How does equity release / Lifetime Mortgages work?

Equity release or Lifetime Mortgages work by raising a mortgage on your residential home for any legal reason such as to increase income, gift family some money for maybe a deposit for a property purchase or to simply go on a dream holiday or make Home Improvements.

What is equity release / a lifetime mortgage?

Homeowners over the age of 55 are able to release equity. It helps you to cash out a portion of the value of your house. Your ability to release funds is determined by your age and the value of your house. The money distributed is tax-free.

You have two options when it comes to equity release:

Lifetime mortgage: A lifetime mortgage is a home loan that is backed by your home. Your house is still yours.

Home reversion plan: You sell all or part of your house for less than the market value with a home reversion scheme. As a tenant, you continue to live in your house.

Regardless of the type of equity release you chose; you can remain in your home until the last remaining creditor passes away or moves out and into long-term care.

There could be less expensive options for borrowing capital. One of our Equity release mortgage advisors can help you decide if an equity release is right for you and which product is better.

Want to know more?

For more details, call our Mortgage Saving Experts today.

How equity release works

It is a mortgage which runs until the last person on the lifetime mortgage dies or goes into full time care. You do not need to make monthly payments on these mortgages, but you can if you wish. It is a fairly inexpensive way to borrow extra money you may need in retirement, however, depending on what you need the extra money for could mean you not needing a lifetime or equity release mortgage as there may be benefits you may be able to get form your local council to help with things such as home improvement grants and if you did take a lifetime mortgage then this could affect any benefits you may get already especially if they are means tested.

If you have people to leave assets to, equity release normally means that they will inherit less. However, it is your home and equity so taking money from equity locked in your home is up to you, but, we would recommend talking it through with your family as it will affect how much they will get in their future inheritance. There are two forms of equity release products:

1. Lifetime mortgage

This is the most popular and (IS) for those aged 55+.

You borrow a portion of your home’s value at a fixed or limited interest rate (see below for more). Since you don’t make payments on old-style lump-sum lifetime mortgages, the debt compounds quickly as the amount you owe rises over time – unlike a standard mortgage.

Some versions allow you to pay back the interest (and in some cases, even some of the capital) to lower the total cost. Some lifetime mortgages allow you to have a drawdown facility which allows you to withdraw funds from your property in small increments up to a predetermined sum, with interest paid on the amount you withdraw rather than the total amount accessible.

A lifetime mortgage is different from a standard mortgage – to find out more speak with one of our mortgage advisers for more detail and guidance.

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2. Home reversion plan

You need to be aged 65+. A provider pays you a tax-free lump sum for a part of your home worth less than its market value. The property is then yours to keep (rent-free) until you die (“or until the last person on the mortgage dies or goes into full time care”). The proceeds are divided based on the ownership percentage and the lender’s ownership percentage if it’s sold. You can sell all or part of your property to a mortgage lender.

If you will only receive a percentage value of the stake you have sold i.e., you get £40,000 for selling part of your property which is worth £80,000. These are not very popular, and more people prefer the idea of a lifetime mortgage because you will still own all of the property. If your house is finally sold for £300,000 after you die, the provider will be entitled to £120,000 – 40 % of the proceeds. With Home Reversion plans, if you sell part of your property, you still retain ownership of some of the property. If you sell 100% of your property, then you do not own the property but are entitled to live thee until the last person either passes away or goes into full time care.

As a result, with lifetime mortgages, you know the exact cost, while home reversion plans, on average, are better if house prices remain flat and worse if they increase dramatically.

What’s the equity release application process?

At Mortgage Saving Experts, we offer a straightforward and individualised service in which our professional and friendly advisors can walk you through the entire application process. From the initial research to the successful release of funds at the end, you can count on our team to describe everything in plain English.

Here is a guide to explain the equity release application process:

1 – Advice and recommendation

The first step in the equity release process is a meeting with one of our advisors for a free initial consultation. They will give you a personalised suitability report based on your specific circumstances and current market items.

