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Mark Gregory, Founder and CEO at Equity Release Supermarket
www.equityreleasesupermarket.com
Tel: 0800 802 1051
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Question
What is equity release? I need to get clued up to help my parents
Hello there – I am sure you receive many more sophisticated questions than this, but I really need some independent help and don’t know where to turn.
My parents are in their late 70s (mum), early 80s (Dad) and are starting to talk more and more about releasing equity. They say they are worried about the cost of living and leaving my sister and me with enough money and they also want to pay someone to do some repairs to their home. I have offered to help financially but they have refused.
I have googled Equity Release and have come up with as much negative and positive coverage. Could you please give me a clear summary of what it involves and what risks my parents may face? They have both become very anxious and less capable since to the pandemic and therefore I feel I need to ensure they step carefully rather than leap into this.
Answer
Your parents have a number of options if they are considering ‘later life lending’ which depend upon their financial situation. These are –
Equity release, RIO mortgages and retirement mortgages.
The key differences are that with equity release there are no affordability criteria to pass and no repayments to make (unless your parents want to). With both RIO and retirement mortgages, there are repayments to make (either of the accruing interest and or capital) and as they are residential mortgages, the lender’s affordability criteria must be met.
Assuming that equity release is the option that your parents want to explore, then there are two schemes available – a lifetime mortgage or a home reversion plan. Lifetime mortgages account for over 99% of all equity release and so I will focus on them.
In a nutshell, lifetime mortgages allow homeowners who are over 55 to borrow against the equity that has built up in their homes over time, and the amount that can be borrowed depends upon the value of the property, its location and the age of the youngest borrower.
There are now a huge range of lifetime mortgages to choose from offering a host of flexible features.
As with any mortgage, interest is charged on the amount borrowed which ‘compounds’ over time. (For example, if £100,000 is borrowed at 4%, at the end of year one, £104,000 is owed. At the end of year two, the 4% interest is charged on £104,000 and so on).
With a lifetime mortgage, you don’t have to make any repayments (unless you want to) and so the interest accruing can be considerable over time. For example, if your parents borrowed £100,000, at an interest rate of 4%, it would take 18 years for the total amount repayable to double to £200,000.
This would only apply to a lump sum plan, where all the money is taken in one go, and no repayments are made at all and so is the ‘worst case’ scenario. The ‘risk’ involved with a lifetime mortgage is that it will reduce the value of your parent’s estate over time and reduce the amount they leave for you to inherit.
That said, there are many options to manage the accruing interest and also many options to make either structured or ad hoc repayments. (We often see children helping out their parents through making some form of repayment.)
With a lifetime mortgage, your parents continue to own 100% of their property and the plan is only repaid when the last surviving borrower either dies or moves into long term care.
As property tends to increase in value over time, when the time comes to repay the plan, this additional value, in turn adds to your inheritance. We offer a free to use equity remaining calculator, which will give you some idea of the value of your potential inheritance in the future.
As life is uncertain, there are also lots of features to support your parents, such as ‘downsizing protection’ whereby if they want to move to a smaller property in the future, they can do and repay their lifetime mortgage in full without penalty.
All lifetime mortgages now come with fixed, early repayment charges which are typically in place for eight years from the start of the loan – meaning that the plan can be fully repaid – without penalty – after this time. So, a lifetime mortgage doesn’t have to be for life.
The equity release industry has changed dramatically in recent years and now offers flexible, tailored financial solutions and is helping increasing number of people to enjoy financial freedom in later life. As a next step, I would highly recommend that you and your parents speak with one of our expert advisers to talk through their options.
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Question
How much does equity release advice cost?
I have been investigating equity release or a lifetime mortgage – still getting to grips with what is what – and I understand I must seek advice before I proceed.
I wondered whether you could direct me to the best place to get advice and give me some idea of how much I should be paying. Is it a percentage of the money released? Or is the fixed sum?
Do financial advisers offer this advice or should do specialist firms deal with this?
Thank you very much for any guidance you can provide.
Answer
You are absolutely right that you need financial advice to take out equity release. In fact, it is a Financial Conduct Authority (FCA) requirement and can only be offered by advisers that have the appropriate equity release qualifications.
I would highly recommend that you speak to a brokerage service that specialises in equity release and offers an independent, whole of market service. By doing so, you can be sure that your adviser has considered every option available to you, from every lender in the market and be confident that their recommendation is right for you. One such brokerage is Equity Release Supermarket.
