Equity release has become increasingly popular. The amount of equity being released has grown in the recent years, reaching £4.8 billion by the end of 2021. And with popularity set to continue increasing, we are expecting many more home owners to tap into their property wealth.

There are two types of equity release: lifetime mortgage and home reversions. Both types allow you to stay in your home and release a lump sum of cash from the equity stored in your property. However, unlike home reversions, lifetime mortgage enable you to retain ownership of your home.

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Eligibility

To be eligible for Equity Release, you will need to meet some key requirements, the most basic of which are:

  • You must own the property
  • You must be a UK resident
  • You must be over the age of 55
  • Your property must be in England, Wales or Scotland
  • Your property must be your main residence.

Other requirements relate to your personal circumstances.

Misconceptions

Equity Release has been around for a long time now. And while the products has changed a lot in that time, not everyone is aware of the important developments.

“I have to stay in my property for the rest of my life”

If you want to, you can stay in your home for the rest of your life. Or, if you’d prefer a change of scenery, you can choose to ‘port’ your lifetime mortgage to your new home, providing it’s suitable to the mortgage provider. This means that when you move into your new home, you take the mortgage with you.

“I’ll end up owing more than my home is worth and leave my loved ones with debt”

Our products come with a ‘No Negative Equity Guarantee”. This means that when your home is sold, we guarantee that the mortgage lender will not ask you or your loved ones to pay for the shortfall, if solicitor and estate agents’ fees do not leave you with enough to pay the amount owed to the lender.

If your home is sold for more than the amount you’ve borrowed against it, the amount left over belongs to you or your loved ones.

“I can’t change my mind”

Whilst a lifetime mortgage is a long-term commitment, you can choose to pay back the full loan amount at any time. There may be a charge for this, but for mortgages with fixed early repayment charges, you’ll know about the penalty before signing up to the mortgage.

Some products offer features that let you clear your mortgage without penalty:

  • Early Repayment Waiver

If you take out Equity Release with a partner or spouse, in the unfortunate event that your partner or spouse passes away or goes into long-term care, you will not need to pay an early repayment charge if you repay your lifetime mortgage within 3 years.

  • Downsizing Protection

If you have held a lifetime mortgage for 5 years and you want to repay the loan because you are selling your home and moving to a different property, you wont need to pay an early repayment charge.

“I can’t take out equity release if I still have a mortgage”

If you want to take out Equity Release but still have a traditional mortgage, you will need to clear the traditional mortgage with the money you release. This is because there can usually only be one charge on the property. Some lenders may allow for two charges on the property, but this is not always the case.

Clearing a traditional mortgage is one of the most popular reasons for taking out a lifetime mortgage, with more than 2/5 of customers using it for this purpose.

“The interest rolls up quickly and the debt grows in size”

If you choose an interest roll up mortgage, the outstanding balance will grow quickly over time. This is because the interest is calculated on a daily basis and added to the mortgage balance each month.

If you want to reduce the impact of interest roll-up, you can choose a product that allows you to make repayments. Much like a tradition mortgage, most lifetime mortgages give you the option to make necessary capital and interest repayments

Products are expensive”

Equity Release products are typically more expensive than regular mortgages. However, they are a different type of mortgage lending, and they offer an interest rate that is fixed for the life of the mortgage, which can be 25+ years long. The products also come with safeguards which tradition mortgage don’t offer.

“It is not possible to reduce the debt”

Most lifetime mortgages offer the option to make partial, or full, repayments. Some plans may charge for this, but for mortgages with fixed early repayment charges, you will already know about the penalty fee before signing up to the mortgage.

You can also choose a product that allows repayments, so that you can reduce the balance throughout the mortgage term.

“I can’t leave an inheritance to my loved ones”

If leaving an inheritance is important to you, we will be able to recommend a product that meets your needs.

You can take advantage of a number of products features that ensure that you leave an inheritance. For example, if you apply an ‘Inheritance Guarantee’ to your lifetime mortgage, you can protect a percentage of the eventual sale of your home from the outset, so it is available to you or your loved ones in the future.

Another option is to make regular or necessary payments, which will reduce the outstanding loan balance and help reduce the impact of interest roll-up.

“I’ll lose ownership and control of my home”

With Equity Release, if you stick to the terms and conditions of the loan, you will always retain ownership and control of your home. This means that you are still responsible for looking after the property.

