Equity release schemes have come a long way since they were first introduced in the market. Equity release plans proved to be a very popular concept, and it is their popularity that paved the way for new, improved and more flexible options. Equity release mortgages today are also better regulated when compared with older mortgages.
The popularity of equity release is due to a very real need in society. Living costs have gone up considerably, as have property prices. In this light, pensioners who own homes, but not have enough cash flow can find equity release to be a good solution. It allows homeowners to increase their income during retirement, without the need to sell the property and move into a different place.
The Financial Services Authority (FSA) is a body that regulates financial services and products. The FSA aims to maintain transparency and fairness in communication related to financial services, including advice issued to customers. It also aims to eradicate financial wrongdoing. Equity release schemes and mortgages today are completely regulated by the FSA. Equity release customers can seek support and protection from the FSA.
A common concern that people have with equity release mortgages is the potential risk of negative equity. Due to compounding interest built up over a long period of time, an equity release debt can become quite large compared to the amount borrowed. When the house is sold, if the amount owed is higher than the sale value of the house, a negative equity is created.
As the equity release market has matured and become more competitive, it has also become safer for customers. Safe Home Income Plans is a self regulated body that aims to serve customers by making the terms of equity release mortgages more transparent and safe. For instance, all SHIP equity release schemes offer a no negative equity assurance. This means that any negative equity does not need to be repaid to the lender.
Solicitors that can handle all the paperwork related to an equity release application, as well as provide specialist advice. The equity release solicitors’ alliance ERSA, is a charter of specialist solicitors dealing with equity release mortgages. There is a wide variety of equity release schemes available in the market. It is important to seek professional independent expert advice regarding equity release. Independent experts can provide guidance on the potential risks and advantages of equity release for you.
The decision to take out an equity release mortgage is not a small one. It has major implications on your life, and as such, the decision should be taken with careful consideration, and with the help of expert advice. Fortunately, as the equity release market has matured over time, it has also become safer for consumers with independent regulatory bodies committed to maintain high safe practice standards.
Safe Home Income Plans is an independent trade body that aims to ensure transparency and consumer safety in the context of equity release plans. SHIP approved equity release providers adhere to certain rules that are designed to maintain transparent communication to consumers, as well as safety measures such as the no negative equity guarantee.
There are certain procedures that need to be followed while applying for an equity release mortgage on your house. Procedures include valuation and completing the application process as per required terms, which can be done by professional solicitors. There are solicitors that specialise in equity release schemes, and can therefore ensure that everything goes smoothly.
The role of a solicitor in the process of getting an equity release is not just to guide you through the paperwork, but more importantly, to guide you through the potential risks and rewards of equity release in your specific context. A solicitor who is an expert in equity release will have up to date knowledge about different options suitable for your particular circumstances. It is therefore vital to find an expert solicitor who knows the equity release market.
Some specialist solicitors firms have formed an independent charter known as the equity release solicitors’ alliance or ERSA. The objective behind this alliance is to uphold the importance of expert and specialist advice within the field of equity release mortgages and also to increase awareness of the public regarding this. If you require guidance about equity release in general or about specific equity release schemes and their suitability, it is necessary to take advice from an expert in the field.
While there may be a lot of information available on various platforms, such as the internet, when it comes to financial products such as an equity release mortgage, it is important to seek information from genuinely impartial sources. An independent financial adviser or solicitor can give fair and unbiased advice about a product, unlike any party affiliated with a particular provider or company.
Equity release is a relatively new concept in the world of finance. When property prices began to soar over the last two decades, a situation arose where many people owned valuable properties, but due to rising costs of living did not have enough income to support their lifestyle during retirement. Equity release was an answer to this gap in the market.
Equity release mortgages allow you to free up some of the equity built up on your property, without the need to sell the house. It allows you to continue living in the house, but free up some of the value of the house and get it as a loan, either as a lump sum or in smaller regular installments.
The two main types of equity release mortgages are lifetime mortgages and home reversion plans. A lifetime mortgage is a loan taken against the home. Interest is generated on the loan, which usually compounds and results in a debt much bigger than the original loan. However, such loans do not need to be repaid until the homeowner dies or moves into permanent care, and the house is sold.
Modern equity release mortgages have a no negative equity policy. This means that if your debt becomes larger than the sale value of the house, the negative equity does not need to be repaid and is written off by the lender. This is how lifetime mortgages are repaid. In case of a joint application, the loan is expected to be repaid only after both the applicants have either died or gone into care.
Home reversion is a way to sell a portion of the house notionally, and take the loan of that amount. The loan and interest are repaid when the house is sold. The principal amount that needs to be repaid is the same proportion borrowed of the total sale value of the house. Therefore, the amount that needs to be repaid reflects the market value when the property is sold.
When interest builds up on the principal amount, this interest is added to the principal and the next year, interest is charged on this bigger amount. This compounding interest can result in huge debts, which is one of the main risks concerning equity release mortgages. Equity release lenders now offer what are known as interest only lifetime equity release mortgages wherein unlike roll up mortgages, you only pay the interest every month and when the equity release scheme ends, the amount to be returned remains the same as the amount borrowed.
