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Archive for February, 2011

Equity Release Schemes – Do The Sums Actually Add Up?

Wednesday, February 16th, 2011

The main concern of equity release schemes is the reduced inheritance which is passed down to beneficiaries. Here we discuss the pro’s & con’s of roll-up equity release plans.

 

First, let’s look at the effect on the beneficiaries & the source of the causes for concern. This then leads us to the equity release calculator with facts & figures showing how these schemes fair for the beneficiaries on final redemption of the plan.

 

Ok, we’ve have all heard the saying; bad news travels faster than good news & this is synonymous with terminology ‘equity release’.

Although equity release plans were initiated in 1965, the news damaging these schemes generally dates back to the late 1980’s when the first home income plans were launched.

Linked to an annuities or regular income investment bonds & an interest only mortgage, plans such as these were destined to fail, relying heavily on investment performance in a period of falling property values & rapidly rising interest rates.

 

The mid 90’s then introduced the much derided & chastened Shared Appreciation Mortgages (SAM’s), the focus of most causes for campaigns against equity release including Trevor MacDonald’s Tonight TV programme.

Therefore, its no wonder the industries reputation was soured.

 

So what has the equity release industry done about repairing this negative sentiment?

At the time of the SAM’s debacle, SHIP (Safe Home Income Plans) was launched. Formed from its originators – Ecclesiastical Life, Hodge Equity Release, Home & Capital Trust & GE Life all members agreed to abide by a strict code of conduct, which still exists today.

Soon new lenders entered the equity release market, with household names such as Norwich Union & Northern Rock with their newly developed roll-up equity release schemes bringing a significant boost & trust to the industry.

Although equity release schemes began to blossom around 2003 with approximately 25,000 equity release loans completed, a lack of regulation still overshadowed the equity release sector. The market was still somewhat bighted by the previous misdemeanours.

 

Thankfully, partial regulation was soon imposed on the equity release industry with lifetime mortgages coming under the auspices of the Financial Services Authority on 31st October 2004. Home reversions soon joined lifetime mortgage schemes & by 2007 full regulation & confidence was brought back to the equity release marketplace.

Therefore, the market has evolved & strived to restore pride; a far cry from the negative perceptions of decades ago.

 

So what does this all mean for today’s beneficiaries?

The main ‘clean up act’ came with the introduction of SHIP & its rules imposed on the members. The ‘no negative equity guarantee’ affords the greatest level of protection the industry has to offer.

Safe in the knowledge that any amount borrowed by their parents can never escalate to more than the eventual sale price of the property, they are at least guaranteed no debt can be passed onto themselves.

A crumb of comfort maybe, but certainly peace of mind for parents.

 

As an equity release adviser, encouragement must always be shown to involve the heirs to the estate. With their input & assurance, feelings can then be vented either for or against equity release being taken as for many this is a major financial proposition.

Again qualified advisers should play an important role in explaining the pro’s & con’s of equity release mortgages & convey these issues to all parties concerned.

 

What else does the equity release sector afford by way of protection?

Interest rates for home equity release schemes, albeit not the lowest ever, are still historically low. One positive feature of these schemes is the lifetime fixed rate on all equity release loans now.

 

So what is the benefit of this?

If you borrowed an amount of capital, with a fixed interest rate for life it enables you to calculate the exact future balance.

This is building further reassurance for potential equity release applicants.

We know the equity release balance escalates over the lifetime of the scheme; this is the nature of plans & should never be entered into unless this has been clearly explained. The effect of the interest compounding annually, approximately doubles the balance every 10-11 years, depending on interest rate charged by the equity release companies.

 

Sounds daunting? Well, let’s now look at the sums as promised earlier:

One of the lowest interest rates around at present would be the Aviva Lifetime Lump Sum scheme, which  currently has a fixed interest rate of 6.65% (6.9% APR) annual.

 

A male, aged 65 borrowing a lump sum of £25,000 on the 6.65% Aviva Lifestyle lump sum would know exactly what the future balance will be, even before taking out the equity release scheme. The Key Facts Illustration provided by the equity release adviser will confirm these figures & also the costs & additional features involved.

For instance, based on a release of £25,000 in this scenario would lead to a balance in 10 years of £47,594 & after 20 years would be £90,606.

This may seem expensive given only £25,000 was borrowed initially; however there are two factors that could still rule in the equity releases favour.
One common issue overlooked is the potential for property prices to increase. If so, & with 100% ownership of the house still retained the homeowner will fully benefit from any future escalation in the house price. This will then offset some of the compounding effect of the interest & mitigate its effect on the overall estate. Again, we are looking longer term & no guarantee can be given prices will go up; nevertheless historical data confirms they still have.

As a consequence, a rule of thumb is never to borrow anymore than required beyond the initial 12 months. Plans are now flexible enough with drawdown schemes being available that funds can even be drip fed over time as & when required.

Hence, by taking a lower initial amount would result in less interest being charged, meaning more inheritance passed to the beneficiaries.

 

 

The second factor affecting the balance accruing & is the main cause of equity release roll-up is purely down the fact that NO monthly payments are required. This helps retirees to have access to the equity tied up in their property & at the same time leave their budget unaffected.

Nevertheless, equity release schemes do have an increasing role in retirement planning for the over 55’s. Care must always be taken & never rushed into without discussion & involvement of third parties.

Advice should always be provided by an industry qualified equity release consultant. If so, & in the right circumstances equity release can provide a comfortable & enjoyable retirement.

 

Finally, hopefully lessons have been learned from the past & the industry can move forward, innovate & develop further over time.

