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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
Switching to a new equity release plan
Can I switch providers once I have taken out an equity release plan? Is there any minimum time limit for this and will I incur any fees or charges as a result?
Answer
Just as with a residential mortgage, you are free to repay your lifetime mortgage (the most popular type of equity release scheme) and switch to another plan and provider.
But having said that, as lifetime mortgages tend to come with fixed rates for life and are not designed to be repaid until they end (when you die or move into long-term care,) there are potentially early repayment charges (ERCs) if you did want to switch provider in the future.
Having previously been an adviser at Aviva (formerly Norwich Union) I’m aware that some of these ERC’s can been onerous. However, in recent years lenders have started to move away from such gilt-based ERC’s, towards fixed ERCs which could make it much more affordable and practical to switch plan in the future.
ERCs do vary by lender and plan, but to give you some examples, here are some ERCs and associated terms that lenders currently offer:
• 8 Year – 5% for the first five years of the plan, 3% for the next five years and none thereafter
• 10 Year – 5% in years one to five, then 3% years six to 10 and none thereafter
• 15 Year – 10% in year one, down to 2% of the balance outstanding in the ninth year. Thereafter, 1% in years 10 to 15 and finally no ERC after the 15th year.
It’s also important to understand what the percentage penalty is based upon. Some lenders can charge their penalty on the amount that is repaid, some on the original amount that was borrowed.
There is a clear distinction that borrowers should be aware of.
Hence, those schemes that have been running some time with compounded interest would have a higher ERC than those charging on the original balance (assuming the same percentage being applied).
These are only some of the important aspects to take into consideration when switching equity release plans. The overall decision is by assessing the potential financial gain of switching, i.e. would you be better off in doing so? It is best to speak to an expert, such as an adviser at Equity Release Supermarket before taking any action.
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Question
Leaving an inheritance
I am currently looking into my options with regard to equity release and haven’t quite decided whether to go for it or downsize. My main stumbling block is inheritance. More to the point, whether I might be able to leave anything for my two children? I would love to leave them something, but I am concerned that with compound interest amongst other things, this won’t be possible. Is there a way to leave them a portion of the house?
Answer
Downsizing is certainly an option but you must take into account all the costs associated with selling your home, the costs associated with buying a new home, such as stamp duty, and the fact that properties popular with older people tend to be premium priced. You may also have to move away from where you currently live to find the right property at the right price.
Equity release could be the right solution for you as it now offers a variety of options whereby you can maximise the inheritance you leave or even guarantee it.
Firstly, there is a drawdown lifetime mortgage – which is the most popular. After an initial minimal borrowing of £10,000, you are then able to borrow in the future against the remaining amount held in your ‘cash reserve’ facility. As you only pay interest on the amount borrowed, this can help to reduce the final amount to be repaid – and so provide a greater inheritance.
If you have the disposable income, there are two ways you can make payments back to the lender, thereby reducing, even halting any roll-up of interest.
The first is selecting a plan with voluntary repayments, where some lenders will allow you to repay up to 15% of the amount borrowed per year with no penalty or income check. Therefore, you can manage the future balance as you choose, effectively as either an interest-only scheme by just repaying the interest, or on a capital and interest basis, which could reduce or even fully repay your lifetime mortgage over time (subject to the lender’s criteria).
Secondly, you could consider an interest-only lifetime mortgage, where you repay the interest accruing on the amount you borrow every month by direct debit. This means that when your plan is repaid, only the initial amount borrowed is outstanding. Moreover, you could make voluntary repayments to further reduce (or clear) the final balance to be repaid – as mentioned above.
Some lenders now also offer a ‘Guaranteed Inheritance’ feature on their lifetime mortgages, which means that at no extra cost to you, the lender will automatically protect a proportion of the future sale value of the house based on the amount initially withdrawn.
This feature is available on drawdown, interest-only and even lump sum lifetime mortgages. So that even if you didn’t want to make any form of repayment, borrow the maximum you can and allow the interest to roll up, you’ll have peace of mind of knowing the inheritance your children will receive.