4 – Conveyancing and legal

The legal procedure will be managed by the equity release solicitor you have selected. They’ll communicate with the lender’s solicitor and complete an introductory questionnaire about you and your home. The lender will then make you an offer and provide you with a Solicitor’s Certificate.

2 – Application

After our recommendation is accepted, the equity release adviser will fill out an application form and gather supporting documents and identification. The file will then be forwarded to the equity release provider by our new business team.

5 – Offer made

You will receive a formal mortgage offer once a valuation has been carried out on the property and approved by the mortgage lender. This document confirms the mortgage’s terms and conditions, including the interest rate, fees, and loan duration. The original offer is submitted to your solicitor and must be signed in his or her presence at a face-to-face meeting.

3 – Valuation report

Following your application’s receipt, the lender will contact you to arrange a mutually convenient valuation of your property with a local independent surveyor. For security reasons, the surveyor will perform a business assessment and advise its current value and status. How much equity can be released will be determined by the results of this study.

6 – Completion

Finally, the lender’s solicitors will set a completion deadline after they have finished their final reviews on all the legal paperwork. The funds are initially sent to the solicitor, with any fees deducted. The net sum will then be forwarded to your nominated bank account or posted via check, depending on your preferences.

7 – Enjoy the proceeds!

You can now invest the equity release proceeds however you like now that the funds have been raised. Since Mortgage Saving Experts places a premium on customer service, we will make every effort to check in on an annual basis to ensure that the package remains competitive.

Want to know more?

Get in touch with of our mortgage saving experts today.

How long does the equity release application process take?

A lifetime mortgage plan normally takes 4 to 6 weeks to complete, whereas a home reversion plan takes 8 to 10 weeks to complete, assuming the house title is clear. The length of time it takes can be determined in part by how effective and knowledgeable your solicitor is. Applying for equity release necessitates legal work, which should be done by an equity release professional.

This will help you avoid any future submission delays. Mortgage Saving Experts will link you with a panel of eligible equity release solicitors who can support you with your application.

Looking for help?

Thinking about Equity Release? You can get free, impartial equity release advice from us online or by calling 01273 738 072.

If you’re thinking of taking out an equity release product, you should take financial advice from one of our experts. All our advisers recommending equity release schemes have a specialist qualification.

So, if equity release is the right choice for you, they’ll be able to suggest the plan most suited to your needs by researching all the products in the market.

Check your adviser:

  • Searches the whole of the market so that they can find the right plan for you.
  • Is on the Financial Conduct Authority register (you should search by the firm’s name) – a firm on the FCA register is regulated and must sign up to the Financial Ombudsman Service, which is a free-to-use complaints service if you’re unhappy with the service you receive.
  • Is a member of and on the Equity Release Council member directory, so you can be sure they abide by the trade body’s strict Rules and Standards, which go beyond the basic regulatory requirements

Before you decide whether or not to take out an equity release product, ask the adviser:

  • What their fees are
  • What type of equity release products they can offer
  • What other fees you’ll have to pay (e.g., legal, valuation, set up costs).

FAQs

Is releasing equity the right option for you?

Whether equity release is the right option for you depends on your circumstances, such as:
  • your age
  • your income
  • how much money you want to release
  • your plans for the future.
When releasing equity, it’s tempting to focus on the immediate boost you will get from the money you unlock, but you need to look at how it will affect your future choices and financial situation in later life.  

Can I still pass on an inheritance?

There are steps you can take to protect how much you can pass on as an inheritance.
  • Choose Inheritance Protection: This option lets you secure a proportion of the net sale proceeds of your home for the beneficiaries of your estate when you die. Choosing this option will reduce the amount you can take as a loan. You’ll need to decide on the percentage you would like to protect (the Protected Percentage) when you apply for a lifetime mortgage.
  • Make repayments during your lifetime: You can choose to repay some or all of the interest on the loan. You can also pay off some of the capital. This way, you reduce the amount you owe, which could leave more for your family to inherit on your death.
  • Living inheritance: You can use a lifetime mortgage to pass on money as a ‘gift’ while you’re still alive. For example, you may want to give a living inheritance to help children with university fees, wedding costs or getting onto the property ladder. If you give the money this way, the recipient might need to pay inheritance tax in the future.

