Posts Tagged ‘No Negative Equity Guarantee’
Sunday, January 25th, 2015
Having been advising on Equity Release since the halcyon days of Norwich Union, I have seen a continual, albeit gradual decrease in the level of equity release interest rates. The latest news has it that Aviva will be aggressively reducing their interest rates today – Monday 26th January 2015 to an unprecedented lowest rate ever, starting from just 5.13%!
So what are the factors behind this interest rate drop, given the rest of the equity release companies trail so far behind Aviva in competitiveness?
History of Equity Release Interest Rates
Equity release interest rates historically don’t tend to move that regularly, or by very much. It tends to be market forces that dictate how competitively they wish to be & where they wish to be positioned in the market. Going back the early days of equity release schemes, particularly plans from Northern Rock (now Papilio) and Norwich Union (now Aviva), their early interest rates were in excess of 8%. However, comparatively mainstream mortgage rates were also higher at that time and therefore equity release plans were not considered as expensive as they look today.
Time to Consider Interest Rate Diversification?
However, the difference between mainstream mortgage rates and equity release interest rates is the fact that equity release schemes historically have a fixed interest rate for life. Residential mortgages don’t & therefore can be re-appraised frequently which enables the best interest rate to be achieved each time.
Perhaps it’s time that equity release providers took time to consider this fixed lifetime interest rate offering? Afterall, the reason that traditional equity release schemes have a fixed rate is to act as a safety net due to the compounding effect of interest as no payments are normally necessary, or permitted. This also aides the protection of their insurance policy, which is the ‘no negative equity guarantee’.
How Can Equity Release Lenders Reduce Interest Rates Further?
New Voluntary Repayment Plans from the likes of Aviva, Stonehaven & Hodge Lifetime accept repayments of upto 10%pa with NO penalty and therefore if managed correctly cancel out the potential compounding effect of interest. Therefore, would it not make sense for these lifetime mortgage lenders to offer a reviewable interest rate every so many years? A reviewable interest rate could have a bearing on the nature of early repayment charges where so many equity release companies use the unpredictable nature of government gilts as their barometer. Retirees are looking for greater flexibility these days and a change in structure could certainly assist.
Catering to the New Silver Surfer Generation
More retirees are becoming financially savvy, particularly those arriving at retirement still owning interest only mortgages. This crop of mortgagors have experienced the variances in interest rates & the different types of rates available during their mortgage years. For instance, is it not time for a standard variable equity release interest rate, or a tracker equity release interest rate? Why not, if the interest or upto 10% of the original capital is to be repaid each year, then why is it necessary to have a lifetime fixed interest rate?
If the equity release market is set to expand it needs further innovation & development of its equity release schemes. Therefore, should the forecast for future interest rates be historically low, then it would make sense to consider the options of tracker, discounted or variable interest rates. Perhaps the future of the no negative equity guarantee can be questionable given this has an effect of increasing the interest rate by upto 0.5%?
Why not have the option of choosing whether to include the no negative equity guarantee, or not. With that would come the choice of two representative interest rates; one including the guarantee & a lower interest rate without it. These options could all help to reduce the future interest rates of equity release plans & help the market move forward & expand.
A strong case in question for the optional inclusion of the no negative equity guarantee would be where retirees are committed to making repayments & managing the future balance of their lifetime mortgage scheme. Clearly advice of the consequences of not including this guarantee should always be provided, but we shouldn’t be treating the majority of equity release consumers with kid gloves. Equity releasers can themselves make informed decisions based on the facts & advice provided. As long as the adviser is giving quality impartial equity release advice then why can’t the industry open up & start becoming more diverse in its thought process & product innovation!
New Aviva Flexible Lifetime Mortgage Interest Rate
As stated earlier Aviva are to significantly reduce their minimum interest rate on their Flexible Lifetime Mortgage Plan. Equity Release Supermarket is able to obtain a lower interest rate than mainstream equity release advisers. This is set to continue from 26th January 2015 with the reduction in the minimum interest rate as calculated by the Aviva flex tool calculation. The lowest equity release interest rate with Aviva is determined by personal criteria, such as age, property value & also health.
Consider the following equity release scenario: –
Mr & Mrs Chambers are aged 67 & 64 respectively & own a property valued at £250,000 which is unencumbered. Unfortunately, Mrs Chambers had cancer last year and they now realised how important it is for them to enjoy their retirement. They wish to go on a cruise, carry out home improvements and release approximately £30,000 with access to a future cash reserve facility.
