Equity release isn’t a tricky concept if you know the right terminology. There are so many terms that recurringly pop up, but what do they mean?
No need to worry! We’ve compiled a list of the most important Equity Release jargon to define and clarify unfamiliar terms.
What Are the Terms Used in Equity Release & What Do They Mean?
Advisers are there to meet you and provide support to your queries as they come up. They will review your situation and give advice on the best steps to take that’ll benefit your finances and future. They’re friendly working professionals, trained and qualified in everything related to equity release.
AER (Annual Equivalent Rate)
This shows you the yearly interest rates on any savings or investments. If the AER is high, it means a better return.
It’s a determined amount of cash paid yearly between parties, like a mortgage or a pension.
Cash is paid to the lender or lending provider, like an administration fee used to produce various equity release costs.
APR (Annual Percentage Rate)
It’s the overall cost for borrowing on credit or with a loan. If the APR is low, the deal is better for you.
A person your estate is left to. This will be stated in your will and will be actioned upon your death.
Calculator can let a customer know exactly how much equity they may be able to release from their property.
Compound Interest Or Roll-Up Interest
Interest owed gets added to the loan total. Meaning you’ll have to pay interest on interest. The amount will increase annually.
CPI (Consumer Price Index)
This measures price level changes of a selected sample of everyday services and items. Lenders and providers look at these changes and then determine interest rates on equity release plans.
These are charges solicitors give their clients from 3rd parties. They’re added to basic fee charges.
This refers to the cash leftover from your income after paying for life essentials, like bills, groceries, and travelling.
Money left over after tax deductions have been made. Both are important to an equity release adviser because low incomes are one of many reasons people choose lifetime mortgages.
Drawdown Lifetime Mortgage
One out of 3 lifetime mortgages is a drawdown plan. A drawdown plan lets homeowners access a large amount of cash to be drawn from when needed.
This is when you opt to sell your home and buy a smaller one or one of less value. That way, you can release some extra cash.
Early Repayment Charges
You have the option to repay your equity release loan at any time. But, if you do so, you might be fined for it. You’ll have to pay additional charges that can be up to 25% of the initial loan amount. Usually, these charges are defined or gilt based.
Defined charges mean that the percentage charged, applied annually, will be set out and will decrease over time.
If they are ‘defined’ charges, the percentage charge which applies each year will be set out and will typically reduce over time. However, in some instances, you won’t have to pay a fine. It all depends on the plan you have.
These are types of lifetime mortgages with enhanced loan-to-values or otherwise preferential interest rates. Qualifying health conditions and lifestyle choices can make you get this type of loan.
This refers to the portion of your house not taking into account any mortgage on the property. In other words, it’s the amount of cash tied into an asset after any debt that is owed.
Equity Release Council
The Equity Release Council is an industry body that regulates the equity release market. They’re responsible for ensuring members act with integrity and transparency towards their customers – the borrowers.
This is a way you can gain access to any cash locked up in your home. You can use this money to help you in your retirement, for example. There are two types: lifetime mortgages and home reversion plans.
This refers to everything you own at your death after your debt is repaid. Equity release decreases your estate.
FCA (Financial Conduct Authority)
Otherwise known as the Financial Conduct Authority, which is an independent body regulating financial services. This includes equity release plans that are run ethically.
Fixed Interest Rates
These are interest rates that are set and do not fluctuate. For example, with a lifetime mortgage, you will get a standard interest rate (let’s say 4%) and this rate will be in place for the rest of your plan.
Fraud refers to a criminal act where there’s an unlawful acquisition of money. Advisers are always on the lookout for those who take out loans for illegal reasons, including when it comes to equity release.
It’s a property where the resident is the owner of the land, home and all surrounding areas like gardens or garages. The property must be freehold or leasehold to qualify for release equity.
Home Reversion Plan
A form of equity release where a homeowner can sell a portion of their house in return for a cash lump sum or a regular income.
