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Mark Gregory, Founder and CEO at Equity Release Supermarket
www.equityreleasesupermarket.com
Tel: 0800 678 5955
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Question
Home improvement conundrum: what comes first?
Hello there – I have a ‘chicken and egg’ type scenario I need some help with please. I would like to get building work done on our home. My husband and I are both retired and desperately need work done to improve our home, so we are pondering over equity release to help us fund the refurb.
I feel utterly overwhelmed and don’t know where to start. I want to find out if we are eligible for equity release – or another product – but without getting builders in for quotes we won’t know what figures we are dealing with.
However, on the flipside, we also don’t want to start looking into building work and getting plans drawn up if we don’t know we can get equity release.
For information we have a house worth (by my reckoning) £375k, we own outright and have an income of £3,500 per month. We have very little in the way savings – hence the need to release equity.
Answer
The three main criteria for equity release eligibility are that the youngest homeowner is over 55, the property is worth at least £70,000 and it is in the UK. From what you have told me, it appears that you are eligible for equity release on these terms.
The amount that you can borrow with a lifetime mortgage is then determined by your age and the value of your property. In essence – the older you are, the more you can borrow.
As I don’t know your exact ages, I’ll give you an idea assuming that you are aged 65 and 70.
At 65, you could borrow up to 39.8% of the value of your home. Using your valuation of £375,000 – that’s up to £149,250. At 70, you could borrow up to 45% of the value of our home – that’s £168,750.
Always bear in mind you should only withdraw the amount you actually need, as there are plans such as drawdown schemes that will allow you to take funds as and when you require them, rather than taking the whole lump sum all at once. Remember with lifetime mortgages the greater the loan-to-value, the higher the interest rates become, hence another reason to be cautious on the initial amount taken.
There are other borrowing options you could consider such as retirement interest-only (RIO) mortgages or retirement mortgages as they potentially allow you to borrow much more than with a lifetime mortgage.
With a RIO, you could borrow up to 75% of the value of your home (£277,500) and with a retirement mortgage, up to 90% (£337,500). Both are dependent on your incomes.
The main differences between a lifetime mortgage and a RIO or retirement mortgage is that RIOs and retirement mortgages are residential mortgages and you are required to make monthly repayments of either interest only or interest and capital – just as you would have done with the previous mortgage on your home. You must also pass the lender’s affordability and credit criteria – which considers your income and ability to make repayments both now and in the future.
While you can’t borrow as much with a lifetime mortgage, you don’t have to make any repayments – unless you want to – and there are no affordability checks to pass.
As a next step, I recommend that you speak to an independent and whole of market equity release adviser who will be able to discuss your financial goals and find the right solution for you. All our advisers at Equity Release Supermarket are experts in their field and it won’t cost you anything to speak to us.
In fact, Equity Release Supermarket won’t charge you anything until your plan is complete and your money is in the bank. You can find your local, Equity Release Supermarket adviser here.
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Question
How much can we borrow?
Both my wife and I are 67 and we don’t have any children or dependents. We are looking into equity release to top up our pensions and wondered if you could draw any light on how much of our cash we could potentially release from our home.
Our house is in the south east of England and is worth £525,000. We are hoping to top our income up by a further £1,000 a month. What proportion of our property would we need to relinquish in order to do this?
Answer
Lifetime mortgages are commonly used to provide additional income to retirees and help supplement general day-to-day living costs, where all other avenues of generating income have been investigated. Usually, the need for income is combined with a lump sum to solve any capital shortfalls required too. Lifetime mortgages are flexible enough to cater for both cash revenues.
With lifetime mortgages, like a residential mortgage, you do not relinquish any ownership of your home. This is a common misconception of lifetime mortgages. The lender places a first legal charge on your property, to ensure they are paid out first when the property is sold.
To generate income with a lifetime mortgage you have two main options to consider.
Drawdown lifetime mortgages are the most popular plan, as once you have borrowed a minimum initial amount of £10,000, the remainder of what the provider will lend, is then held in a cash facility for you to drawdown in the future. With most lenders you are able to take as many withdrawals as you wish, free of administration costs.
The minimum drawdown amount does vary between lenders, and can be anywhere between £500 – £5,000. If the lender that’s been advised has a higher minimum drawdown than £1,000, as you state you require, then as payments are flexible, you could take £3,000 per quarter, or £6000 per month to suit your requirements, or any other suitable alternative. The choice would be yours.
The second option of taking an income using a lifetime mortgage is to consider an income lifetime mortgage.
Income lifetime mortgages are currently only offered by Legal and General and they are specifically designed for those that want to use a lifetime mortgage to support their existing pensions as the money is paid into your bank account monthly – rather like a salary.