After conducting research with Equity Release Supermarket they were recommended the Aviva Flexi Plan with an interest rate of just 5.13%pa (5.33% representative APR). This recommendation was borrowing £30,000 & having a further cash reserve facility of £33,000 for possible future use.
Aviva’s Lowest Ever Equity Release Interest Rate To-Date
This 5.13% enhanced lifetime mortgage rate is the lowest ever equity release interest rate that any home equity release company has made available in the history of equity release & presents many opportunities for retirees to consider their future finances: –
- Those people with interest only mortgages – where lenders are demanding repayment as the end term has been reached & they are not prepared to extend can benefit from these interest rate reductions. By switching onto the Aviva Flexi Lifetime Mortgage Plan they could consolidate onto a mortgage for life, at a low fixed interest rate, thus enabling them to budget accordingly knowing the interest to be charged in the future.
- Existing equity release customers – who are on interest rates that are over 6%pa should consider whether to remain with their existing lender or switch equity release plans. By taking a lower interest rate would mean less interest charged & hence either a lower future balance, or less interest payments to maintain control over the balance. There are factors to consider such as potential early repayment charges & set up costs, however this is a calculation your Equity Release Supermarket adviser can arrange & analyse for you.
- Anyone over the age of 55 – who has been contemplating taking a release of equity, but maybe waiting for the optimum interest rate or occasion to apply for it. With the various lifetime mortgage schemes available now including interest only, drawdown & voluntary repayment schemes, the equity release market has never been so competitive.
So why have Aviva aggressively reduced their interest rates?
Word has it there are new lenders set to enter the equity release marketplace. With new names entering the market such as L&G and Santander, plus More2life have new funding available, Aviva are sure to find new competitors in their space. Perhaps they are trying to gather as much momentum & market share as possible now before they come under pressure?
We have already seen unprecedented movements in equity release interest rates so early in 2015. More2life’s Enhanced Lifetime Mortgage & Interest Choice plans have seen rate reductions, followed by Stonehaven’s Interest Select range in response to keep their market position above More2life. Whatever equity release 2015 has to hold its going to be exciting time and one for any future lifetime mortgage customer can benefit from with the lowest equity release interest rates ever seen.
Should you wish to request an Aviva Flexible Lifetime Mortgage quote & find out how low your equity release interest rate could go, please contact Mark Gregory on Freephone 0800 783 9652 or email me at email@example.com
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Saturday, July 5th, 2014
It has recently come to my attention, having watched my own daughter attempt to buy her 1st property, how difficult it has become for 1st time buyers to fulfil their dreams of becoming a homeowner.
It also occurred to me that EQUITY RELEASE could in fact play a significant role in assisting the “Bank of Mum and Dad” and others in providing funds to enable these dreams to come true.
First some FACTS:
- The average age for 1st time buyers is now 29
- 2/3rds of 1st time buyers now turn to the Bank of Mum and Dad (BoMAD) for help
- 30 years ago 12% of income was needed for a deposit on a property. Today this is staggering 82%!
- The cost of an average house in the UK is 10 times bigger than the average salary rising to 14 times in London
- In all but 2 regions in the UK, prices are 7 or more times the average salary for that area (Office of National Statistics)
- More than 3.3 million 20-34 year olds were still living with their parents in 2013
Although these figures clearly indicate it is becoming almost impossible for 1st time buyers to get on the property ladder, help could be at hand – YES, from the “Bank of Mum and Dad”
Parents are an obvious first point of call. However with rising living costs, low interest rates and diminishing savings pots, it has become increasingly more difficult for mum and dad to find surplus funds to gift to their children, grandchildren or loved ones, to assist in fulfilling the dream of property ownership.
However, there could be a way to take an early inheritance from parents now in order to benefit 1st time buyers when the money is needed the most!
A special type of retirement mortgage commonly known as Equity Release could potentially unlock cash tied up in a parent’s property. This can enable mum & dad to generate sufficient funds to gift as a deposit on a property purchase for their loved ones.
What is equity release?
Equity release schemes are available in two formats – home reversion & the more popular lifetime mortgage. Both of these equity release schemes enable people who own their main residence to release a percentage of its value in return for a tax-free cash lump sum. These two types of equity release mortgages then run for the rest of your life & only repaid once upon death or moving into long term care.
