Equity release allows you to live your life to the full, while remaining living in your family home. In recent years there has been a huge growth in innovative equity release products, at low interest rates and with bargains to be had. It can be organised quickly and efficiently too, in around six weeks from initial consultation. But there are restrictions, and some potential clients have concerns about losing their home. So what do you need to know?
Property Guides and our partner Your Overseas Home recently organised a webinar with Responsible Life, one of the best known companies in the market. You can view the whole webinar here, but we have written out the answers, so you can read them at your leisure.
We spoke to Matthew Jefferies from Responsible Equity Release. Matthew has 12 years’ experience within financial services, working for both brokers and lenders. His role at Responsible Life is to inform and educate businesses and customers around the benefits of lifetime mortgages and helping you to navigate this complex marketplace.
Who are Responsible Equity Release?
Responsible Equity Release – part of Responsible Life Group – focuses on lifetime mortgages. We are one of the biggest brokerages within the UK, with about 81 advisers delivering face-to-face advice across the UK (although via media platforms such as Zoom at the moment).
Our goal is to give as much information to customers to allow them to make an informed choice. So there’s no sales culture in Responsible Equity Release. None of our guys are targeted on sales. We provide the relevant information and allow customer to make an informed decision.
Having no sales targets really means that we breed the right behaviours within our business and given the fact that we deal with vulnerable customers, we know this is the right route to go down.
We’re relatively new, set up in 2010 and based in Plymouth. We follow the format of many other financial services organisations: an initial fact-find followed by a presentation.
We are part of the Equity Release Council, which has strict rules on how we operate.
How does equity release work?
We meet the customer initially to gather information. Then we go away and do our research, making a recommendation at the second meeting. During every step of the way, customers are under no obligation to sign up to any kind of form of mortgage and there are no fees paid at this stage.
How much we can lend is down to a combination of factors. It’s not that different to what we call a mainstream residential mortgage. The property is used as security against the loan itself.
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How much you can borrow depends on the value of your property, the age of the client, the chosen plan and health and lifestyle. So in this situation, the older the customer, the more they can potentially borrow.
Health and lifestyle also impact the amount that can be borrowed. Typically, if there are any health impairments, such as diabetes or Parkinson’s as examples, it potentially allows the lender to lend significantly more than someone who is in perfect health.
Any money released through an equity release plan is tax-free
Money can be paid out as a one-off tax-free lump sum. Any money released through an equity release plan is tax-free. Alternatively, and this is probably the most popular plan, is a drawdown plan. You take an initial tax-free lump sum upfront and then drawdown amounts between £2,000 and £5,000 at regular intervals.
We find that’s the most popular plan. The interest on these plans doesn’t roll up on a particularly fast rate if you go for that option.
Interest is charged on the amount you release. From day one, you’ll receive an interest rate and that rate will be fixed for life. So unlike mainstream mortgages where they’re usually fixed for around two to five years, or they might track some sort of base rate, lifetime mortgages are fixed for life.
You’ll know exactly how much you’re going to pay over the period and you can work out exactly what it’s going to cost you.
The property remains your own and interest will continue to build up over time. However, you won’t need to make any repayments on that.
You won’t need to make repayments and the interest rate is fixed for life.
That’s another key differentiator; you won’t need to make repayments and, as I said, the interest rate is fixed for life. You can make repayments if you want but that’s not a necessity; you don’t have to do that.
In terms of redemption, a mainstream mortgage will normally be redeemed after a set period, maybe 25 years or 30 years. In the case of equity release, redemption is on death of the last homeowner on the deeds. Or alternatively when the last homeowner enters long term residential care. In those situations, the property would need to be sold and any interest owing, plus the original capital, paid back to the lender. They’re the only two situations where the lender would insist on repayment of the loan itself.
What are the eligibility criteria?
The minimum age is 55 and we wouldn’t lend to anyone below 55. There is no maximum age.
The next criterion is a really key one if the purpose of equity release in to purchase an overseas home. The minimum annual occupancy is 183 days (six months). So your UK home needs to be your main residence, and the way lenders determine that will be the fact that you reside at that property for 183 days annually.
The minimum property value needs to be £70,000 and the minimum initial advance needs to be £10,000.
So if you go for one of those drawdown plans where you take an initial amount upfront and then a subsequent amount drawn down at regular intervals that the client would choose, the minimum initial advance would be £10,000.
There is usually no maximum valuation and there’s no maximum advance. Some lenders will cap their maximum lending criteria, but if you were looking to release a substantial amount over and above that cap, it simply means that it’ll have to go to their underwriting team and they’ll make an assessment of the risk at that point and then release any money subject to the underwriting itself.
Can I do a short term equity release to cover the purchase until I sell my current property?
Good question; we get asked this quite a lot! What we’re talking about there is a little bit like a bridging loan. The short answer to this is no.
The longer answer is that technically you can do it, but we would strongly advise against it on the basis that all equity release plans have built into them what we call early repayment charges. These are usually a set percentage of the loan amount, which reduce over a period of time.
It’s usually on a ten-year basis, so in year one you’ll pay the maximum early repayment charge and then as you progress towards year ten, the percentage payable will reduce. In year ten or the end of year ten, no early repayment charge will apply.