Lastly, there is a home reversion plan to think about, which is a different type of equity release scheme to a lifetime mortgage. Here you sell a percentage of your property to the lender in return for which you receive a lifetime tenancy. When you die or move into long-term care, your property is sold with the proceeds being split in accordance with the percentages originally agreed with the lender. Any money left will then be shared amongst the homeowner’s beneficiaries as an inheritance. While not popular these days, home reversion plans can offer you a guaranteed inheritance.
The good news is that you have lots of options to think about and you can guarantee your children’s inheritance with equity release. At Equity Release Supermarket, we believe it’s important to include your children in your decision and so if you’d like to see how we can help you, please do invite your children along.
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Question
Am I too young for equity release?
I mentioned equity release to a friend who works in finance recently and he said I was probably too young to take it out. I am 57 and all the research I have done shows you must be 55 and over to be eligible. Why would he say this? And do you think there is anything to consider when taking out equity release at this stage in life?
Answer
To be eligible for equity release, you must be a homeowner aged 55 or above and so yes, from an age perspective you do qualify. (I’ll assume that you are homeowner.) Some specific plans are only available from age 60 – so perhaps your friend was confused.
There are a couple of things to bear in mind if you are considering equity release at age 57.
With lifetime mortgages, the younger you take out a plan, the lower the percentage of the value of your home (the loan-to-value) the provider will lend you. So, if you are looking to borrow a larger sum, then it is advisable to wait until you are older – but obviously that depends upon the value of your property.
The younger you take out a plan, the longer the interest to be repaid on the amount borrowed will accrue. But this can be mitigated by the type of plan you choose and if you are able to make additional voluntary repayments to manage the balance going forward.
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Question
What are the pros and cons of drawdown?
I wondered if you could tell me the pros and cons of having a ‘drawdown’ element to a lifetime mortgage?
I like the idea of receiving money from my property at a steady rate, like an income, but am worried this is new and maybe not quite so ‘tried and tested’ as other schemes.
Answer
Drawdown lifetime mortgages have now been available for many years and you should have no concerns about the quality of them as they are offered by the leading providers, all of whom are members of the Equity Release Council and governed by the Financial Conduct Authority (FCA).
They are the most popular type of lifetime mortgage because of the flexibility they offer. Below are some of their advantages and disadvantages for you to consider.
Advantages
Easy access to funds – The money in your cash facility is yours to do with as you please. You can make withdrawals at any time without incurring further fees.
Manage the interest to be repaid – Borrowing in ‘chunks’ over time will reduce the final amount of interest to be repaid as interest is only applied to the amount actually borrowed.
Flexible features – The features you can expect from a drawdown plan include guaranteed inheritance, ’Downsizing Protection’ and voluntary repayment options. All of which allow you to tailor a plan to meet your needs both now and in the future.
Reduced impact on means-tested benefits – Large sums of equity release can take your ‘savings’ above the Government’s eligibility threshold – and this could affect your eligibility for means-tested benefits. By drawing down smaller amounts, you are less likely to lose any means-tested benefits you can claim. You can learn more about means-tested benefits by talking to your Equity Release Supermarket adviser.
Disadvantages
The lender has the right to withdraw a cash reserve facility – In extreme cases, usually in adverse economic conditions, the lender retains the right to withdraw access to your cash reserve facility. No lender to-date has ever put this into effect.
Different interest rates may apply – Any future drawdown from your cash reserve will be at the applicable interest rate at the time. This can vary based on economic conditions and may be higher, or lower than the previous interest rate applied on earlier drawdowns. No lender currently guarantees the interest rate on future drawdowns.
Your maximum reserve facility may be capped – Regardless of how much equity is tied up in your property, some lenders will cap the size of their maximum cash facility. This can limit the amount of equity you can release in the future.
They are not designed to provide maximum lump sums – If you need a large initial sum of money for a ‘big ticket’ expense (such as a house deposit for your children) then a lump sum lifetime mortgage could better suit your needs.
A new application and advice may be required – If you use all your cash facility and want to borrow again, then a new application and further financial advice maybe needed.
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