The equity release scheme known as a lifetime mortgage has proven the most popular due to its flexibility. This has been strengthened this year with providers such as Hodge Lifetime & Aviva both providing an option to repay upto 10% of the original capital borrowed each year. Therefore, control over its final balance, or even repayment of the whole scheme over the longer term could represent a serious possibility, for either parents to pay, or the children themselves!
Lifetime mortgages are available to those aged 55+, with a minimum property value of £60,000. The amount that can be borrowed is not always based on affordability, but on factors such as age & property value. Effectively, the older you are, the greater amount of equity you can release.
Following a release of the equity, the lifetime mortgage company places a first legal charge on the property. This is exactly the same as any conventional mortgage and 100% legal ownership is still retained by the client providing peace of mind.
Typically, someone age 60 could release equity of between 18-25.5% of the value of the property, dependent on the lender concerned. These equity release funds can be spent on anything you like, however a sensible & cautious approach is always advised. Therefore, parents looking to assist their children onto the property ladder, a lifetime mortgage could prove an effective mortgage vehicle to achieve this goal.
Which equity release schemes can help 1st time buyers?
Equity release schemes have become a lot more flexible and innovative these days. You can choose to make NO repayments and have the interest added to the loan which is known as a roll-up lifetime mortgage. The amount borrowed plus any interest accrued is repaid upon sale of the property. This would happen on death (last death if joint plan) or having to go into long term permanent care. Thought must be given here should there be more than one beneficiary. With an increasing balance & possibly reducing net equity figure, consideration must be afforded to any remaining beneficiaries as to what they may potentially receive at the end of the day?
However, there are new repayment versions of equity release schemes that have proven even more popular with parents looking to securely gift money to their children to help with a property purchase.
Interest only lifetime mortgages from Stonehaven & more2life will allow the repayment of just the interest only element. By repaying interest charged each month prevents the loan from increasing and thus remains level for the rest of the mortgagor’s life. This is a great idea when there is more than one child involved. The problem has always been how to separate the gift now, from the overall inheritance at the end of the day if more than one child is involved?
The solution is having an interest only lifetime mortgage. By knowing in advance what the balance will be, this loan amount can be deducted from that child’s share of the inheritance at the end of the day. This would be even fairer for the other siblings, should that child also pay the monthly premiums on behalf of the Bank of Mum & Dad!
NEW -Voluntary partial repayment plans
Equity Release Supermarket now has access to specialist equity release schemes where there is the option to repay up to 10% of the original capital released each year without any early repayment charges. These equity release schemes through Aviva & Hodge Lifetime have proved popular for those not just looking to repay the interest, but also the opportunity to repay the equity release scheme in full over approximately 16-17 years. These voluntary partial repayment equity release schemes are proving to be the next generation of the equity release market.
How is the Bank of Mum & Dad protected?
All the equity release schemes we recommend are members of the Equity Release Council, which means that there are certain guarantees built into them for consumer protection. As a minimum the Equity Release Council will ensure the following guarantees are included:-
- The schemes are portable and can be transferred to another qualifying property should you wish to move in the future
- There is a no-negative equity guarantee which means a debt cannot be left to your estate even if the value of the property becomes less than the balance of the loan outstanding
- You can live in your house for as long as you wish and with a lifetime mortgage you retain full ownership
- They can be repaid at any time, subject to potential early repayment charges
Benefits of using Equity Release
Contrary to directly gifting your property to your children, by using equity release to gift instead, would avoid any Capital Gains Tax as the main residence is retained by the client. There could still be a potential Inheritance Tax liability, but only if the client died within 7 years of the gift.
The lifetime mortgage would be a deductible liability against the client’s estate, reducing the value being taxed and although interest would have to be paid on the loan; this could still prove beneficial to both the client and those receiving the gift. Always consult a tax expert on these matters in conjunction with your independent equity release adviser.
Of course let’s not forget the best part of this!
The potential to fulfil the dreams of our loved ones in an age where quite frankly, property purchase is almost becoming nothing more than just a dream for some. The joys of parenthood!
I would be delighted to offer a FREE initial consultation to discuss any of the above matters relating to how equity release can help your children step onto the property ladder.
Please call me on 07788 605620 or 0203 7517228 or email firstname.lastname@example.org
Saturday, March 22nd, 2014
Pure Retirement recently became the latest equity release provider to enter the lifetime mortgage market. Launched in January 2014, it signalled the re-emerging confidence & growing popularity in the equity release market.