So the penalty that you’d pay for redemption of the equity release plan would be the absolute maximum and as a responsible lender and broker, it’s not something we’re probably willing to go ahead with. We’d probably recommend that alternative forms of finance are sought in that situation.
Can I borrow the full amount of my property value when I release equity or is there a maximum percentage of my property value?
It depends on two factors; the property value and the age of the client. If you’re, say, around about 60/65 years old, it’s likely that the loan to value (LTV) that you can qualify for is anything between maybe 30-33%. So on that basis, we can lend against that property 33% of its value.
The younger you are the lower the LTV.
What happens if I want to downsize my UK property and therefore go to a property with a lower value? Then my LTV reduces…
You’ve raised a really good point. A lot of the plans have what we call ‘downsizing protection’ built into them. It allows you to downsize but the LTV will shift up. The new property will also be subject to lending criteria: what’s the value of the property and is the property acceptable in terms of its construction?
Lenders will consider it but it needs to match their lending criteria at that point. If the loan-to-value is shifted up to the point where it falls outside of eligibility criteria, higher than they’d be willing to lend, then potentially a partial repayment will be due, just to bring that LTV back down in line with current lending requirements.
If you’re downsizing and looking to release equity from the property, or just downsizing because you don’t need to live in that size property anymore, then a proportion of those funds would likely need to be used to make a partial repayment. Or if you’re lucky enough to have that cash readily available, then it really needs to be used to bring that loan back in line with the lender’s criteria.
How long generally would it take from first meeting to getting the money?
It’s roughly six weeks. We’re actually completing them quicker now. From initial first appointments through to receiving the funds from the lender into the customer’s bank account, I’d say six weeks.
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Suppose I already live overseas and want to release equity to move to the UK; do you work in any other countries?
The main residence has to be in the UK. What the client does with the money is entirely up to them, within reason. We wouldn’t recommend that equity release is the correct route to follow to invest in the stock market, for example. There are checks and balances in place for what you use the monies for, but in terms of purchasing property overseas, there aren’t really any restrictions around where they want to do that.
Can you explain a little more about the living arrangements and how much time you have to spend in the UK?
When you look at the T&Cs outlined by lenders, 183 days is the standard across the industry. When that number of days is reached we see that as your main residence. It doesn’t have to be consecutive. So it could be three months there and then another three months further down the line. How that’s monitored, I guess, is a different story.
What happens if I already have a mortgage on my UK property?
Lenders will only accept first charge on the property, so if there’s already a mortgage on there, then that mortgage needs to go. This happens a lot of the time. What you do is use the equity release plan to clear the existing mortgage, then you use any monies left over to purchase your overseas property.
To sum up, it’s an extremely dynamic market, a very competitive market at the moment and it’s a great time for customers, in terms of rates and also product features. Innovation has really driven down rates and the competition within the market space has ensured that customers are really getting the best possible deal out there with this particular financial product.
Is there a cost to the mortgage added onto the loan, like with a traditional mortgage?
In terms of costs, there’s an initial advice fee on application of £1,490. That’s what we call the advice fee and the client’s got a couple of options in terms of paying that. They can pay that upfront or they can incorporate it into the lifetime mortgage itself.
Obviously interest will then be payable on that fee if you’re building it into the lifetime mortgage so it’s probably more of an expensive option. But it is also probably the most common option.
In addition to the advice fee, all individuals who take out an equity release mortgage plan need to seek independent legal advice and there’s also a valuation.
The lender will need to value the property itself. Depending on which lender you go with, sometimes they’ll offer free valuations, but many won’t. How much that valuation costs depends on the lenders and on the value of the property itself. Usually the higher the value of the property, the higher the valuation cost will be.
In terms of legal costs, all customers need independent legal advice and fee for that can be anything from around £250 to £300.
What kind of interest rate might we pay?
The equity release market is one of the fastest growing markets within financial services. That’s brought a lot of innovation and competition and means that rates are at all-time lows. We’ve got rates which are comparable to mainstream mortgage rates of around 2.4 to 2.5%. That’s probably our lowest rate but you could go up to nearly 6% for younger customers.
So usually the younger you are and the higher the LTV, the higher the rate that you’re going to pay and the older you are and the lower the LTV, the less you’ll pay. Broadly speaking, I think average rates is probably a better way of answering this, around about 3.2% and that’s come down around 1% year on year. So we’re in a really competitive space and customers are actually probably getting some of the best deals that we’ve ever seen within the marketplace.
Has coronavirus had an impact on rates or on availability of the product?
We also get asked this a lot! From mid-March up until the end of April we saw significant movement in what lenders were willing to lend against. Most restricted their loan-to-value; the amount they were willing to lend people. It was really a precaution to limit the potential risk to them as a business. So the amount customers could borrow was less than they could borrow pre-Covid.
Our governing body, the Equity Release Council, insists on face-to-face legal advice, which was a hurdle for us, as was the fact that a lot of lenders insist on physical valuations of the property.
But we’re in a good position now. We can now deliver advice via Zoom or various other platforms and do ‘desktop’ or ‘drive-by’ valuations of properties.
We’re also now seeing lenders relax their restrictions around loan-to-values.
So to cut a long story short, we’re as close to business as usual as we possibly can be.