Equity Release guide discussion 26 June 2018 at 4:10PM edited 30 November -1 at 1:00AM in Over 50s Money Saving 145 replies 58.7K views

MSE_Rosie

Equity Release guide.

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Browntoa

I did option 1 , downsizing to clear my outstanding mortgage and leave some money .

I did this prior to retirement and chose somewhere with a small garden and needed minimal work in an attempt to future proof.

I decided equity release was too expensive an option for me long term

Hoppitinn

Can you tell me why a property with a condition on the title deeds stating !!!8220;property has to be sold to some who has worked or lived in the county for three years!!!8221;. Cannot get equity release.

echos_mum

What happens if, after some years from taking Equity Release, you need to move for any reason, eg down-sizing, disability issues, or just to be nearer relatives. Do the repayment terms come into play? Or can you transfer the plan to the new property somehow? Otherwise you could end up with insufficient equity to buy anywhere.......

echos_mum

Hoppitinn wrote: »

Can you tell me why a property with a condition on the title deeds stating !!!8220;property has to be sold to some who has worked or lived in the county for three years!!!8221;. Cannot get equity release.

I have heard that the Equity Release companies are very choosy in what they will take, and, like many insurance companies, will use a multitude of !!!8220;reasons!!!8221; either not to give you Equity Release, or to over-inflate their costs. Anything, therfore, that may make their life difficult in the future, like having to restrict to whom they can on-sell the property, abd thus delay a sale, would be rejected.

LanguedocFox

echos_mum wrote: »

What happens if, after some years from taking Equity Release, you need to move for any reason, eg down-sizing, disability issues, or just to be nearer relatives. Do the repayment terms come into play? Or can you transfer the plan to the new property somehow? Otherwise you could end up with insufficient equity to buy anywhere.......

Like most things to do with property, the answer is "it depends"!


Lots of Equity Release mortgages are transferable - there are usually legal costs and arrangement fees - as long as the new property is suitable and provides the lender with sufficient security. Also, most providers will only lend a proportion of the value of the property (maybe 30%), so if you owe £40,000, you might find it difficult to transfer this to a £80,000 property.


If you've not already done so, I suggest you talk to a number of brokers, and get them to give you proposals based on a check-list of things you want (eg, no-penalties for early partial repayment, opportunity to switch to a new property etc etc).


Best of luck with it.

Grevster

The equity release market is getting more and more competitive which is a big plus for the consumer as the schemes now offered are generally far more flexible than the more historic schemes

TRANSFER THE ARRANGEMENT
You may be eligible to “port” or transfer the equity release arrangement to your new property with the equity release provider’s prior agreement. If you are moving to a less expensive property, you may only be eligible to transfer a proportion of the equity release arrangement in which case, you would need to repay the balance. Depending on the provider, they may or may not charge you an early repayment charge {ERC} – see below – on the element that you may have to repay

WHERE NOT TRANSFERRING THE ARRANGEMENT
Early repayment charges {ERC}
ERC’s become payable where, for example, a lifetime mortgage {LTM} is repaid for anything other than an “agreed event”. Examples of “agreed events” are death or having to go into permanent long term care. In terms of couples, the agreed event if 2nd death or the 2nd of a couple having to go into permanent long term care

Many lifetime mortgage {LTM} providers now offer what are known as “fixed / defined” early repayment charges {ERC}. For example, pay off the LTM in the initial 5 years and the ERC would be 5% of the sums you have borrowed not the sums borrowed plus any interest that may have accrued / rolled-up. Pay it off in years 6 – 10 and the ERC would be 3%. Thereafter, it would be nil; so, don’t win lottery until year 11!

The alternative to “fixed / defined” ERC’s are “variable / undefined” ERC’s. These are far more complicated to understand but in short, will reflect the interest rates on Government borrowing or Gilts. Whilst they could be 0%, do keep in mind that they could be as much as 25% of the sums borrowed!

Downsize option
Some providers now also offer a “downsize option” meaning that if you pay off your LTM after 5 years {literally 5 years and 1 day} from the sale proceeds of your home, on moving to a less expensive property, they will waive the “fixed / defined” ERC that may otherwise be payable.

