Archives September 2020

Releasing Equity From Your Home

A guide to the risks, the costs and the benefits.

What do you need to think about if you’re taking out an equity release or lifetime mortgage?

Equity release has come in for some pretty bad press over the years, but for some older homeowners, it’s a better option than selling up or trying to survive on their pension. The main disadvantage of equity release is that it can be an expensive way of raising money (sometimes very expensive). But if you don’t want to move or can’t afford to downsize, it may be worth considering. However, it’s an important financial step and you have to be aware of the disadvantages as well as the benefits.

Raise a mortgage or sell your home?
If you want to release equity, you have two different options:

• A lifetime mortgage: Here, you take out a loan against the value of your home but never make any payments. Interest builds up every year and the loan is paid off either when you die or when the house is sold.

TIP: Because you never make any mortgage repayments, the unpaid interest ‘rolls up’. This means the debt can grow significantly. There’s more about lifetime mortgages on the independent Money Advice Service website. There’s also a factsheet on equity release from Age UK.

• A home reversion plan: Instead of taking out a loan, you sell part or all of your home to an insurance company. You have the right to continue living in there until you die ‘rent free’ (although you’re normally responsible for all the maintenance and any service charges). When the property is sold, the insurance company takes its share.

TIP: If you sell part of your property through a home reversion scheme you’ll only get a percentage of its true value – typically between 30-60% – and the older you are, the higher the percentage. You’ll also miss out on any rise in value of the percentage you sell, so if property prices rocket away you could really lose out.

Where to start
Your starting point is to make sure you get good quality advice from someone who’s independent (pay a fee rather than letting them receive a commission) and who can look at products offered by all the companies in this market and not just one or two.

TIP Make sure you talk to someone who’s already done equity release before you go ahead, preferably someone who took it out at least 10 years ago.

• Look for products offered by companies that have signed up to a code of conduct. All providers that are members of the Equity Release Council (previously known as SHIP) have to guarantee that you will never owe more than the property is worth and you can live in your home for the rest of your life.

TIP: Equity Release Council members also give consumers the right to choose their own independent solicitor rather than using one linked to the equity release provider. But be aware that this is a specialist area and many high street solicitors won’t have the level of expertise you need. Contact a specialist solicitor, such as one who’s a member of Solicitors for the elderly.

• The older you are, the more you’re able to borrow. The amount you can release will depend on the value of your property, your health and your age.

TIP: Although the amount you can borrow is tiered according to your age, some equity release providers will let you release more cash than others.

• Ask about the impact on benefits. If you’re entitled to means-tested benefits you may find you’re no longer entitled to them if you receive income or a lump sum payment. However, if you’re aged 75 or over or you receive disability benefits, these shouldn’t be affected.

TIP: The Joseph Rowntree Foundation and financial providers Just Retirement have launched a pilot scheme in two London boroughs and Maidstone in Kent, with an equity release product that is designed not to have an impact on benefits.

What to look for
• Redemption penalties: Early repayment penalties vary between providers, both in terms of how high they are and how they are calculated. Make sure you understand exactly how much you might have to pay if you need to pay off the mortgage early.

TIP: It’s also worth checking how long you (or your estate) would have to pay back the loan if you die or need to move into a care home. .

Understanding the Different Types of Mortgages

Your guide to fixed-rate, tracker, discount, variable and capped mortgages.

What’s the difference between a fixed and tracker rate? And what are the disadvantages of cashback? One of the big decisions you have to make is what type of mortgage deal to take out. You may think you know the difference between a fixed rate and, for example, a tracker rate mortgage. But do you know how a discount rate works and how much difference there may be in lenders’ standard variable rates? Read on to find out more…

Which Mortgage Deal?

There are over half a dozen different types of mortgage deal to choose from and some that look similar at first glance may be quite different when you scratch beneath the surface.

1. Standard variable rate (SVR): This does what it says on the tin but it’s normally not a good deal. It’s never a rate that lenders promote and it’s not used to win new customers. Mortgage lenders are under no obligation to reduce it when Bank of England base rates fall, but may raise it by more than Bank base rates when they increase.

2. Discount rate: This rate is linked to the standard variable rate in that you get a discount off whatever the lender’s standard variable rate is at the time. Confusingly, if you’re choosing between two discount rate mortgages that charge the same interest rate, one may be a better deal than the other.

TIP: If there’s a tie-in period after the discount rate has ended and you have to go back onto the lender’s standard variable rate, look at the level of the SVR and not just the discount rate you’ll be paying for the first few years.

3. Tracker rate: Tracker rates have become much more popular in the last couple of years since interest rates started plummeting. They track the Bank of England base rate and must fall or rise by an identical amount as soon as base rates change. However, they may have a minimum level (otherwise called a ‘collar’) below which they won’t fall, no matter how low base rates fall.

TIP: It’s easier to shop around for a tracker than a discount rate because you only have to worry about how much more than the Bank of England base rate you’re being asked to pay (with a discount rate, you have to look at how big the discount is and the level of the standard variable rate).

4. Fixed rate: This mortgage rate won’t change for the term of the fix. It’s a good idea if your budget (or personality!) couldn’t cope with a rise in rates, but you will normally pay a premium for that certainty.

TIP: You will pay a redemption penalty if you remortgage during the term of the fix and there are also normally limits on how much extra you can pay off your mortgage (10% a year is not unusual).

5. Capped rate: Here your mortgage can’t rise above a certain level but it should fall if the Bank of England cuts interest rates. Some lenders link their capped rates to their tracker rate, others to their standard variable rate and it’s an important difference.

TIP: Capped rates linked to a lender’s tracker rate will normally be the cheapest, so it’s worth finding out how the capped rate deal is structured if you’re thinking of signing up to one.

6. Cashback rate: Here, you’re given a cash lump sum when you complete on the mortgage deal. These mortgage rates seem to drift in and out of favour, so it’s possible there may not be many on the market when you’re looking for a mortgage. They’re normally an expensive way of getting some cash.

TIP: Avoid them if possible because you’ll pay a higher interest rate (than, for example, a competitive tracker) during the lifetime of the deal. It’s normally enough to pay for the cashback several times over.