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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
Can I use equity release to repay Covid debt?
I live alone following the break-up of my marriage five years ago. I live in a flat which I own outright and which is valued at £240,000 or thereabouts. Like many, due to Covid, I lost my job and due to my age (I am 60) I am struggling to get another job. To make matters worse, the loss of income has meant I have racked up quite a bit of credit card debt and I am starting to worry whether I’ll ever pay it off.
I think equity release is my only solution, but will I fail the credit test? And, even if I pass the criteria, will I be allowed to use the money to repay debt?
For your information, I have around £23,000 in debt across several credit cards and have been paying the minimum each month.
Answer
I’m really sorry to hear about your circumstances, but the good news is that you may be able to use equity release to change your financial situation.
I say ‘may’ because you’ve told me that you live in a flat which for equity release lenders isn’t usually an issue, but they do consider things like the location of the flat, how many floors up it is, the time left on the lease etc. and so I’d need to understand more about it. So, I suggest that you speak to an adviser at Equity Release Supermarket who will be able to help you further.
Another caveat is the management of your debt. You mention that you have been repaying the minimum amount each month, so I assume that you haven’t incurred any adverse credit? Again, this isn’t usually a problem for lenders, but again we’d want to better understand your credit situation.
We’d always suggest considering alternative options before recommending equity release. This would start by conducting a full review of your finances first to establish if there are any cheaper alternatives before embarking on equity release.
Hence, have you considered transferring to 0% credit cards firstly and how you are managing with the repayments against the income you have coming in. Even a personal loan, however given your current employment position, may not be an option.
A real positive of equity release for people in debt, is that lenders don’t consider your income or outgoings and they don’t have a credit score, or affordability check that you need to pass.
The criteria for being eligible for equity release is very simple. They are your age (which must be 55 or over), the value of the property (which must be a minimum of £70,000) and its location.
What’s more, the money you release is tax-free in your hands and yours to spend on what you want. So, you are free to repay your debts and alleviate the pressure you find yourself in.
It’s also great that you own your property outright, because if you did have any outstanding mortgage, you’d need to repay that first with the money you release.
To give you an idea of how much you could borrow – as you are 60, you could borrow a maximum of 36.2% of the value of your flat. Therefore, if your flat is valued at £240,000, you could borrow a maximum of £86,880 – which is more than enough to repay your debts. The minimum you could borrow is £10,000.
However, we would always recommend that you only borrow what you need, rather than what you want, as the more you borrow, the greater the interest rate and the impact of compound interest if you choose not to make any form of repayment – which you don’t have to with equity release as the balance can be repaid from your estate when you die or move into long-term care.
The flexibility of the equity release plans in 2021 means that should you find employment & have sufficient income at a later date, you could always make flexible ad-hoc repayments back to the lender to help control the future balance if needed.
All these options and advice could be provided by your local adviser here at Equity Release Supermarket.
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Question
Later life mortgage – what is it?
I wonder if you can help with a query my husband and I have. We are looking at securing some additional cash to make some renovations to our home and have heard we can take out a ‘later life mortgage’ or use equity release. Are they one and the same thing or are they completely different products? Your advice would be gratefully received.
Answer
There are two types of equity release plan – one is a lifetime mortgage and the other is home reversion.
Equity release is more of a generic term which applies to any borrowing vehicle that allows you to ‘mortgage’ or take equity from your property.
Home reversion is rarely used these days and rather than focus on this, I’ve provided a link to our website where you can read more about it.
The terms ‘equity release’ and ‘lifetime mortgage’ are commonly used as interchangeable terms within the industry and by the media – so I understand your confusion!
A lifetime mortgage could certainly be an option for you and a very common use of the money released is for home improvements.
Lifetime mortgages work by allowing homeowners that are over 55, to borrow some of the equity that has built up in their homes over time – typically as the mortgage has been paid down and the value of the property has increased.
The amount you can borrow depends upon your age (the older you are the more you can borrow) and the value of your property. There is no credit score to pass, the lenders don’t consider your income or outgoings and there are no repayments to make (unless you want to, to manage the accruing interest and/or balance). Plus, the money you release is tax-free and yours to spend how you wish.
Today’s lifetime mortgages come with a host of flexible features and very attractive interest rates and there are now over 600 plans to choose from.
There are also other options to borrow in later life through either a retirement interest-only (RIO) mortgage or a retirement mortgage – which again I won’t go into detail here as I’ve provided links to read more about at your leisure – but the main difference between these and a lifetime mortgage is that lenders apply affordability criteria which you must pass. You must be able to prove your ability to meet your monthly repayments both now and in the future, which for many is not possible.
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Question
Home improvements – how does the value increase work?
My partner and I are both in our 70s and have lived in our house for 15 years and are mortgage free. It desperately needs updating – new kitchen and bathroom – and we’d like a downstairs bathroom to be put in, which involves an extension in the hall. I think it will be about £60k in total.
We expect this will increase the value of our home considerably. Does the increased value get taken into account when assessing our eligibility for equity release and will it impact the rate etc?
Answer
When an equity release provider is considering what they are prepared to lend, they access the value of the property in its current condition to determine its market value – not its potential value in the future when improvements have been made.
The interest rate the provider will offer you again has nothing to do with the market value of the property but is determined by your age (the age of the youngest borrower), the amount you want to borrow against the value of your home and the available features of the plan you choose to include.
That said, equity can be released from a property more than once. So, if you do take out equity release now, spend a significant amount of money on improving it (and increasing its market value), you may be able to borrow again in the future – simply because your property is worth more.
What’s more, the amount you can borrow against the value of your home (the LTV) also increases with age, again making it possible to borrow again in the future.
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Question
Can I pay back the interest now?
I am looking into the prospect releasing equity from my home and wondered whether there was a way I could pay the interest monthly or annually during my lifetime rather than have it roll up to the end of the plan?
Answer
There are a number of ways you can manage the interest accruing on a lifetime mortgage, depending upon the type of plan you choose.
Interest-only lifetime mortgages are rather like their residential mortgage equivalents, in that the interest accruing on your plan is repaid monthly so that when your plan ends, only the initial amount borrowed is repayable.
Drawdown lifetime mortgages allow you to control the interest accruing in a different way. Here, you borrow from a cash facility that the lender sets up for you. For example, if you could borrow £100,000, but only need £20,000 – then the lender sets aside the £80,000 for you to borrow against in the future if you wish to do so. As you only pay interest on the amount you borrow, drawdown lifetime mortgages are a very popular way to control the accruing interest.
Lifetime mortgages also allow you to make voluntary repayments as and when you wish, without penalty, which effectively means you could not only manage the interest accruing but also reduce the balance to be repaid. The percentage value of these voluntary repayments varies by the plan you choose and there is one available that allows up to 40% repayment per annum!
Alternatively, if your financial situation allows, you could consider other types of later life lending in the form of a retirement interest-only mortgage (RIO) or a retirement mortgage. The main differences between these and lifetime mortgages is that they are classed as residential mortgages and so the lenders’ affordability criteria must be passed – which can be a challenge if you are not certain of your retirement income both now and in the future.
RIOs work very much like an interest-only lifetime mortgage where the interest accruing is repaid monthly and retirement mortgages typically allow you to repay the interest accruing and reduce the capital (the amount you borrowed) each month. The main advantage of both RIOs and retirement mortgages over lifetime mortgages is that the LTVs – the amount you can borrow against the value of your home are much larger.
As next steps, I recommend that you speak an adviser at Equity Release Supermarket, who will be able to talk through your financial situation, your goals and find the right solution for you.
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