Equity release is a popular way of raising money on your property without having to sell the house. There are different types of equity release mortgages, but essentially it is a loan taken against the value of the home, and is repaid when the house is sold, after the owner has died or moved into care. If you have more than one property, it may be possible to release equity on the second home as well. Buy to let equity release is now available from certain equity release lenders.
Some lenders offer equity release loans on multiple holiday homes as well as buy to let homes. Loans are usually offered only if the landlord or the landlords’ family does not rent or live in the property. Buy to let equity release rates are different from home equity release interest rates so it’s worth using an equity release calculator specially designed for buy to let equity release.
Of course, most lenders do not lend if there is an existing large mortgage on the property. The mortgage, if any, must be smaller than the equity that can be released on the property. The amount of equity that can be released on a holiday home depends on several factors, including the age of the applicant. Buy to let equity release is generally only offered if the youngest applicant is over 55 years of age. Landlords with up to 5 buy to let properties can potentially release a proportion of the equity on each property.
The amount of the loan generally varies with age. The more the age of the applicant or the age of the youngest applicant in case of joint applications, the more the proportion of equity that can be borrowed. Also, loans are generally offered in lump sums as opposed to monthly borrowing. Buy to let equity release schemes are becoming increasingly popular, especially among landlords with an extensive property portfolio, as it opens up many possibilities for them in terms of financial planning and further investment.
As with any equity release mortgages, buy to let equity release mortgages involve some setting up costs. These include professional valuation fees which are usually in proportion to the value of the property, application fees, and solicitors’ fees. In addition, if you go to an independent financial adviser, setting up costs also include any fees charged by the adviser.
Individual buy to let equity release schemes may also have additional costs such as early repayment charges. These vary with each policy and as with any financial loan, it is important to find out about all the associated costs before entering into any legally binding contract.
Equity release mortgages are financial products, essentially loans, that allow you to free up the equity tied into your home. For those who own a real estate property and require a supplementary income, this type of loan can be the right option. This is especially true of pensioners who have a house but often require additional cash flow for a better lifestyle, medical expenses etc. There are many different types of equity release schemes, and choosing the right one requires proper understanding of the concept, as well as proper guidance.
As equity release mortgages have become more and more popular, they have also evolved and improved over time. Today, there are not only a greater number of equity release providers in the market but also a great variety in terms of the type of equity release plans. Equity release plans have also become more flexible to suit people in a wider variety of circumstances. Something that was not available a few years back may now have become accessible.
If you already have an equity release mortgage, it may be worth your while to explore the market and see whether there are better options available for you. Switching to a new lender may have several advantages, from lower interest rates to more flexible terms of lending. However, switching your equity release is not always a straightforward process. Before applying for a new loan, it is important to understand all the equity release risks associated with your existing mortgage.
Many lenders charge an early repayment penalty on their equity release mortgages. This changes from lender to lender and also varies with different mortgages. But it could be as low as 5% to as high as 25% of the total amount that is borrowed. These penalties are put in place to protect the lender from losses made on interest when a debt is repaid ahead of term. While ERCs were common until a few years ago, a more competitive market has led to many lenders scrapping this policy.
Sometimes an equity release remortgage with an alternate lender could help make huge savings, however, high early repayment penalties could cancel out any saving and make it economically unviable. In other cases it could still be viable notwithstanding a seemingly high ERC! As always, it is useful to consult a financial adviser, with expertise in the field of equity release mortgages, to help you make the right choice.
Equity release schemes have been around in some format since the 1960’s. However, they have undergone significant changes to ensure that today’s equity release mortgages are complaint & trustworthy in the eyes of the over 55 marketplace.
The first steps towards recognition of the need for consumer protection came in 1991 with the launch of SHIP (Safe Home Income Plan). SHIP brought about a voluntary code of practice that must be implemented within any equity release scheme in order to achieve SHIP status: –
- The flexibility to still be able to move house. Therefore the equity release plan must be portable
- You can repay the equity release mortgage at any time, subject to potential early repayment charges
- All plans must have the inclusion of a ‘no-negative equity guarantee‘ option
The no-negative equity guarantee provides the protection in an ‘over’ roll-up situation, where the equity release balance supercedes the value of the property in the future.
If this does occur the lender will invoke the no-negative equity guarantee and only ask for the property value on eventual sale. This provides the reassurance that no debt can be transferred onto the beneficiaries.
Since then, the FSA (Financial Services Authority) has become involved in the equity release market & taken all schemes under its wing.
Therefore in 2004, lifetime mortgages became fully regulated by the FSA & provided greater consumer protection. This led to only qualified equity release advisers being able provide recommendations to the general public.
Three years later in 2007, home reversions plans were amalgamated with lifetime mortgages resulting in both types of plans becoming regulated by the FSA.
With recent developments in the industry & SHIP now reforming itself into the Equity Release Council to have a stronger presence & stance within the post retirement market, then greater changes are to follow. This in turn will lead to greater consumer awareness of equity release schemes & their benefits to the over 55’s.