The costs involved with equity release come from the three areas involved in the process – that is the lender, your solicitor and your financial adviser.
Many lenders are currently offering ‘fee free’ packages whereby they pay for your property valuation and don’t charge an application fee.
Your solicitor’s costs depend upon who you choose to use, and I would recommend that you use the firm recommended to you by your adviser. For example, at Equity Release Supermarket we have an expert panel of solicitors who charge a fixed fee of £695 + VAT (plus disbursements). This is a very competitive fee and can be considerably higher, depending upon who you choose to represent your legal interests.
Lastly, there is the fee for your financial advice, which again can vary considerably depending upon the service you choose. At Equity Release Supermarket, our advice fee is guaranteed never to be more than £995 whereas our competitors charge fees which can be up to 1.99% of the amount you borrow. For example, a typical loan of £100,000 could incur an advice fee of £1,990.
I hope that I’ve given you an insight into the costs involved with equity release and you can read more about them here.
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Question
Can I release equity on my buy-to-let?
I currently own a buy-to-let property which used to be my home. I moved from there two years ago to live with my daughter’s family in a granny annexe. I had a small mortgage left on it and decided, instead of selling, to switch to a buy-to-let for all sorts of reasons which are too complicated to go into.
So, now I am in a situation where I have a buy-to-let home with quite a bit of equity – I believe approx. £300,000 – whilst my daughter and her husband are struggling to afford some vital repairs on their home. I wondered, therefore, if I could release equity on the buy-to-let to help support them? If not, then we may have to look at selling, but I really don’t want to have to go down this route.
Thanks for your advice.
Answer
Your options really do depend upon your financial situation. You could, for example, approach your current buy-to-let mortgage lender and look to increase the size of your mortgage with them and potentially use those funds to support your daughter and husband. That said, we’d need to look into your current position before considering this option.
The good news is that there is one leading equity release lender – Canada Life – that offers two buy-to-let plans. Both are available from age 55 and it sounds as if you have plenty of equity within the property to borrow against. At 55 you can borrow up to 19% of the value of the property, rising to 44% for the over 80s.
With the money you borrow, you will have to fully repay your buy-to-let mortgage, but then the remainder is yours to spend as you wish. And the additional pluses are that there are no ‘affordability’ criteria to pass (as there would have been with your buy-to-let mortgage) and you also don’t have to make any repayments – but this option is available should you wish to manage the interest accruing on your plan.
The Canada Life plans also come with fixed, early repayment charges (which taper for eight years) and after this time you can fully repay the plan without any charge.
There are a few lending criteria to be aware of and so I would recommend that you speak to an expert adviser at Equity Release Supermarket to discuss your options in more detail.
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Question
Releasing funds gradually over time..?
I wondered whether there was an equity release plan which allowed me to release the money gradually, over time. I would prefer this option as I need to provide additional money to top up my pension income. Are there any financial benefits of this? For example, would the value increase over time as the house (hopefully) rises in value?
Thank you for your assistance.
Answer
There is a type of equity release plan, called a drawdown lifetime mortgage, that could meet your needs and is in fact the most popular type of equity release option.
Here’s how they work. Once the lender has agreed the maximum they will lend you, you must firstly withdraw a minimum of typically £10,000. How you then access the remainder of your money is entirely up to you.
The lender will hold your money for you in a ‘cash reserve’ and when you need further funds you simply get in touch with them, and they will arrange the transfer into your bank account.
The minimum you can withdraw varies by lender but can be as low as £500. Lenders typically allow you to make unlimited withdrawals each year – which means that you can use this facility to top up your income on a monthly basis – giving you real flexibility.
Lenders don’t charge you to make a withdrawal, but the thing to be aware of is that the interest charged for any withdrawals will be at the rate applying to the mortgage at that time – which could be more (or less) than the initial rate when you first took out your plan.
The main advantage of drawdown lifetime mortgages is that interest is only charged on the amount withdrawn, and so if you dip into your cash reserve only when you need to, and over time, this can be an effective way of managing the interest accruing on your plan.
The amount of money in your cash reserve is obviously determined by what the provider was prepared to lend you based upon the value of your property, it’s location and the age of the youngest borrower. This won’t increase with time, but you may be able to borrow more in the future as you get older and perhaps your property increases in value. To achieve this, you would need to submit a new application to the lender, have your property revalued etc.
If this is something you are considering, then I would highly recommend that you discuss this with your equity release adviser who will be able to guide you and find the right solution for you.
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