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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
Valuing a property when taking out equity release
Please can you help me by explaining how the house price valuations work when taking out equity release? My mother and father are considering this is as way to fund home improvements. I have given them my full backing as I believe releasing the cash to spruce up and modernise their home will significantly increase the value.
Conversely they are panicking property prices might go down and leave them out of pocket.
So, how does the valuation process work and does it take into account any potential for future increases or decreases?
Answer
Over 99% of equity release plans taken out are lifetime mortgages and to ensure that the property is in a condition to lend on and to confirm the property’s market value, all lenders will conduct a physical valuation, which involves the lender’s appointed surveyor assessing the property.
House prices may indeed go up or down in the future, but history shows us that they only tend to go up over time.
In fact, since the inception of the Nationwide House Price Index in 1952, house prices have only decreased in three years, and have then strongly rebounded.
Lifetime mortgages have three great features that will hopefully reassure your parents that they won’t be out of pocket.
The first is that the amount they choose to borrow is up to them. Most lenders only insist on a minimum borrowing of £10,000 and the most popular type of plan – a drawdown lifetime mortgage – then allows them to borrow more in the future, as and when they want to and penalty free, from the total the lender has made available.
For example, if your parents are able to borrow £100,000 (which is the amount typically borrowed) and only require, say, £30,000 for home improvements, they have another £70,000 available to them at any point in the future.
The advantage of drawdown is that interest is only charged on the amount you borrow. A point to note is that drawdown facilities are not guaranteed by lenders and can be withdrawn in the future – always check the circumstances with your adviser.
Secondly, a lifetime mortgage can be reviewed in the future and at Equity Release Supermarket, we review our customers’ plans every 12 months, to ensure that the are still with the best plan for them. In the future, your parents could switch their plan to a potentially better deal and at the same time their house would be revalued – which could give them an opportunity to review their borrowing and perhaps increase it – if needed.
Thirdly, all lifetime mortgages come with a no negative equity guarantee. So, even if the worst was to happen and when it comes the time to repay their plan (when your last surviving parent dies or moves into long term care) their property is worth less than the amount to be repaid, your parents beneficiaries would not have to fund the difference and be out of pocket.
We have a free calculator which helps you understand the impact of changing property prices on the value of an estate on our website, which you may find useful.
It is also always worth speaking to your local Equity Release Supermarket adviser who will be able to answer all your questions and concerns.
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Question
Retirement interest-only: Concerns about income
My husband and I are looking into taking out a retirement interest-only (RIO) mortgage. One thing we have discovered is that there are problems if one of a couple does not have an income. My husband has a very good final salary pension and if he died I would benefit from two thirds of the amount we currently receive. Would this satisfy a RIO lender?
Answer
As you rightly point out, RIO mortgage lenders do assess both partners’ incomes, not only current income, but also in the future when considering whether they will lend to you.
This is because a RIO is a residential mortgage and works in the same way as mortgages you will have had in the past. As well as affordability checks, you will also have to pass the lender’s credit tests and any other suitability tests they may have in place.
This requirement has caused issues in the past, with lenders declining applications, however as they gain experience of lending into retirement, these issues are being constantly addressed.
It is impossible to say at this point whether you benefiting from two thirds of your husband’s pension upon his death would be sufficient, as this depends on the size of the pension and the amount you are thinking of borrowing through a RIO.
The lender’s primary concern is that your income (both now and in the future) is sufficient to meet your monthly mortgage interest repayments. Nevertheless, the good news is that some later life lenders such as Hodge Lifetime could take a spouse’s pension into consideration.
As an alternative, you could consider an interest-only (IO) lifetime mortgage which works in the same way as a RIO, in that you make monthly interest repayments so that when your plan is repaid, only the initial amount borrowed is outstanding.
The advantage of an IO lifetime mortgage over a RIO is that there are no affordability checks to pass and your income is not considered by the lender, removing this barrier to entry. The amount you can borrow is based on the age of the youngest applicant and the property value.
