council and abide by its codes and principles. It’s also inclusive of the ‘no negative equity guarantee,’ which makes it impossible ever to owe more than the value of your house and allows you to transfer your plan to another home, incurring no penalties.
#8. You Get Tax-Free Cash
By taking out equity release,5 you get tax-free cash that you can spend however you want. Whether you need to make any home improvements, go on a world tour, or help your children, it’s all up to you.
#9. There Are Eligibility Checks
There are certain variables that you must meet before taking out a plan:
- You have to be a UK resident, though some lenders can impose localised rulings on whether they can encompass the extremes of the UK within their remit.
- Your home must be valued from £70,000. Theoretically, there’s no upper property valuation limit. Nevertheless, some lenders can impose an upper amount to protect them from the risks.
- You need to be at least the age of 55. However, some plan providers might require you to over 60.
#10. Value Amount
One question most plan providers get is if one can know the value of the equity release that they’re entitled to. Well, this is all dependent on your lender. Nonetheless, most plan providers offer you a minimum of £10,000 and £100,000 for others.
The maximum you can borrow also depends on the age of the youngest homeowner, their health and lifestyle, and the estate’s market value. Also, the older you are, the more equity you can release.
Equity release is, in a nutshell, a way to release the value of your estate and convert it into a cash lump sum.
You can unlock the cash through several modes (like the home reversion plan and the lifetime mortgage) which allow you to access – or ‘release’ – the equity (capital) tied up in your house if you’re 55+. Moreover, don’t need to have fully paid off your mortgage to do this.
There are several alternatives to equity release, including downsizing, moving to a less expensive neighbourhood, or by asking your relatives or friends for help.
No. You can’t lose your estate with an equity release plan. The ERC demands that you keep the right to sell whenever you want to and to leave it to whoever you wish to once you have settled your mortgage.
Moreover, since the ERC governs these plans, you have a guarantee that your home will always belong to you and can’t be repossessed under normal circumstances. Other mortgages may repossess your property for non-payment. So, your Equity Release lifetime mortgage is more secure than a normal one.
However, sometimes your lender could instigate repossession of your home if:
- You deliberately falsified information on your application
- You leave the estate unoccupied for over six months, without going into long-term care
- You fail to comply with the terms and conditions: failing to maintain the property routinely or not having valid Buildings cover insurance
Again, this is dependent on your preferred scheme, its on-going balance, and if any fees are due for getting out early. You first have to ensure that you conduct a switch plan analysis to know if it will be beneficial to make the transfer. Switching can be for three reasons:
- To attain lower annuity stipulations – it can hypothetically save your property over the longer term.
- To borrow more funds – if you cannot, or will not be offered more, you may need to look for an alternative lender.
- To gain more features – where old plans had limited flexibility, by swapping plans now, you can gain access to a host of fresh options.
If you have an existing equity release, it’s always a nice idea to see what the sector is offering & consider switching to another plan if its terms are more favourable.
If you want to – yes, you can with the voluntary repayment plans. However, it’s imperative to reiterate how an equity release lifetime mortgage is designed to remain in place before you die or move out into long-term care.
Unlike conventional mortgages, a lifetime mortgage doesn’t have a set timescale where you have to pay back all the money owed plus interests in full. Two principal life events trigger full repayment, and that’s your death or relocation to residential care.
For joint applicants, this depends on the last applicant’s passing away or if he/she moves into permanent care. At this point, your plan provider can use the security they hold on your estate to instigate a sale and recover the money they’re owed.
If you choose to repay all your equity release mortgage, then it’s probable that you might pay an early repayment fee.
No, you don’t pay tax on equity release. The money you unlock is tax-free. However, how you choose to spend your capital could be taxable.
If you, perhaps, decide not to spend it and instead hold it in several savings accounts, it could be subject to tax.
Today, most of the traditional high street banks like Barclays, NatWest, TSB, and Santander don’t offer equity release products. It’s mainly because of them failing to provide their consumers with the right products in the past, and prioritising lending opportunities across various sectors of the mortgage market like first-time buyers. There’s now a reluctance to re-enter the equity release market.
As with the banks, most major high street building societies, except for Nationwide Building Society, no longer offer equity release plans. It’s because of issues with the product offering and, eventually, a lack of funding following the credit crunch.
Today’s leading equity release providers are insurance companies and finance houses like L&G, Aviva, and More2Life.
These companies have been continuously successful at offering consumers a range of products that all have a unique selling point and offer various perks. The current range of equity release schemes also provide consumers with the most diverse range of equity release plans and competitive interest rates in the market.
You aren’t required to settle your lifetime plan during your lifetime unless the last surviving owner moves out permanently.
Alternatively, you may have a considerable lump sum available and want to settle your plan so that you can include your home in your will.
You aren’t obliged to repay your lifetime mortgage pan during your lifetime unless the last surviving homeowner moves into permanent care.
Alternatively, you can have a lump sum available and may want to pay off your lifetime mortgage plan so that you can include your home in your will.
Yes. As per the federal law, the Financial Conduct Authority (FCA) regulates all home-owner mortgages. However, most buy-to-let mortgages aren’t.
Lifetime mortgages, like the equity release plan that allows older borrowers to unlock cash, also have their own FCA rules.
Extending your mortgage term can decrease your monthly payments or aid you in avoiding a probable foreclosure. Still, it would be best if you gave the decision to extend your mortgage loan some cautious thought.
Perhaps you can manage your loan payments better if they are smaller once you lengthen your mortgage.
Yes. The home reversion plan enables you to sell part or all of your estate to your preferred home reversion plan provider.
In return, you’ll receive a lump sum or regular payments. You’ll generally get between 20% and 60% of the market value of your property (or the part you sell), whether or not you release equity in several payments or as a single lump sum.
If you have a lifetime mortgage plan, you borrow equity against the value of your manor and then repay this cash, plus interest, at the end of the deal.
If you want to move home, your lender should be able to transfer the debt to the new estate.
Equity release is an excellent financial plan. However, before you make your ultimate decision, make sure that you consider the advantages of claiming the equity release plan, the impact it’ll have on your life, and other alternatives available.
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