The “3 year option”
In addition, some providers also, offer what I call the “3 year option” but this applies to couples only. It works like this. If one party passes away or has to go into permanent long term care, the survivor / healthy party can sell up and repay the LTM ERC free. And that would apply even if one party were to pass away the day after completing the LTM.

Voluntary charge free ad-hoc payments
Also, don’t forget that many providers allow you to make charge free ad-hoc payments ranging currently from 10% – 15% per annum of the sums borrowed

Even if not regularly used, this option can come into its own if you suddenly decide to repay your LTM for anything other than an “agreed event” For example, imagine you’d borrowed £100,000 and won the lottery 4 years later. Your LTM came with fixed ERC’s and the charge after 4 years was 5%. But your LTM also, came with the option to make charge free ad-hoc payments of 10% per annum which you never used. You could, therefore, pay off 10% of the £100,000 charge free so, reducing the debt to £90,000 meaning that your 5% ERC would be based on the remaining £90,000 and not £100,000 so reducing the ERC from £5,000 to £4,000

And finally ……
The vast majority of the older style schemes whilst transferrable didn’t come with the sorts of options listed above and in the case of ERC’s it’s ot unusual to see charges of 100%!!!

Hope that’s helped

HalifaxBob

As I understand it equity release rates are fixed, am I correct? I am a single guy with no existing mortgage and no dependents. I am therefore thinking I am a good case for an EM. However I am concerned as to when I might apply and hopefully be accepted. I can only believe interest rates will someday (soon?) escalate again so my question is this: can I get an EM now, at a fixed rate, but only draw down a minimal amount for now and so be paying interest only on that drawn down section leaving the balance for a rainy day? Make sense ? Bob

BaldacchinoR

I would advise anyone to avoid equity release as a means of raising cash because it is more expensive, as interest rates are higher, and you don't pay off the principle sum or the interest which compound over the years and can wipe out any equity, as you are not making any repayments. Better if you do make repayments but then if you are going to do that, you may as well get a mortgae at lower interest rates, where you are paying off the debt or some of it, so the equity, or most of it, is preserved for your beneficiaries.

LanguedocFox

BaldacchinoR wrote: »

I would advise anyone to avoid equity release as a means of raising cash because it is more expensive, as interest rates are higher, and you don't pay off the principle sum or the interest which compound over the years and can wipe out any equity, as you are not making any repayments. Better if you do make repayments but then if you are going to do that, you may as well get a mortgae at lower interest rates, where you are paying off the debt or some of it, so the equity, or most of it, is preserved for your beneficiaries.

In my opinion, anyone who takes out an Equity Release mortgage without paying the interest each year is a mug because, as you suggest, you end up paying interest on interest on interest.


However, interest rates aren't massively higher than for conventional mortgages. My wife and I are in our 70s, and we're in the process of buying a house in the UK having lived abroad since 2004, so getting a conventional mortgage is all-but impossible for us.
Accordingly, we've taken an Equity Release mortgage to help fund the purchase, at an interest rate of 3.83%, which on the £90K we are borrowing works out at £3600 a year. The rate is fixed for the life of the mortgage, and we intend to pay off the interest and part of the capital each year - we can pay up to £9000 without penalty.



I suspect that interest rates will increase, possibly substantially after Brexit hits home, but we will still be paying 3.83%.

tonywick

Last week we sold my mother-in-law's bungalow as she's gone into permanent nursing home care and we need the money to pay the bills.

Sale price was £327K. Approx £200K of this went to Bank of Scotland before we saw a penny. That's based on a £23K loan taken out 20 years ago against a valuation of £97K.

In fairness, the BOS stopped doing this type of shared appreciation mortgage (75%), when it became apparent that the extreme rise in house prices in the early years of the new millenium were making the loans look like robbery! Even they hadn't reckoned on such a steep rise in the property market. I think some families even tried to take them to court, but they'd done nothing illegal (just maybe a bit immoral)

Even more galling for the family is that the amount mortgaged could have been easily raised if only their parents had asked! It wasn't as if the money was targetted at anything particularly useful.

As Martin points out, even with the current forms of equity release, DO look carefully at projections for people living into their nineties, and see if there isn't an alternative way of raising the dosh. And don't borrow in this way just because it's nice to have cash for a rainy day!