Your Equity Release Guide
Equity release enables the over 55s in the UK to release tax-free cash from their homes to the tune of £10 million a day!.
In 2018 £3.9 billion from equity release was raised from across 80,000 homes and this is set to surpass £5 billion in 2019 according to the Equity Release Council. In the first quarter of 2019 £936 million was released.
There is a huge pension gap for the older generations in the UK and property is being used to release funds to plug that gap.
There is now more choice than ever with the household names like Legal & General and Aviva helping to provide over 200 products that are now available for equity release and this trend is set to continue giving the over 55s more choice when it comes to providing an income in retirement.
How Does Equity Release Work
Criteria: Homeowners need to be aged 55 to qualify who either own their homes outright or they have a small mortgage outstanding.
The minimum house value for equity release is £70000 and the property has to be mortgageable and in the names of the applicants. The lenders will ask for proof of identification in the form of a passport, proof of address ID which would be a council tax bill or utility bill with the applicant’s names and addresses.
3 months bank statements. There is no affordability check because with equity release you are able to make no repayments if you choose not to, Your property will never be repossessed because you are not required to make any repayments.
The lenders will lend up to 56% (LTV) loan to value depending on their age and health. As a rule of thumb the older you are the more money you will be able to lend.
All the different property types are acceptable Houses, bungalows, flats,ex-local authority subject to valuation which is carried out on behalf of the lender. If you have lived in your home for a number of years you will perhaps not had a home valuation done for a long time then, this is nothing to worry about.
On the day of the valuation, the surveyor will be looking to access every room, he is not interested in whether the room is untidy he just needs access to check the windows etc.he will need to access the loft to check loft insulation again he will not need to climb in to the loft just to stand on some steps to have a look in, he will probably have a torch to see in the loft.
He will want to see and take pictures of the kitchen and the bathroom he will check outside paths and access. The valuation will take approx 45mins.
Please: note the majority of people are using equity release for home improvements so the valuer will take this into consideration.
There are only two events that will terminate an equity release lifetime mortgage, that is the death of the last-named occupant and or they enter long term care either in sheltered accommodation or a care home.
The two main types of Equity Release.
Home reversion Plans & Lifetime Mortgages
A home reversion plan is when you sell part or all of your property to a scheme provider, which pays you a tax-free lump sum in return. This lump sum is significantly less than the market value of your home – typically only between 20 percent and 60 percent of its true value.
If you are considering equity release to unlock some of your property wealth, think carefully about the type of scheme you choose. A home reversion plan, for example, can be a good option for a select few, but they carry considerable risk that makes them unsuitable for most people. Less than one percent of all equity release plans sold in the second half of 2018 were home reversion plans, according to the Equity Release Council. Almost all equity release plans arranged in recent years have been Equity Release lifetime mortgages.
Home reversion plans: pros and cons of home for life plan
The amount of money you will receive if you choose a home reversion plan depends on your age and health. The older you are when you buy a plan, the closer to market value you’ll receive. In return, the provider gives you the right to continue living there rent-free for the rest of your life or until you move into long-term care.
Do I have to pay interest on a home reversion scheme?
There’s no interest to pay with a home reversion plan, as this type of scheme is not a loan. When your house is eventually sold, the provider will take their share of the proceeds. If, for example, you sell 50 percent of your home to a home reversion provider, they will take 50 percent of the sale price. The remaining 50 percent will go to your estate.
- 1 You remain in your home
- 2 The lump sum is tax-free
- 3 You retain a share of the property to pass to beneficiaries
- 1: You will receive far less than the true market value
- 2 It would be costly to cancel the plan early, or if you die within ashort period
- 3 You will no longer be the sole owner of your home.
Home reversion plans versus lifetime mortgages
Home reversion plans are very different from lifetime mortgages. With the former, part or all of your home will belong to a company, although you retain the right to live there. With a lifetime mortgage, 100 percent of your home belongs to you.
And although with a home-reversion plan you can stay in your home for as long as you live, you give up any right for you or your beneficiaries to benefit from future increases in the value of the share you have sold.
Lifetime mortgages have become the most popular type of equity- release scheme in recent years. This type of plan is essentially a loan, but, unlike a normal mortgage, you don’t have to make monthly repayments.
Instead, interest usually builds up over time, and this – along with the sum you borrowed – is paid out of the proceeds of your estate when you die or move into long-term care.
You can choose to release your equity as a lump sum or take a regular income over a period of time.
