Making voluntary payments on equity release – how does it work?
Question
I’ve just booked an appointment with an equity release broker to consider my options regarding finances in my retirement. I am 64 and due to retire next year. My wife has already retired and is 67.
One thing I have been looking into is making voluntary repayments, which I believe is becoming quite a popular way to manage interest costs.
Could you please explain a bit more about how it works? Our house is valued at £350,000 and we don’t really know how much we need to release yet.
Thanks for your advice.
Answer
Thank you for your question, and it is good to hear that you have completed some research into the features and benefits of equity release.
Here at Equity Release Supermarket, we are whole of market independent equity release specialists, and we offer advice with no ties or allegiance to any company or product.
Releasing equity can include raising capital from a Home Reversion plan, a Retirement Interest Only Mortgage (RIO) or a flexible Lifetime Mortgage.
As your question refers to making voluntary payments, this is usually associated with a flexible Lifetime Mortgage due to it being an available repayment option on such plans.
I must point out that RIOs also allow voluntary payments, however this is in addition to the monthly interest only payments you are mandated to.
I can confirm that I have been involved in equity release for nearly 25-years and the option to make voluntary payments was adopted by a large amount of providers in 2015, and in my opinion this feature gave the equity release industry a huge boost in credibility.
Furthermore, in 2022, the Equity Release Council incorporated this feature as a standard and insisted that all providers must include voluntary payments in all new plans.
So, to answer your question, you have the option to repay a specified percentage of the original capital you borrowed back to the lender.
The most popular voluntary payment allowance across the market is 10% per annum – with no early repayment charges. This means if you borrowed £50,000, using the full 10% allowance, you could repay up to £5,000 each year back to the lender with no penalty.
Taking this approach would mean that as long as the interest rate being charged by the lender is less than 10%, it would result in not only you repaying the interest, but also an element of capital too.
Effectively, this is now working very similar to a conventional capital and interest mortgage – albeit without having to prove your income and the payments are optional, not mandatory like a residential mortgage.
There are occasionally plans available that can offer 12%, 20% and 40% voluntary repayment allowances which provide a wider degree of flexibility for homeowners who may be looking to repay the loan in its entirety over a period of time with early repayment charges.
Some providers allow you to set-up a regular monthly standing order payment, or you can make payments directly to the provider monthly, quarterly, annually or on adhoc basis.
As an example, if your plan had a fixed interest rate of 6%, you could make a payment of 6% to avoid attracting compounding interest, and a further 4% to repay some of the capital. You can choose to repay a minimum monthly payment of just £50 or as noted, adhoc at your discretion.
The choice to make payments is entirely at your discretion as many customers opt to simply let the interest roll-up; however, making payments will benefit your estate in the long-term as you will reduce or avoid the effect of compound Interest.
If you would like to take advice from one of our experts, they will provide you with a voluntary payment calculator, and I have also added a voluntary payment calculator on the Equity Release Supermarket website which is free to use allowing customers to see the benefit of making flexible, voluntary repayments.
What documents does the equity release lender need to see?
Question
I about to make an appointment to find out more about equity release and to find out if I’m eligible. What information will I need to provide?
I’m 80 and have a pension so presumably I will need to show the documentation relating to this. But will the lender require my bank statement and access to things like my direct debits? Also, will I need a credit check?
Answer
Hello, and thanks for your enquiry. I can confirm that you are likely to be eligible for equity release if you are aged 55 and your property is worth a minimum of £70,000. Therefore, at aged 80, you have ticked one of the boxes for eligibility. If you have a spouse or partner and you want them to be party to the application and give them security of tenure, then they must be at least 55.
One of the most popular ways of releasing equity from your home is via a flexible Lifetime Mortgage and the benefit for you is that the amount you can borrow is based on your age and the value of your home. Therefore, based on your age it may be possible to currently borrow up to 48.5% of the value of your home assuming you want to raise this amount of capital.
With a conventional mortgage, income is assessed to ensure that any payments are affordable, and the provider will review payslips, banks statements and they complete a credit check, to ensure the customer is credit worthy and able to afford to make payments.
However, with a flexible Lifetime Mortgage your income is not assessed because you are not committed to making payments. Therefore, you will not be asked to produce bank statements, or justify your direct debits, or have a credit check to secure a Lifetime mortgage.
During the advice process, an adviser will assess your circumstances and provide you with advice on the best product for you. In order to complete this process they will first need to get to know your current financial situation, which will be gathering details on aspects such as income/expenditure and savings and credit commitments etc.
This isn’t for the lender’s requirements, and they will not need to see this information, but will be for the adviser’s benefit.
