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Equity Release: Key Considerations

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Equity Release: Key Considerations

The No Negative Equity Guarantee

The main consideration for most people is the potential of Negative Equity. Managing Director of The Equity Release Lady, Samantha Bickford explains,

‘Before lenders introduced no negative equity guarantees, it was possible for a clients property to be worth less than their outstanding debt. This situation worried many people so many lenders introduced a ‘No negative equity guarantee.’ This means that the situation where there is a higher debt than the property value can no longer happen if the client sticks to certain rules stipulated by the lender.’

Reasons for taking out Equity Release

Equity Release is an important consideration when planning your finances in your retirement. The released funds can be used for many reasons and the most common reasons we see for people taking out a lifetime mortgage are:

  • to repay an existing mortgage
  • gifting to family, often to help them on to the property ladder
  • home improvements.

With all lending secured against your home, there are some risks that should be carefully considered in line with your individual needs before taking out a lifetime mortgage.

The correct advice

Firstly, the most important way of ensuring that you are applying for the correct deal that meets your needs is making sure you use a good and thorough adviser. A good adviser will provide you with all the information that you need to make an informed decision. They will listen to you and any of your concerns, answer any questions and most of all, they will move in a pace that you are happy with and not rush you at any stage.

It is paramount that you feel comfortable with your adviser and with the deal that they are advising you to consider. After all this mortgage will be with you for the rest of your life. The best way to find a good advisor is to read their previous reviews and look to see if they are a member of the Equity Release Council website.

Interest Rates

Interest rates are at an all-time low for lifetime mortgages with the lowest available today around 3%. This is a huge improvement on the rates from 5+ years ago which could sit as high as 8%. Although the rates may seem high compared to a standard residential mortgage, they are slightly higher as they are fixed for life and because they are funded differently to residential mortgages.

Compound Interest

The dreaded term which most client’s hear when looking into their lifetime mortgage is compound interest.

The interest on a lifetime mortgage is calculated daily and the interest is added to the loan so both loan and accrues interest is then charged interest. This means that the compound interest can escalate quickly.

However, all products allow you to make interest payments so that the accrued interest can be minimised. There are several different payment options available which allow you to pay some, all or none of the monthly interest. This should be discussed in great detail with your adviser and will be clearly shown in a Key Features Illustration that will be provided by the lender.

Early Repayment Charges

There are Early Repayment Charges (ERC’s) involved with all lifetime mortgages, but these are all different. Some products offer a fixed for 5 years ERC whereas others may be fixed for greater than 10 years. Some deals may offer a GILT ERC. This is when you are unsure on the costs of the ERC until the day you wish to pay off the mortgage. You will find out from the lender what the GILT ERC is on that day. The amount can vary from 0 up to a large 25%. If you are planning on moving home in the future its essential to let your adviser know this so that they can source the correct ERC for you.

Costs Involved

There are several costs that are involved when taking out Equity Release. Firstly, there will be an adviser fee which can vary between different companies. You will need a solicitor to complete the conveyancing work for you should you go ahead. These costs again can vary but we have found the average costs to be around £850. Finally, there may be costs for the survey and application that are charged by the lenders. Application costs can range from £0 to £950.

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Call 01752 749656 or CONTACT US for free impartial equity release mortgage advice to help you find the best deal.