You can choose from terms of 10, 15, 20 or 25 years and once you have borrowed an initial amount of £2,500, the income you receive monthly will be determined by the term and plan you choose, and the amount you borrow. By taking the release as an income, means the roll-up effect of interest is minimised as the balance starts from a lower point, than a single lump sum.
With so many options available to you, I’d suggest that as a next step you speak to an expert adviser at Equity Release Supermarket who will be able to find the right solution for you both now and for your future needs.
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Question
Divorce: Are there any later life options available?
I am going through a divorce at the moment. I am in my 60s and my soon-to-be-ex-husband is also in his 60s and we are therefore both retired. Once we have settled I expect to get half the value of our house which is £230,000, which may sound like a very good sum indeed. However, I would like to move to be closer to my daughter who lives in a pricey commuter belt town outside London. I would need at least an extra £100,000 to afford something suitable because I need a three-bedroom house to accommodate my son’s family when they stay.
I would therefore like to take out a later life mortgage. Are there any options for me? Could a retirement interest-only mortgage be a possibility? I will have an income of just over £1,300 a month.
Answer
While you haven’t told me our exact age, I will assume that you are 65 to give you an idea of how a lifetime mortgage or RIO Mortgage could help you. Also, I’m assuming the £230,000 is your half of the financial settlement.
Firstly, with a lifetime mortgage, at age 65, you could borrow up to 39.8% of the value of the new house you want to buy. Again, I don’t know the value of the properties you are looking at, but if you need an extra £100,000 to buy something suitable, then I imagine you’re looking at properties valued in the region of £330,000.
If this is the case, then you could borrow up to £131,340 through a lifetime mortgage – which will be enough for you to purchase your new home outright, when added to the £230,000 you’ll receive through your divorce settlement.
No proof of income or affordability is required with a lifetime mortgage and to borrow £100,000 in this scenario would currently attract a fixed interest rate for life of 2.81% MER. If you chose to repay the interest voluntarily, like an interest only mortgage, the payments would equate to approx £234pm.
A retirement interest-only (RIO) mortgage could also be an option, and you would need to pass the lenders’ affordability criteria and so we would have to better understand your retirement income and expenditures now and in the future.
RIO’s involve monthly payments of interest only to which you are contracted for the rest of your life. This means you balance would remain level for the duration of the mortgage which for many, can help protect their estate and the inheritance of the beneficiaries.
Once we have gathered the necessary information, we could then check eligibility by running a decision-in-principle (DIP) with the lender to check whether a RIO could be an option for you. If so, we can then compare the two schemes for you to see which option (lifetime mortgage or RIO) is the most suitable, both now & in the future.
I suggest as your next step you speak to one of the expert advisers at Equity Release Supermarket, who’ll be able to talk through your options with you and find the right solution for you.
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Question
Legal advice – appointing an equity release solicitor
I understand, when taking out equity release, I need to seek the services of a solicitor to look at the legalities.
Will I receive a recommendation from my equity release adviser, or should I appoint a solicitor myself? If the latter, are there specialist legal advisers working this area or would a conveyancing solicitor do the trick?
Thanks in advance for your help.
Answer
As you rightly point out, a solicitor is involved in managing the legal aspects of equity release for you and it is one of the Standards of the Equity Release Council (the industry’s governing body) that you have at least one, face-to-face appointment with your solicitor who is independent of the lender’s solicitor.
It is entirely at your discretion which solicitor you appoint, but having said that, I would recommend that you choose a solicitor who is a member of ERSA (Equity Release Solicitors Alliance) and the Equity Release Council.
These are established law firms specialising in equity release and are bodies that were formed to promote the importance of specialist legal advice when considering equity release. ERSA also has a charter guaranteeing that it will provide the best legal advice.
Using a recognised member of these trade bodies ensures that you’ll receive full and balanced independent advice while benefiting from competitive fees. They will also have in place streamlined practices which companies like ourselves can access to bring your equity release application to a speedy completion.
The larger equity release brokers, such as Equity Release Supermarket, have their own panel of appointed solicitors. At Equity Release Supermarket, they are members of ERSA and the Equity Release Council and specialists in equity release. It makes sense to use a panel solicitor for several reasons.
Firstly, for their knowledge and experience. They are also likely to have their systems linked directly with the broker, which speeds up the application process.
Lastly the broker is likely to have negotiated a fixed conveyancing fee for you. In our case, most panel solicitors charge £695 + VAT & disbursements with the caveat that if the transaction doesn’t complete there will be no legal fee charged – very similar to how Equity Release Supermarket charges its own advice fee.
You can find out more about what a solicitor does in the equity release process here.
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