However, it’s always handy to have your financial information available at your appointment with your adviser, as this will help save time with their factfinding process and subsequent recommendation.
Equity release has several options, and here at Equity Release Supermarket one of our advisers will listen to your requirements, assess your circumstances, and then make a specific recommendation.
You can talk to them and ask any questions, and they will provide you with a suitability letter containing their recommendations. You will not have to pay for their service until any plan completes and only when you are 100% satisfied.
Can I release equity from my property to help my daughter buy her first home?
Question
My daughter and her husband have been renting for years and it’s looking unlikely they will be able to buy their own home. I would therefore like to release money from my house – hopefully using equity release – to enable them to buy a property.
I would ideally like to release enough money to put down a sizeable deposit on a home for them. So I would like to take £120k from my home, which is valued at £635k (London).
Therefore, my name would be on the deeds, along with my daughter’s and son-in-law’s, on the mortgage application.
How likely is it that I will be eligible for equity release if the money is being put straight into another property transaction? Are there any special products which have been designed for this purpose?
Thank you.
Answer
I have been an adviser, and now CEO for 25 years, and gifting capital via equity release to siblings has always been one of the popular objectives for capital released.
However, over the last few years I have seen an escalation in enquiries as customers are looking to provide their loved ones with the deposit for their new homes’.
Customers have told me that they would like to provide their siblings with capital at a time when they most need financial help, and they can see them benefit rather than waiting for a longer-term inheritance. However, it is important to consider your own circumstances, including if you need capital in the future to be able to fund long-term care if required.
Gifting capital to loved ones to help them have access to a deposit for a property, or even to purchase a property is a popular objective as customers look to transfer their wealth without it directly effecting their current financial circumstances.
Customers have also told me that they like the option to make voluntary payments to manage the loan and if affordable some siblings are happy to give their parents monthly interest to protect their future inheritance!
There are many features and benefits and at this stage of your planning it is essential that you speak with an expert adviser to see if you are eligible for equity release and a legal adviser to discuss your plans, which is also part of the equity release process.
Releasing capital to gift to your loved ones is possible, and assuming you are over 55, based on the value of your property you are likely to be eligible for the capital you require.
From your enquiry you mention that you would then like to become co-owners with your daughter and son-in-law on their new property and it is unclear if you are doing this to be guarantor for the mortgage application, or if your income will enhance what they can borrow.
Therefore, before I can fully answer your question, I would require more detail about your plans once you are in a position to gift the capital. However, if you contact one of our independent expert advisers directly via our freephone service on 0800 802 1051 or via our livechat facility, they will answer your question in more detail without any obligation or cost at this stage of your research.
What is the criteria for taking out equity release?
Question
I wondered if you could help me establish if my husband and I are eligible for equity release please. I am 76 and my husband is 79 and has been diagnosed with dementia. We are currently in the process of obtaining Power of Attorney (PoA).
We live in a house which we downsized to 10 years ago. It’s been valued at £295,000 or thereabouts. We have no debts or dependents, and we are both retired. This is our only property. We receive, in total, an annual household income of £35,000 which includes both our pensions plus state pension.
The reason we are hoping to take out equity release is to pay for care for husband as I think we will need some adaptations and also care in the home.
Can we use equity release, and will we fulfil the criteria? Thank you.
Answer
I am very sorry to learn that your husband has been diagnosed with dementia, and I hope that you are receiving the support you need at this difficult time. Equity release is an option to fund care; however, before you consider this as a solution it is very important that you undertake a review of your options with your local authority.
For example, if you need support with day-to-day tasks, or if you husband needs to move into a care home, your local council might help with the costs. They will also be able to provide you with help regarding disabled facilities grants to help fund adaptions to your home with the grant aiming to support older and disabled people.
How much support for your care costs will depend on your care needs and what you can afford. Therefore, if you contact the social services department of your local council to ask for a care needs assessment they will be able to help you.
My understanding is that they will conduct a needs assessment and a financial assessment to see if you qualify for funding if they deem your needs as eligible when assessed against national criteria.
Once you know exactly what you may be entitled to, if you still have a shortfall in funding, equity release could possibly be used to bridge the gap.
Another valuable source of information and guidance can be found from ‘My Care Consultant’ https://mycareconsultant.co.uk/ who offer a fully independent service that can help you from sourcing suitable care and working out what you are entitled too and signposting you to relevant professional services.
Meet our expert…
Mark Gregory, founder and CEO of Equity Release Supermarket, is here to answer your questions. Mark is an adviser himself with over 20 years equity release experience.
He launched Equity Release Supermarket 10 years ago and it has grown to become one of the UK’s leading equity release specialists.
Email kate.saines@emap.com to ask Mark a question