This is another term used for an enhanced lifetime mortgage. Impaired life loans are given when a homeowner’s life choices, or poor health circumstances, result in a considerably large lump sum.
A way of receiving money. Some equity release providers will give you your money in the form of an income and not as a lump sum. The income is only payable for a limited time and then it’ll stop, depending on the amount of equity you unlock. It’s worth getting some advice on this matter. Lump-sums can also be used as a source of income in retirement.
Inheritance Tax (IHT)
The tax is charged on an estate when the homeowner dies when all the assets are given to their heirs.
This is a feature that comes with some lifetime loans. It allows you to ring-fence a portion of your property’s value as a guaranteed inheritance for your heirs.
This type of mortgage lets the borrower only pay the interest on the capital they borrowed.
Joint Policy Holder
If the property owner on a lifetime mortgage plan passes away, the joint policyholder won’t be kicked out of their home. They can stay in it.
Equity release schemes run until the loan is repaid or until the last borrower needs permanent long-term care or passes away. So, having a joint equity release plan means that your spouse or partner won’t have to move if they outlive you, or if you have to move into permanent long-term care.
KFI (Key Facts Illustration)
This illustration is a document the lender provides. It breaks the terms and conditions of your plan down so you can understand them better. All providers must give a KFI in the same format so that when you are looking at two KPIs, you can compare them easily.
If the ownership of a house is owned according to a set period, after which that ownership is given back to the landlord (sometimes this is also known as “freeholder”).
This is a type of equity release where you borrow a portion of your house’s value. This is secured against your property.
LTV (Loan to Value)
Loan to value1 refers to the portion or percentage of your house value that you’re borrowing. So, if you borrow £30,000 against your home and its value is £100,000, the LTV would be 30%, for example.
When we look at most equity release schemes, they’ll let you withdraw money as one lump-sum cash amount. This is in contrast with taking out smaller amounts more regularly.
The government offers some benefits to those who show that their income and capital doesn’t exceed the limit. So, if you want to know who is and isn’t able to support themselves in this way, the UK government will look at their means.
This guarantee2 comes with most equity release lifetime mortgage plans out there. This guarantee protects you from owing more than what your house is worth. It’s set by the Equity Release Council.
PRO TIP: Never use an equity release provider that is not a member of the council!
Once a lender accepts a case, and they complete a valuation of your property, they’ll issue an offer document to all the parties involved. This document gives you a breakdown of your personalised plan, and you’ll be able to look at any changes that happened after the KFI was issued.
This is an illustration from your adviser, which consists of a unique set of calculated data. The data is based on the homeowner’s details and the equity release scheme they want to take.
These rates are the available interest rates at the time that you draw down from your reserve facility. These rates can be higher or lower than the initial interest rate.
The prevailing rate will be applied at your drawdown time and any extra money you release. Your funds will accrue interest at a different interest rate to your initial funds. So, drawdown customers need to be aware of these rates!
Your provider is the company you choose to give you an equity release plan and finance it. These providers can often be sourced through your financial adviser as they know your circumstances best.
Some providers only have portable plans. These plans are handy when you want to move to a new home that meets the provider’s criteria and requirements. If that’s the case, the provider will simply move your mortgage over to the new house.
The plan is secured against a new property, so you’re not stuck. It’s essential to keep in mind that the new property might be of a lower or higher value, so you might have to repay part of your existing plan.
Property Survey (Valuation)
Once the provider receives your equity release plan application, they’ll send someone to valuate or survey your property. This ensures that the value of your home estimate is accurate.
Therefore, the amount of money you can release will be in line with the LTV you agreed on. Independent and unbiased surveyors perform this evaluation, so you can rest assured they’ll be professional and trustworthy.
Qualified Equity Release Adviser
These advisers are specifically qualified to give you guidance when looking into your mortgage options. Their objective and field of knowledge is equity release.
