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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
Using equity release to pay for building work
I would like to release some of the money tied up in my home to pay for building work. I have already started looking into equity release options, but I understand I need to provide written estimates for the work before releasing the money.
How many estimates would an equity release lender need and what other information should I provide? I want to make sure I am prepared.
Also, is there a particular type of equity release I can use for this purpose?
Answer
Just as with a residential mortgage, the equity release provider will want to be sure that your property is in good condition before they will consider lending on it. This is why a property valuation is part of the equity release process, just like any residential mortgage.
As long as the lender is happy with the valuation report, there won’t be any problems with you taking out equity release and using the money for whatever you wish – such as renovation work, modifications or building an extension.
Depending upon the nature and size of these works, plus the lender involved, this will determine exactly what kind of estimates are required. For instance, if any structural work is involved that requires planning and building regulations, most lenders will want to see evidence of approval from the local authority first to ensure all works comply.
Therefore, there is no black and white answer to exactly what’s required, however hopefully this detail will help prepare you for such eventualities. Engaging with an equity release specialist will certainly help provide guidance in this instance.
Now, regarding the type of equity release you can use for building work. With a lifetime mortgage, the most popular type of equity release plan, there are different types of plans available to you – depending upon your personal circumstances and needs – and any of your options can be used for building work.
If your property requires remedial work to bring it up to standard (e.g. electrical), then there are still options available to you, dependent upon the lender. Equity release providers could have two ways of dealing with this scenario.
Firstly, they could insist that any remedial work is completed first before they will release any funds. This could result in a chicken and egg situation, where you can’t complete the works without the money from the equity release. Sometimes not ideal, but if you have savings then it may not be a problem.
The second option is where lenders put in place a ‘retention’ whereby they will initially lend you the amount needed to complete the works and then release the remainder of the amount you can borrow after the work is completed to their satisfaction.
There is now actually a ‘Restore’ lifetime mortgage product that has been designed to do exactly this. Here the lender will initially release up to £25,000 to get the essential repairs completed. Once these have been done to the lender’s satisfaction, the doors are then effectively open to access the remainder of the cash held in reserve. This kind of bespoke renovate product could help solve issues such as damp, removal of spray foam insulation, clutter or even single skin walls.
As a next step, I recommend that you speak to an expert adviser at Equity Release Supermarket to review all your options.
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Question
Will having a savings account impact equity release?
How does having savings impact my ability to take out equity release?
I have £15,000 tucked away in an ISA which I am keeping for emergencies and to which I hope to continue contributing.
However, I would also like to use equity release to help with some home improvements, a new car, and to provide some cash for my grandchildren. Will having savings impact the amount I can release?
I am 72, widowed, my home is valued at £320,000, I have income of £19,000 per annum and I hope to release around £100,000.
Answer
Having savings or investments etc., doesn’t have any effect on your eligibility for equity release as the only basic factors the lender will consider are your age, where you live and the value of your property.
A Lifetime mortgage includes many flexible features including access to cash reserve facilities that can be used to provide you with capital in the event of an emergency.
One option for you could be that you borrow £85,000 and use your savings to provide you with the £100,000 for your objectives. Then in the future, you may be able to access capital from your reserve facility to provide you with emergency funds. By borrowing less from a Lifetime mortgage, this can mitigate the impact of compound interest, and this could benefit your estate in the long-term.
However, if you prefer the certainty of retaining a fairly modest amount of £15,000 saved in your ISA, at Equity Release Supermarket, we would be comfortable with you keeping that money ‘tucked away’ for emergencies if those funds give you peace of mind.
I should mention that equity release could impact means tested benefits, as any entitlement could be withdrawn or reduced if you retain capital on deposit. I would also highlight that the rules on State benefits could change in the future. Your Equity Release Adviser will conduct a full review of your financial situation and advise you accordingly.
As your home is valued at £320,000 and given your age, you would be able to borrow a maximum of 48.6% of the value of your home, which is £155,520 and you can use your money, which is tax-free, for any purpose.
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Question
Choosing the best rates
I would value some advice on how to take advantage of the best equity release rates on the market, please?
I have been looking around online and see there are some good deals but I wondered if using a broker or going to an adviser might help me access some even better, exclusive, deals.
Thanks in advance for your help.
Answer
You have two options when it comes to taking out equity release. You can either approach a lender directly or speak to an advisory service.
If you choose to speak to a lender directly, they may or may not be able to help you, depending on whether or not they have their own team of financial advisers – as you must have financial advice to take out equity release and this is a legal requirement.
The main disadvantage of approaching a lender directly is that they will only advise you on their own range of plans – which may or may not be the best option for you.
I would always recommend that you speak to an independent, whole of market advisory service – such as Equity Release Supermarket – and the key word here is independent because many of the largest equity release advisory services are not.
They are either tied to a single lender, or only provide advice on a small ‘panel’ of lenders. So always ask the question if independent, whole of market advice is important to you. You may also find that a larger, independent, advisory service have access to exclusive plans or rates, given their status within the industry.
You may also want to consider the full range of later life lending options – which covers equity release, retirement interest-only (RIO) and retirement mortgages – so again ask the question if the broker can advise on all these options.