Equity Release Mortgage Payment Graph 2

Making Payments

Here, we show the impact of making payments on the overall mortgage balance. The graph below shows three options, and the outstanding loan balance 15 years after the mortgage has been taken out:

  • The blue line. This illustrates a mortgage where no payments are made during the mortgage. The balance after 15 years is £141,721
  • The dark grey line. This illustrates a mortgage where all of the interest is paid off each month. The balance after 15 years is £75,000
  • The light grey line. This illustrates a mortgage where all of the interest and some of the capital is paid off each year. The balance after 15 years is £10,000
Equity Release Mortgage Payment Graph 1

To be able to compare the product options, we have applied a standardised monthly interest rate of 4.33% to each product.

Interest Roll-Up

Interest roll-up is where the interest on your loan is added to the mortgage balance each month, which increases the size of the total amount owed. You can see the impact of this in the graph above (the blue line)

Flexibility

One of the major changes to Equity Release has been the rise in flexible plans that give you greater freedom and control over how you unlock the wealth stored in your home, while you retain ownership of your home.

You can decide to withdraw the money from your home as a tax-free lump sum, or you can draw down smaller amounts from a reserve facility as and when you need it. Additionally, by choosing a plan with a cash reserve facility, you can withdraw more funds later if you wish to do so. And depending on your financial needs, you can decide whether making no repayments would work best for you, or whether you would prefer a repayment plan that helps reduce the impact of compound interest.

Reserve Facility

A reserve facility is a key part of dragdown lifetime mortgages, which are the most flexible and popular plans. When taking out a dragdown lifetime mortgage, you take an inital lump sump and keep the rest in a cash reserve facilty – essentially a pre-agreed pot of cash – ready for you to access when you need it. You’ll only pay interest on the cash when you’ve withdrawn it from the facility.

Certainty

If you want to reduce or remove the impact of interest rolling up, we offer a range of repayment mortgages. The amount you repay for these products is always fixed, giving you comfort to make plans accordingly.

You can also repay the full loan amount on your lifetime mortgage at any time. However, there may be an early repayment charge (ERC) if you want to repay money before the dates set out in your contract. Buy these ERCs are fixed too, so you know where you stand throughout the mortgage term. And depending on your circumstances, you may be eligible to an ERC waiver.

Why are customers using Equity Release?

People choose to use the cash they release from their property for a wide range of reasons, but here are some of the most popular uses:

To boost their finances

A growing number of people are choosing to clear their existing interest-only mortgage using the money they release. Others are using the cash to repay unsecured debts, such as credit cards or loans, or to top up their retirement income.

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Clear an outstanding mortgage

%

Top up day to day living

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Pay off unsecured debts

To enchance their retirement

More and more customers are choosing to use the cash to enjoy their retirement. Here are some of the ways:

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To make home improvement

%

To go on holiday

%

To buy a new car or caravan

To support their family and friends

Parents and grandparents are helping their loved ones, whether it’s to help them get on to the property ladder, go to uni, or pay for their care.

Figures source: Canada Life (2021)

 

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Support loved ones

Who’s involved?

There are a number of people involved in the process of getting a lifetime mortgage – from your friends and family to a range of professionals. Everyone has an important role to play in ensuring you choose the product that best meet your needs.

Friends and Family

We always recommend that you discuss your plans with your friends and family. They can be a great sounding board, as well as offering advice and support that will help you through the process.

Additionally, we know that 14% of people used the money they released to support family members last year – making lifetime mortgages very much a family matter.

The Financial Adviser

Releasing equity from your home is a big decision. So to make sure that you make the decision that is right for you.

We will help you decide if Equity Release is the right choice for your needs and circumstances, recommend the most suitable product and help you navigate through the process.

Lender’s Solicitors

The lender will work with a law firm that will do the conveyancing on behalf of the lender. A solicitor at the firm will make sure that the paperwork is complete and register your mortgage at Land Registry.

The Valuer

The valuer is appointed by the lender to determine the value of your property. The valuer will work for an independent company from the lender, so they are not biased in their valuation.

The valuer will arrange a visit to your property and complete a mortgage valuation, which they will then send to the lender.

The Lender

The lender is the company that will provide you with the mortgage.

Client’s Solicitors

To make sure you fully understand the implications of your decision to take out a lifetime mortgage, all members of the Equity Release Council require that you discuss it with your own solicitor before committing to a lifetime mortgage.

You will need to meet your solicitor face-to-face at least once during the process. Your solicitors will then liaise with the lender’s solicitors to sign off on all the paperwork and agree a completion date. When the mortgage deal finalised, your solicitor will also receive the money from the lender and will make arrangements to tranfser it to you.