As long as you are dealing with a provider that belongs to the Equity Release Council, you’ll benefit from the no-negative-equity guarantee, meaning you will never owe more than the value of your home.
Take Expert Advice
Remember that all equity-release plans will reduce the value of your estate when you die, and they could affect your entitlement to means-tested state benefits.
It is very important to seek professional financial advice before proceeding with an equity-release plan.
Apart from the applicants, anybody over the age of 17 would need separate legal advice.
Lifetime mortgage: you take out a mortgage secured on your property provided it is your main residence while retaining ownership. You can choose to ring-fence some of the value of your property as an inheritance for your family. You can choose to make repayments or let the interest roll-up. The loan amount and any accrued interest is paid back when you die or when you move into long-term care.
The Aviva Flexible Lifestyle Voluntary partial Repayment Scheme is specifically designed for homeowners looking for either one of the lowest equity release rates combined with the ability to make ad-hoc voluntary partial repayments to help control the future balance.
There is also added flexibility of this being drawdown lifetime mortgage scheme.
The minimum property valuation applicable to this voluntary repayment Lifetime mortgage scheme is £75000 with no maximum.
Property location which must be a main residence needs to be located within England, Wales, Scotland and are one of only a couple of lenders who will offer a release of equity in Northern Ireland.
Aviva will only take into consideration 85% of the current market valuation of flats.
Aviva’s Flexible Partial Repayment Lifetime Mortgage is available on both a single and joint life basis with a minimum age of youngest homeowner being 55 and no upper age restriction.
The minimum release on the Aviva Voluntary plan is £10,000 with a mandatory minimum reserve facility of £5,000 accompanying this. For Loans greater than £1m the optional payment lifetime mortgage (OPLM), allowing customers to pay some or all of the monthly interest whilst remaining in their homes.
Customers can also stop paying at any time and like traditional lifetime mortgages, these interest rates are fixed for life.
OPLM combines the flexibility of residential monthly interest payments with the long-term security of a lifetime mortgage, as customers are able to stop paying interest at any time and remain in their home for the rest of their lives. It reflects the desire of more consumers wanting to pay the monthly interest on their mortgages in retirement.
Optional Payment Lifetime Mortgage
OPLM is available to mortgage customers aged 55 and for borrowers with some income in retirement but not enough to qualify under residential mortgage affordability assessments, and for whom traditional interest roll-up lifetime mortgages may not be an immediate solution. Ellis added: “We’ve built it because we hear from our research there are lots of customers who want the ability to make repayments but can’t repay the loan.
“We think it will be popular and customers want more control and want to continue making payments with security of fixed for life.
“These customers feel let down by the mortgage market – they have always paid their interest, but no longer qualify for a new mortgage because of affordability assessments or, more simply, their age.
“OPLM is a direct response to this growing customer need for a different kind of retirement mortgage, one that provides flexibility for borrowers and which also has the potential to address the interest-only shortfall that remains a fundamental issue for the mortgage market.”
It has also been designed to respond to the FCA’s request for the market to offer more choices for customers wanting to borrow in retirement. This is something the FCA highlighted in its recent rules on retirement interest-only mortgages.
The product will only be available via intermediaries and on an advised basis.
Customers will not need to pass any affordability assessments or have a capital repayment strategy in place as the amount owed is repaid from the sale of the property upon death or moving out of the home into long- term care.
In the event that they can no longer afford or want to pay their monthly interest repayments, the customer can choose to stop and instead the interest is added to the loan each month.
Home Owners Advice is a company with specialist mortgage advisers who have a market-leading knowledge and experience gained from working within the industry, and who have access to the UK’s leading mortgage lenders
Fed up with monthly mortgage repayments!
Did you know…
Over 20,000 people chose equity release to clear their mortgage last year.
Equity release is fast becoming one of the most popular options for later life lending!
Innovation over the last 5 years means equity release customers can now…
– Ringfence a portion of their properties value for inheritance purposes
– They can never owe more than the value of the property
– And can transfer the policy if they wish to downsize or move later in life Regulated by the FCA and Equity Release Council, over 40,000 people took out a plan last year…
Without having to;
– Risk their children’s inheritance
– Make any monthly repayments
– Or having to sell their home
The average amount each person accessed last year was £67,000. Customers of equity release can spend the money as they please, a recent report found the top 5 ways people are spending their money;
1. Clearing a mortgage
2. Funding home improvements
3. Boosting monthly income
4. Helping family and friends
5. And funding much-needed vacations.
Thank you for downloading the equity release guide I hope it has given you some valuable information regarding equity release.
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