 

To discuss any of these issues & with no obligation whatsoever, please contact the Equity Release Supermarket team on 0800 678 5159 or email mark@equityrelease supermarket.co.uk

 

New Equity Release Scheme Launches To Help Landlords in the Buy to Let Mortgage Market

Friday, February 11th, 2011

The resurgence of the equity release market gathers momentum in 2011 with the news that New Life Mortgages are set to re-introduce their landlord & second home equity release schemes on 11th February 2011.

Following the additions of more2life & New Life Mortgages to the equity release market late in 2010, the latest launch from the innovative lifetime mortgage lender signals a degree of diversity to their portfolio.

New Life Mortgages temporarily withdrew from equity release market in 2009. They obviously haven’t been sat idle, but instead waited for their opportunity to re-enter at the right time & with the right products.

Following on from my previous article on New Life Mortgages rejoining the equity release market in November 2010, here we discuss the features & benefits to landlords of this unique equity release plan.

 

How does the scheme work?

The New Life Mortgages Landlord Loan provides a tax free cash lump sum based on a percentage of the value of the residential investment property & the age of the applicant. Plans start at age 55 & any landlord with a portfolio of upto 5 rental properties can potentially release some of the equity tied up within them.

This buy to let equity release has no set repayment date & no monthly repayments to make. The loan is eventually repayable on the sale of the property when the last surviving borrower has died or gone into care.

 

How do I qualify?

  • Minimum age of 55 (for joint applicants minimum age 55 of the youngest)
  • Investment property must be in England & Wales
  • Landlord loan minimum property valuation  of £100,000 & a maximum of £1million
  • Minimum release is £25,000 & maximum is £500,000
  • The property should be standard construction with flats over 5 storeys excluded
  • If leasehold property, then 80 years must be remaining on the lease
  • Any existing mortgage must be repaid on commencement of the Landlord scheme

 

How Much Can I Borrow?

This is determined by the age of the youngest applicant & the value of the investment properties:-

Age 55 –  16%
Age 60 –  21%
Age 65 –  26%
Age 70 –  31%
Age 75 –  36%
Age 80 –  41%
Age 85+ – 45%

 

Therefore, as an example a 65 year old landlord with a single investment property of £200,000 could potentially release a capital lump sum of £52,000.

 

How does it compare to a normal equity release scheme?

The scheme in principle works exactly the same. You borrow the money, the interest accrues on a monthly basis & it is repaid when the property is finally sold.

The differences lie in the rental side; an assured shorthold tenancy agreement must be in place to qualify & cannot be let to family members.

Also, there are maximum borrowing criteria, similar to a buy to let mortgage. This states that the monthly interest charged cannot be more than the rental income received.

 

What are the costs involved?

  • Valuation fee dependent upon the value of the investment property
  • Application fee which can be added to the loan
  • Solicitors legal fees
  • Lifetime fixed monthly interest rates of 6.39% (age 55-80) & 6.55% (age 81+)
  • Early repayment charges only 5% for the first 5 years. No charges thereafter.
  • Any advice fee charged by your equity release specialist

 

Practical uses of the New Life Landlord buy to let mortgage?

The equity release funds can be utilised in many ways.

With market opportunities growing in the rental market as house prices fall & yields increase, bargains are there to be had.  Should any residential landlord wish to expand their portfolio & have concerns over the expense of buy to let mortgages they can consider schemes such as this.

Should a potential landlord spot a new investment opportunity, but has limited capital for deposit, then landlord equity release schemes could assist. The borrower could review all properties under his portfolio & by using an equity release calculator; assess how much could be released individually to meet the shortfall required.

Additionally, with the age group eligible for this buy to let mortgage there could be tax implications. Therefore, should some of these assets need to be disposed of, rather than selling the property & incurring capital gains tax, then equity release can be undertaken instead.

Finally & the most common purpose for this could be for debt consolidation purposes. Should financial difficulties arise on a buy to let mortgage or other personal finances, then subject to the amount that can be released, these debts can be repaid.

 

Perhaps one has just had enough repaying a buy to let mortgage & would rather receive the gross rental income to support their retirement?

The uses of the New Life Landlord scheme can be many; so to discuss how the features of this unique buy to let lifetime mortgage can benefit you contact the Equity Release Supermarket team on 0800 678 5159 or email mark@equityreleasesupermarket.co.uk

 

Two Reasons Why You Should Consider Purchasing Equity Release Schemes

Monday, February 7th, 2011

Not many people are aware of the benefits of purchasing an equity release scheme. An equity release scheme is a type of loan scheme which allows you to receive a sum of money without having to make monthly repayments. This amount of money can be ascertained by the use of an equity release calculator.

 

Here are some reasons why you should consider a home equity release scheme:

Back-up for your retirement

Everyone plans to relax and enjoy their retirement years. After all it is the longest holiday of your life!

However, this is possible only when you have a steady flow of income and many pension schemes have been unreliable in both performance & trust.

On the other hand, an equity release mortgage allows you to release money according to both your age & the value of your home. This amount can then be used for your retirement period to assist with any expenditures that are incurred in retirement; whether it is a new car, holiday, home improvements or debt consolidation.

You can also receive money on a monthly basis with equity release schemes. Equally, you could opt for the more popular lump sum.

 

Debt Consolidation

Equity release schemes can allow you to take a percentage of the total value of your home in order to repay credit card, mortgage or any other form of debt. An equity release mortgage will enable you to clear the debts which in turn will alleviate your finances & provide surplus monthly income with which retirement can be made all that much easier financially.

 

Consider these options and take advantage of an equity release scheme to take care of your retirement worries.

A free initial consultation is available with any of Equity Release Supermarket’s experienced & friendly advisers.

 

Call today on 0800 678 5159 or email mark@equityreleasesupermarket.co.uk

 

 
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