How much does equity release cost?

For the lifetime mortgage equity release, the typical rates start from as little as around 2.5% (as at May 2021). This is cheaper than rates have been for several years. As well as the actual cost of the interest, you’ll have to pay arrangement fees. These can typically tally £1,500-£3,000 (They can actually be from £0 upwards) in total, depending on the type of plan being arranged. They can include such costs as application fees, fees for legal work and surveyor fees.  

Is equity release safe? Four quick tips

If you’ve read the above and you’re sure equity release is right for you, here are a few tips:
  1. Don’t borrow the full amount you need in one go.The sooner you borrow, the more expensive it is, as the interest has longer to compound. So, borrow as little as you need now, and wait as long as you can to do it again.
For example, if you think you may need £40,000 from your home to cover 20 years, only take what you need now and wait to take more until needed. Drawdown lifetime mortgages are set up to make this easier, so you can drawdown small payments as and when you need them.
  1. Ensure you use a company that’s a member of the Equity Release Council.This trade body’s members must promise a ‘no negative equity’ guarantee, so your estate will never owe more than your home is worth.
  2. Get advice before you do it.Speak to an independent mortgage broker or financial adviser with an equity release qualification to find the best deal. Get in touch to discuss your needs.
  3. It can affect your benefits. Having cash rather than a property can affect the benefits you’re entitled to, for example, pension credit, universal credit and others. So if you’re entitled to those, check the impact first.

Can I move home?

Yes, a lifetime mortgage allows you to relocate to a more suited property. Some properties may be subject to restrictions based on your ability to sell the property on the open market once your plan expires. Your mortgage advisor can go over this with you in greater detail.

Will I need to change my will?

When taking out a lifetime mortgage, we recommend that you examine your will. You usually don’t have to change your will, but it depends on how it’s written.

What is the Equity Release Council?

The Equity Release Council (ERC) is a non-profit organisation dedicated to promoting and supporting equity release providers. The Equity Release Council is dedicated to ensuring that consumers are protected and that providers deliver products that adhere to the council’s standards and principles.

Can I repay the lifetime mortgage early?

This is dependent on the type of lifetime mortgage you choose. You can typically return a lifetime mortgage in full, although you may be charged an early payback fee. This will vary depending on the scheme, the length of time you’ve had the mortgage, and the reason for repayment. If the possibility of early payback is significant to you, your adviser can discuss it with you and factor it into any recommendations he or she makes.

Will my family end up in debt because of equity release?

No, all equity release plans have a no negative equity guarantee, which means that when you eventually return the debt (when you or the last member in your household dies or enters long-term care), the amount owed will never exceed the value of your home (provided the T&Cs of the mortgage are met).

What happens if I move into long-term care?

All lifetime mortgage options guarantee that applicants will be able to live in their house until they die or enter long-term care. If you file the application jointly and one of you enters care, the other will be entitled to remain in the house until they die or enter long-term care.

Does bad credit affect the interest rate for Equity Release?

Bad credit won’t absolutely prevent you from acquiring Equity Release, but it will make it more difficult to find lenders who provide the best rates. Equity Release lenders will look at your credit history when you apply, so if you have a County Court Judgment (CCJ) or have been bankrupt in the past, you’ll likely pay a higher interest rate. Some homeowners use Equity Release to pay off debts, including their mortgage, and there are a few lenders who are aware of this and have less severe requirements. An Equity Release expert can search the UK market for lenders who accept homeowners with negative credit and highlight the ones offering the best rates.

Who owns my home if I take out a plan?

With a lifetime mortgage, you keep complete ownership of your house as long as you follow the terms and conditions of the loan.

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Want to know more?

For more details, call our Mortgage Saving Experts today.

Want to know more?

Get in touch with of our mortgage saving experts today to find out how we can help.

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