How much interest will I pay and when will I pay it?
Question
My family have been helping me look into equity release and we’ve hit a brick wall in terms of our understanding because we are a little confused about interest payments.
So, how does it work exactly? If I took £60k from my house which is worth £430k, and we took out an equity release plan with an interest rate of 5%, would this rate be charged on the entire sum borrowed – so we pay 5% of £60k ie £3k when we sell up? Or is it more complicated than this?
I am expecting it to be more complex, hence why I’m asking! But I hoped you could make things a little clearer.
Answer
Thank you for your question, and it is nice to read that your family are helping you with your plans, and here at Equity Release Supermarket, we are also here to help you without obligation.
There are several ways to raise capital from the equity in your home including downsizing, or you could sell a share of your home or all of your home in return for a cash lump sum, called a home reversion plan.
Alternatively, you could borrow an initial lump sum via a Retirement Interest Only Mortgage (RIO) and be contracted to make monthly payments to ensure the capital you borrow remains level.
One of the most popular ways to release equity from your home is with a flexible Lifetime mortgage and assuming you are aged 55+ it may be possible for you to borrow £60,000. The lowest fixed rate of interest at the time of writing is currently 5.33 MER%.
You would be able to keep the capital for the rest of your life or until you need long-term care, and you are not committed to making payments.
However, all plans now include a voluntary payment option, and you can repay up to 10% of the capital you borrowed (£6,000) each year without incurring a penalty, or alternatively, you can make partial or ad hoc payments at your discretion.
Should you choose not to make payments your loan would increase each year with the addition of the fixed interest, and this will then compound over your lifetime which will reduce the amount of capital that your beneficiaries will receive.
So, if no repayments were made and your interest rate was 5% as you stated, the interest charged by the lender in the first year would be £3,000. The balance at the end of the first year would then be £63,000. Then the second year the lender would charge 5% interest on the £63,000 which equates to £3,150 taking the balance to £66,150. This process continues for as long as the plan remains in force and is repaid when the last person has died or moved into care.
My advice to you would be to contact Equity Release Supermarket and ask one of our award-winning advisers to produce a non-advised Key-facts illustration for you which will include all of the features, benefits, and risks of the plan, and it will also include a fully disclosed example of compounding interest so you can be certain how much you will owe at anytime in the future.
I can assure you that you will receive this information free of charge and without any obligation to help you and your family.
What’s the timescale for releasing equity?
Question
I’m planning to release equity from my home to pay for an extension and renovations. I have had several quotes from builders and have chosen one I’d like to work with. They are proposing we pay them in two-week instalments – we basically pay for what’s done. They can start work in June. Therefore, I need to release the equity in the next couple of months.
How long does the process of releasing equity generally take and do I have enough time…? We own the property outright, no mortgage, and have no debts, loans etc.
Answer
Thank you for your enquiry and I can confirm that as you have done your homework and acquired quotations for your extension and renovation work, this will help when you take advice for equity release.
The next stage is vitally important to ensure you receive the best advice for your circumstances and here at Equity Release Supermarket, we can provide you with whole of market expert advice from all of the equity release providers, so this can save you time shopping around for a suitable solution for your circumstances. Our advisers can provide their advice over the telephone, via video conferencing or face-to-face so you can decide what is best for you. The advice process is over two meetings to allow the adviser to assess your situation and then create a bespoke recommendation and present their advice to you.
Assuming you qualify and happy to take your advisers recommendation, an application can be submitted and on receipt of your application, the provider will instruct an independent valuation of your home to ensure that it is suitable for lending purposes. The surveyor will send their report to the provider and assuming your property is accepted the provider will make you an offer.
At this stage, your independent solicitor will prepare the legal paperwork and then arrange a face-to-face meeting with you to provide you with legal advice and then you can accept the offer. The paperwork is then sent to the provider, and they release the capital to your solicitor, who will deduct their fee and our advice fee, and provide you with the remaining capital to complete your objectives.
As you can see the equity release process includes a number of experts, who are there to ensure your application is the best solution for you and assuming there are no complications with your property, the process can take between six to eight weeks to complete.
You can contact Equity Release Supermarket using our free phone telephone number – 0800 802 1051 or via our Livechat facility, and the first person you talk to will be one of our expert advisers.