Some lifetime mortgages have this as an extra feature. This is additional interest on the money you borrowed and any accumulated interest. When the interest rate compounds every month, it refers to the frequency of interest being capitalised. However, interest doesn’t necessarily compound every month. Sometimes it only happens a few times per year (quarterly, weekly, daily etc.)
Retentions & Undertakings
The surveyor can identify what they consider as essential work on the property. They’ll then recommend the provider retain some money until the job is finished. The provider can choose to do so or attach an ‘undertaking’ condition to the offer. The undertaking condition stipulates that any work done on the property must be done by a specific time.
Right to Remain
This right is a guarantee that you’ll be able to continue living in your house until the end of your equity release plan. The end of the plan generally happens when you die or move into permanent care. This is subject to some conditions, of course. The plan’s requirements can include things like the state of the property, which needs to remain in good condition etc. Always read the T&Cs.
Roll-Up Lifetime Mortgage
This is another type of equity release plan. Unlike a drawdown plan, the property owner will get the borrowed money as a lump sum instead of a smaller amount whenever it’s needed.
Secured loans are secured by the provider against an asset you own, like your house, enabling the lender or provider to recover unpaid debts if you can’t repay them.
A solicitor is a professionally trained and qualified person who gives legal support and advice.
A lender needs to survey the house or property to determine its exact value so that they can offer you the right loan.
Tax-free means that the money you released through equity release won’t be taxed with income tax or capital gains tax. However, it may affect your overall tax position.
Trustpilot is a public consumer review website. You can review your experience with equity release businesses and companies.
If your property is valued lower or higher than the estimated amount, it’s called an up or down valuation. Depending on the amount you want to borrow and the max LTV the lender will give, it may change your possible release amount or interest rate.
Variable Rate Plans
These plans usually offer a lower interest rate initially, but they have variable rates from year to year. It’s based on market condition changes.
Waiver of Occupancy
This document can be signed by anyone older than 17 that permanently resides in the house and who isn’t party to the equity release scheme. The document confirms that if the end of the plan’s condition is met, they’ll lose their right to stay in that house. Then, the house can be sold by the provider and repay the loan.
Got Questions? Check These First
What Does Equity Release Mean?
Equity release is a type of remortgaging allowing homeowners over 55 to unlock equity from their homes as a tax-free lump-sum of cash.
It’s a great aid in putting away money for retirement or to buy another home.
What's a Lifetime Mortgage?
This mortgage is repaid when the homeowner dies, need medical care permanently or when the house gets sold. They have fixed interest rates, and you don’t have to make regular repayments.
You can choose to repay the mortgage at the end of the term plus any rolled-up interest.
What are Home Reversion Plans?
With a min age requirement of 65, these plans work by you selling part of your property or the whole property at a lower rate than its market value. You’ll be able to continue living in your property rent-free, of course. Your provider will repay your loan after you die and they’ve sold the house.
However, it’s important to remember that by taking out money from your home, the value of your estate can be reduced and your entitlement to means-tested benefits as well.
What Rates Do I Need To Pay For Equity Release?
Also called an application fee. Some providers charge £599, and others charge nothing at all. There is also a transfer fee of £30 to transfer your funds to your solicitor at the end. You can’t pay these until the end of your mortgage.
If you’re feeling peaceful and satisfied with the lifetime mortgage offer and want to accept it, you’ll need to instruct your own equity release expert solicitor. They’ll act on your behalf. Equity release solicitor charges are around £650 but vary widely. Compare s a few prices before making your decision.
Lifetime Mortgage Interest Rates
The interest rates are fixed on lifetime mortgages1 so that they won’t be different in the future. Any interest you haven’t paid is added to your loan every month. Interest is charged on your loan and any interest that’s already been added (compound interest or roll-up interest).
After reading this article, you’re geared up to face any uncertainty that comes your way. Equity release doesn’t have to be complicated. If you know these terms and understand the conditions, you can ensure that the plan you agree to is the one that’s best for you.
Are you considering equity release but are still unsure? Perhaps check out the pros and cons next!