What’s the process?

  1. Research

Before taking out an equity release product, it is important to research all of your options to make sure it’s the right choice for you.

2. Talk to your family

As a lifetime mortgage could affect your family, we encourage you to talk to them before making a decision.

3. Talk to your financial adviser

You must talk to a qualified financial adviser about the possibility of taking out a lifetime mortgage. If they decide that it’s right for you, they’ll provide you with a summary of the important details and costs involved – a ‘Key Facts Illustration’ document.

4. Fill out an application form

Once you’re happy, you’ll need to complete an application form, which your financial adviser will help you with.

5. Have your property valued

An independent valuer will then contact you to arrange a convenient time to visit your property to carry out a valuation. 

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6. Appoint your solicitor

You will need to choose which solicitor firm you want proceed with.

7. The lender will make you an offer

Following the valuation, the lender will confirm how much you can borrow, and send an Offer Letter to you, your solicitor and your financial adviser.

8. Legal Process

You should then talk to your solicitor about the offer, who will explain the terms and conditions of the contract. If you’re happy, you’ll be asked to sign a Mortgage Deed. Your solicitor will sign a certificate to confirm the essential features and implications of the plan have been explained to you.

9. Cash Released

Once the lender has received the correct documents and carried out the necessary checks, they will release the cash to your solicitor. 

Equity Release Mortgage Payment Graph 3

Safeguards

All of our lifetime mortgage products come with safeguards that give you the clarity and certainty needed for complete peace of mind.

We’re member of the Equity Release Council and adhere to their product standards.

We’re proud to be a member of the Equity Release Council, the industry body for the lifetime mortgage sector. All of our lifetime mortgages adhere to the Council’s Statement of Product Standards.

This includes a guarantee that the lifetime mortgage interest rate must be fixed or, if it’s a variable rate, there must be a ‘cap’ that is fixed for the life of the loan. The full list of protection measures can be found on the Equity Release Council website.

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No Negative Equity Guarantee

This guarantee is applied when your property is sold for a fair market price and as long as you have adhered to the terms and conditions of the mortgage. It means that when the property is sold, if the proceeds after solicitors’ and estate agents’ fees are not enough to pay the amount owed to the lender, they will not ask your beneficiaries to pay the shortfall. If your property is sold for more than the amount you’ve borrowed against it, the amount left over belongs to you or your beneficiaries.

No threat of repossession

Providing you keep to the terms and conditions of your loan you will be able to live in your home until your death or you move into long-term care. You don’t need to worry that your home will be repossessed due to the loan, including rolled-up interest, exceeding the value of the property.

Considerations

There are various reasons why people choose to tap into their property wealth. Some use the equity to top up their pensions, others to help pay off their mortgage.

Today, more people are using Equity Release to gift a lump sum to their children or grandchildren to help them get on the property ladder.

Whatever the reason, taking out a lifetime mortgage is a long-term commitment that you should consider carefully. You should consider the other options available to you, such as downsizing, paid work, or using any savings you have.

And before you apply for Equity Release, we suggest you talk to you family about getting a lifetime mortgage. Your tax position, eligibility for means-tested state benefits, and the amount of inheritance your friends and family receive are all subject to change. Getting all the relevant people together will make it less likely that you’ll have to have difficult conversation later down the line.

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Additionally, lifetime mortgages come with a number of features and benefits , but we can discuss how these products will meet your needs and circumstances. As with any financial product, there are risks as well as benefits.

Benefits

  • You still own your home, and you can stay in your home for the rest of your life
  • The money you release is tax free
  • You’ll never owe more than the value of your home, because our products come with the ‘No Negative Equity Guarantee’

Risks

  • Your entitlement to state benefits and grants might be affected by taking out a lifetime mortgage
  • A lifetime mortgage could work out more expensive than selling your home in the long run
  • The size of the estate will be reduced
  • Taking out a lifetime mortgage is a significant decision, it’s not for short-term financial needs

More Information

If you would more information, or to speak to one of, feel free to contact us via phone, email, social media, or even face-to-face. We will answer any questions that you may have. You can find all of our details on our contact page.

Nigel-Dolphin-Dolphin-Financial-Limited

Nigel Dolphin

Principal Director

Tel – 01928 761001

Email – nigel@dolphinfinancialltd.co.uk

Equity released from your home will be secured against it. Equity release will reduce the value of your estate and may effect your entitlement to means-tested benefits. Equity release is available from the age of 55. Your home may be repossessed if you do not keep up with the mortgage repayments