When it comes to comparing rates, there are really only two ways you can do this, using the free services provided by Equity Release Supermarket.
Your first option is to use our compare deals functionality, which doesn’t require you to input any personal details and will show you the latest deals that are available across the market, across equity release, RIO and retirement mortgages.
That said, ‘compare deals’ won’t show you how much you could borrow etc., because it doesn’t know anything about your personal circumstances.
That’s where smartER comes in. smartER is the first and only equity release search engine. By inputting a few details about yourself, your property and the plans you have for our money, it will search the entire marketplace, in real time, and show you a comprehensive list of plans that are tailored to personal needs – including the rates available and the exact amount you could borrow.
There are also a range of filters available to you, to further personalise our results and you can set up an account, allowing you to save and return to your search at any time.
The real beauty with smartER is its flexibility because every time you choose an option or feature that best meets your needs, your list of plans will change accordingly. This is important because we always advise that the lowest rate is not necessarily the best deal for you, as that depends upon your financial goals both now and in the future.
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Question
Cashing in on the house price boom – advice needed
My husband and I have owned our house since the early 80s. We purchased it for £25,000 and paid off our mortgage in 2005. It has now increased in value and to our complete shock our neighbour sold their house (which is almost exactly the same as ours) for £650,000 last month!
We have heard from estate agents house prices have increased at a significant rate since the start of lockdown and we wondered whether this might present us with an opportunity.
However, there’s a problem. We don’t want to leave our area and all the properties we could downsize to simply don’t exist. We wondered whether releasing some equity now, whilst the market is high, then downsizing in a few years when there are more available properties might be a good option.
My question, therefore, is can we release equity in the knowledge we plan to downsize and is there a plan for customers who wish to only release a proportion – ie 20% – of their property’s value?
Answer
Firstly, I’m going to look at the situation you find yourself in re – downsizing, as it has been a popular topic recently with Martin Lewis on MoneySavingExpert. Here we’ll tackle some of the issues and potential solutions to this common question.
While selling your home, downsizing to a smaller, cheaper property and using the proceeds to support your retirement is certainly an option, in reality there are plenty of considerations you need to make.
As you mention, you have to find a suitable property, which may not be available in your local area and if they are (such as bungalows), then they tend to be premium priced because they are in high demand with older homeowners. You also need to consider the costs associated with moving home such as Stamp Duty and estate agent’s fees etc.
I would also advise caution on your comments that the housing market is now at a high and the only way is down, as that may not be the case. If history is anything to go by, house prices, over the long term, have increased in the past, and they have only fallen during stock market crashes or major recessions – and then quickly rebounded.
Instead, it is better to consider your needs both now and in the future.
If you need some extra money now, and you indicated you need up to £130,000, then equity release is an option for you. The question any adviser would need an answer to is ‘when you envisage downsizing?’ – as this would affect any recommendation, for a number of reasons.
If downsizing in the future is your primary goal, then I can reassure you, because all lifetime mortgages are portable, if you take out a plan and want to sell your home in the future, you can do and transfer your equity release plan with you to your new home. The only caveat here is that your new property must meet the provider’s lending criteria.
However, there is now a flexible option included within many plans that allows you to repay the equity release loan without penalty – if you move home in the future.
This feature is called ‘downsize protection’.
Dependent upon the lender, with this option in place, means that should you move house, and based on the property you are downsizing to, you can repay the loan with no penalty after a fixed number of years (e.g. three or five years).
In fact, a new entrant to the market, Standard Life, will actually allow the loan to be repaid immediately following inception of the plan, should you move to a property that does not meet their lending criteria.
Finally, a word of caution on downsize protection.
If this feature is being relied upon as a vehicle to repay an equity release loan in the future, then you must choose the correct version, as there are two formats to downsize protection:
The most popular offered by lenders is where the property you move to does not meet lending criteria and the loan can then be repaid with no penalty (Option#1). E.g. Aviva, More2Life, Pure.
The second, which is less popular, provides a more comprehensive form of downsize protection. This allows you to downsize or even just move property, regardless of whether the next property meets lending criteria – and repay the loan with NO penalty (Option#2). e.g. Canada Life.
As you can see, there is a subtle difference between the two, however this could have a big impact on your plans for the future.
Another consideration if you’re thinking of repaying your plan in the future when downsizing, is to consider plans with fixed term early repayment charges (ERC). These allow you to repay your plan, penalty free, at some point in the future.
The term of the ERC varies by lender, but to give you an example, plans from Canada Life come with ERCs that are 5% of the amount borrowed for the first five years, 3% for the next three years and then penalty free after eight years. Therefore, if you are considering downsizing after eight years, you can repay a Canada Life plan with no penalty at all.
Again, if your finances allow, you could also consider either a retirement interest-only (RIO) or retirement mortgage as these require that you pass the lender’s affordability criteria and commit to making monthly repayments of interest and/or capital.
As two, three and five year fixed terms are available, you could take out a mortgage for a few years, repay it fully and then downsize with no penalty.
Clearly there are lots of lending options available to you, which can be very confusing. Therefore, I would highly recommend that you speak to one of our expert advisers at Equity Release Supermarket, who will be able to fully explain your options at your leisure and recommend the ideal solution for you.
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