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Do you know what equity release means?

23/03/2022 |  min read

Making any kind of financial decision can be daunting, but with Responsible Equity Release you can be sure that you are always getting the right advice and support throughout every step of your journey.

We have compiled a list of some of the key terms that might pop up throughout your enquiry so that you feel fully informed when it comes to your Lifetime Mortgage:

Equity

The equity that you have in your home is the value of your property, minus any loans secured against it. For most homeowners, this will be any outstanding mortgage amount.

For example, if your home was worth £200,000 with a £50,000 mortgage secured against it, you would hold £150,000 equity.

Lifetime Mortgage

A Lifetime Mortgage is the most popular type of equity release plan and allows you to borrow a tax-free cash lump sum secured against the value of your home. With a Lifetime Mortgage you are guaranteed to retain ownership of your home and, as the loan is designed to run for your lifetime, there are no required repayments.

The loan balance plus accrued interest is repaid when the last homeowner has either passed away or moved into long-term care, usually when your home is sold.

Drawdown

A drawdown Lifetime Mortgage is a type of Lifetime Mortgage that gives you the opportunity to access some of the equity available to you at a later date.

With a drawdown Lifetime Mortgage, you receive an initial and smaller lump sum with the rest of the amount that you are eligible to borrow placed into a reserve that you can draw upon in the future. Interest is paid on the cash that you release, with the interest rate being fixed at the point at which you decide to release and use the funds in your reserve.

If you have multiple financial goals in mind, or perhaps varying timescales for when you want to achieve your goals by, a drawdown facility could provide the necessary flexibility.

Home reversion plan

A home reversion plan is a form of equity release whereby you sell a portion of your home to a provider in exchange for a tax-free cash sum. You lose complete ownership of your home but are then permitted to remain living there rent-free. This means that the amount of cash you receive is usually below market rate.

Home reversion plans account for a very small proportion of the equity release market and Responsible Equity Release do not advise on this product due to their lack of value and customer protection.

Equity Release Council

The Equity Release Council (ERC) is the voluntary trade body that aims to ensure honesty and transparency across the equity release industry. Through various customer-focused safeguards, the ERC hold their members to required standards that put customer needs and safety first when it comes to a Lifetime Mortgage. These safeguards include:

  • A no-negative-equity guarantee, which means that you will never end up owing more than the value of your home.
  • An interest rate that is either fixed for life or capped at an upper limit for the duration of the loan.
  • The right to move home, providing that the new property meets the existing security criteria of the Lifetime Mortgage.
  • The guaranteed right to remain in your home for life or until you enter long-term care.

Responsible Equity Release will only advise on Lifetime Mortgages from lenders that are members of the Equity Release Council, so you can be sure that you will benefit from these safeguards when you choose us to help you release equity.

No-negative-equity guarantee

A no-negative-equity guarantee is one of the safeguards imposed by the Equity Release Council.

Based on current interest rates, it is unlikely that you will ever owe more than the value of your home. However, to ensure you never pass on Lifetime Mortgage debt to loved ones you will be covered by a no-negative-equity guarantee.

If your Lifetime Mortgage ever exceeded the value of your home, this guarantee means that your lender would absorb any excess.

Portability

Portability is one of the customer-focused guarantees imposed by the Equity Release Council. It means that you have the right to move home again as long as your new property meets the lending criteria of your lender.

Ringfencing

Many people are concerned that releasing equity will prevent them from being able to leave an inheritance to loved ones.

However, it is untrue that you cannot guarantee an inheritance and release equity. Ringfencing is when you protect a certain amount of the value of your home which you can then give to your nearest and dearest when you pass away.

The ability to ring-fence a proportion of your home’s value is often called an inheritance protection guarantee and is something offered by most lenders, but a fully qualified adviser will be able to explain this option to you in more detail.

Early repayment charges

Early repayment charges are charges that you may be liable for if you choose to repay some of your loan during your lifetime.

A Lifetime Mortgage will reduce the value of your estate and may affect your entitlement to means-tested benefits. Many people choose to make early repayments to help reduce the impact a Lifetime Mortgage will have on the value of their estate.

The potential cost of Early Repayment Charges will always be outlined in the personal illustration provided by your adviser, and this is important to consider when deciding whether you would like to make voluntary repayments. They will be able to talk you through the options available, including products with fixed and defined early repayment charges.

Financial Conduct Authority

The Financial Conduct Authority (FCA) is the body responsible for regulating the equity release industry.

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