As a next step, I recommend that you speak to a whole of market, independent equity release broker, such as us at
Equity Release Supermarket. Your local adviser will be able to find a solution for you that meets your specific needs.
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Question
Will I lose ownership of my home if I release equity?
If I take out an equity release plan, will I give up ownership rights to my home? I have heard mixed messages on this and it would be good to get things clarified.
Answer
I can absolutely reassure you that with a lifetime mortgage, the most popular type of equity release plan, you retain full ownership of your property and are free to live in it, just as you always have done, until you die or move into long term care.
Only then would your property be sold to repay the mortgage (and any accrued interest). The balance would then be passed to your chosen beneficiaries.
Even at this point, your home doesn’t have to be sold as your beneficiaries can repay the lifetime mortgage from their own funds, if they prefer to retain the property – for rental purposes, for example.
There is another type of equity release plan, which isn’t as popular now called a home reversion. Here, you sell a percentage of the value of your home to a lender in exchange for a lifetime tenancy at the property.
When you die or move into long term care, the lender will sell your property and the proceeds are split between them and your beneficiaries, depending on the percentage of the property you decided to sell/keep. These are the only form of equity release where you do sell any part of your property and like lifetime mortgages are also regulated by the FCA.
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Question
Help needed with fees and other costs
I have been looking into various later life mortgage and equity release plans and if I am honest it all seems a bit too good to be true! Someone mentioned there would most likely be hefty fees attached and I wondered if you could help me understand more about these, please?
I am assuming usual legal fees would apply but are there other things to consider too? Would I have to pay for valuations and brokers, for example?
Answer
I certainly agree with you that equity release is enabling many older homeowners to enjoy the financial freedom they fully deserve. While there are fees to pay, with the current offers available in today’s competitive marketplace, there are usually only a couple and these are only payable once the plan has completed.
Although lifetime mortgages can be used for mortgage purposes, they are much less common than those used for traditional equity release reasons e.g. home improvements, holidays etc.
Therefore, costs for a lifetime mortgage in most scenarios are much less than those typically involved with buying a property because there is no Stamp Duty to pay and no associated fees such as estate agents or moving costs.
The standard fees involved with equity release are –
Lender’s application fee – this would be to cover the application processing and the lenders legal costs and could be as high as £995. However, many lenders don’t charge an application fee as an incentive for you to choose them.
Lender’s valuation fee – This is the cost to value/survey your property for mortgage purposes and again many lender’s pay this for you as an incentive. If it’s payable, then the fee would be needed upon application submission.
Solicitor’s fees – As you previously mentioned, a solicitor’s fee is payable, as they manage all the legal aspects of your equity release plan. This varies greatly by the broker you choose and at Equity Release Supermarket, our panel of expert solicitors’ fees start at just £695 + VAT (plus disbursements). This is collected once everything has been completed.
Financial advice fee. It is a legal requirement that you must have financial advice to take out an equity release plan. You could either choose to go to a lender directly to get this for free, but the big caveat here is that a lender can only advise on their own lifetime mortgages and not the whole market.
With over 400 different plans now being available, it is obvious that a single lender may not be able to offer you a plan that best meets you needs. A lifetime mortgage lender also may not be able to discuss other lending options with you – such as retirement mortgages or retirement interest-only (RIO) mortgages.
If you choose to use a whole of market broker, such as Equity Release Supermarket, to ensure that your adviser has searched the entire market to find the best deal for you, the cost for this advice can again vary greatly. At Equity Release Supermarket, we charge a fee that is guaranteed never to be more than £995 and is only payable if the plan completes.
Other leading brokers charge their whole of market advice fee based upon a percentage of what you borrow. For example, some of the largest brokers can charge up to 2.25% of the amount you release. So, if you borrow £100,000 (which is a very typical lifetime mortgage), you could be paying up to £2,250 for your advice. It therefore pays to shop around and do your research beforehand.
These are all the fees involved with equity release and you can read more about the fees and charges here.
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