My parents are concerned about compound interest
Question
My parents are researching equity release to help them with their general cost of living. They are struggling with rising costs and their pensions are not cutting the mustard.
They seem reasonably happy with how equity release works and the different options available, but they have heard a few ‘horror stories’ on the internet about people who have taken out equity release and have no money left in their home as the interest has gone up so much over the years.
Is there a way they can limit the amount of interest they can pay over time? Alternatively, is there a plan where the interest is fixed and therefore enables my parents to better plan for their future finances?
For your information, their house is worth £540k and they wish to release around £80k. My mum and dad are aged 77 and 87 respectively. Downsizing is not an option as they are resolutely refusing to move!
Answer
I am sorry to learn that your parents are struggling with rising costs, and their pensions are ‘not cutting the mustard’; however, reading between the lines you have clearly recognised that your parents do not have to struggle financially when they could access some of the equity in their home valued at £540,000 to supplement their income and lifestyle.
Fortunately, equity release has evolved over the years through innovative new features, and benefits, and most recently the Equity Release Council who are the trade body that set the standards for the equity release industry have adopted a new standard which states that all providers of Lifetime mortgages must allow a customer to make flexible voluntary payments to allow them and/or their families to manage their loan.
So, to provide an example based on the information you have given me, your parents are likely to be eligible for a flexible Lifetime mortgage subject to a satisfactory valuation of their home. Assuming one of our expert advisers recommends a flexible Lifetime mortgage, your parents could receive the £80,000, and then use it for their objectives.
They may not need all of the capital initially, and they could consider borrowing a minimum of £10,000 and then have £70,000 in a cash reserve facility where they can drawdown further funds in the future when they need additional capital.
The benefit of this feature is they will only pay interest on the capital they borrow, and they will not pay interest on capital held in reserve until they access the funds in the future.
Once your parents are in receipt of the capital, they will secure a fixed interest rate for life, and they are allowed to repay 10% of the capital they borrowed each year without penalty. They can make full, partial or no payments, and as a family you could consider making a contribution to manage payments which would offset compound interest. This allows them, subject to their affordability, to make payments back to lender to help control the interest.
My advice as always is to talk to one of our expert advisers who will be delighted to provide you with bespoke advice, they will provide you with a key-facts illustration so you can see exactly how much your parents would owe as the plan has a fixed interest rate.
Furthermore, your adviser will provide you with a calculator to allow you to see how making partial, full, or just Ad hoc payments can benefit your parents’ estate in the short, medium, and long-term.
The key-facts illustration and calculator are provided free of charge and without obligation, and you would only pay an advice fee on the completion of any application.
How much do I pay the broker or adviser when I take out equity release?
Question
I wondered if you could help me understand a bit more about the fees for equity release. I would specifically like to understand more about how much I pay the adviser/broker/intermediary and whether there’s an initial set-up fee.
If I were to take advice and it emerged equity release was not the right product for me, would I still have to pay for this advice?
Answer
Thank you for your enquiry and of course it is very important to consider the costs and charges before considering equity release. I have been an adviser and now CEO working in the equity release industry for 25 years, and I am passionate about providing customers with everything they need to help them make an informed decision before they pay for any services or advice.
For example, the Equity Release Supermarket website contains everything you need to understand your options and choices with the different equity release plans available. I have created our smartER technology for customers to complete their own research to obtain a personalised plan tailored to their circumstances.
Once a customer is ready to discuss their plans with an expert adviser, they can do this by simply making a telephone call or by using our Livechat facility, and they will provide you with any information without any cost to you.
Furthermore, they can assess your situation, and they will advise you if equity release is right for you, and if it is not they will tell you, again at no cost to you. If at anytime before the completion of your application you decide not to continue with your application, our adviser will not charge you for their services.
During the advice process, your adviser will provide you with our client agreement, a key-facts illustration, and a personalised suitability letter which will clearly explain and provide you with all the fees that you will need to pay to complete your application.
Only when you are 100% satisfied will your adviser proceed with your application, and you will not pay their advice fee until your application completes, which is a fixed of £1,495 for whole of market, fully independent advice.
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
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