However, it makes no sense for a new lender to enter the market without finding a niche for itself. So, over the past few months Equity Release Supermarket advisers have encountered practical experience of where the Pure Drawdown Plan has fitted in providing best advice scenarios. Here we help explain where we feel the Pure Retirement Plan wins, in an already competitive equity release marketplace.
First, the Pure Drawdown Plan in Detail
Before we enter the wheres & wherefores of how the Pure Plan fits in with equity release recommendations, let’s look at the Pure Retirement plan facts…
The Pure Retirement Drawdown Plan is the first offering from the new lender formed by funding assistance from equity release brokerage – Age Partnership. This follows the similar relationship that exists between more2life & Key Retirement Solutions and represents a growing trend where brokers have become equity release providers. This similarity is also evidenced from where the funding source is derived, in that Pure Retirement relies also on the same annuity backed insurer to give it the ability to fund its lending – Partnership Assurance.
The Pure Drawdown plan is a lifetime mortgage that starts later in life than most equity release schemes with a minimum age at commencement of 70. It’s aimed towards the higher end of the loan-to-value ratios without any medical underwriting, which the enhanced lifetime mortgage plans have the advantage of.
The starting percentage is 36% of the property value at age 70, which compares favourably with other high LTV products. Albeits not the highest maximum equity release plan out there, it has a neat trick up its sleeve with how it can still compete with these maximum lifetime mortgage plans. Details of how are explained later in this article.
As a member of the Equity Release Council, the Pure Drawdown Plan offers a free no-negative equity guarantee and 100% ownership of the home. Portability enables you to still move house once the plan has been set in force and the interest rate is fixed for life, launched at a reasonably competitive 6.74% monthly rate (7.1% representative APR).
The minimum loan is higher than most at £25,000, which is where Pure Retirement’s market lies and is available in England, Scotland & Wales.
This is a roll-up lifetime mortgage plan with the option of a cash reserve facility. Therefore, Pure Retirement will calculate the maximum release possible, from which an initial amount can be withdrawn. Any funds untaken, remain in a cash reserve held by Pure Retirement at no cost until needed in the future. Should it later be necessary to access these funds, they can be drawndown in minimum amounts of £5,000 with no further charges.
Where Pure Retirement Lifetime Mortgage Strengths Lie
As an independent equity release adviser, one of the most common reasons for client objection lies in the costs of implementing an equity release scheme. Here is where the Pure Drawdown Plan wins – set up costs!
Only one equity release company has previously offered a scheme whereby the standard terms dictate a cost effective route to market for any client taking out a lifetime mortgage, & that’s Partnership’s Enhanced Lifetime Mortgage. Some lenders will temporarily create pockets of time whereby a cashback exists or a reduced interest rate for a limited period, but these come & go.
However, Pure have created these features as a permanent fixture & all credit to them in seeing this gap in the market and understanding what the consumer requires. Afterall, many applicants want a release of equity to help them financially as they have limited funds in the first place. By asking them for more money up front, it makes the process more difficult for them to get the whole application underway. Pure Retirement alleviate these areas, both pre & post application stages, let me explain how and why.
Pure’s Set up Costs
Pure Retirement provide a two tier set up cost operation; one for equity release loans between £25,000 & £44,999, the other based on loans in excess of £45,000.
All equity release schemes will normally incur set up fees in four main areas – Valuation, application, solicitor & adviser charges.
Pure approach this differently in the sense they aim to cover the majority of costs; the more one borrows, the greater the help provided. For loans over £45,000 the cost is enhanced furthermore by them providing: –
- FREE valuation
- NO application fee
- Contribution of £600 towards legal costs
- Contribution of £500 towards the advice fee
Therefore, dependent upon how much the advice fee being charged is, which in the case of Equity Release Supermarket its £895; the net advice fee cost would only be £395. Bearing in mind we can source an ERSA equity release solicitor, for a reasonable £495 + VAT & disbursements (including home visit) the £600 contribution from Pure Retirement should cover this on a standard freehold property. This effectively means to implement a Pure Drawdown Plan with Equity Release Supermarket would only cost approximately £395!
Where Does the Pure Retirement Plan Offer Clients Best Advice?
As previously stated, Pure Retirement Drawdown Plan has been targeted to meet those clients looking towards a maximum equity release in order to assist them with their retirement needs.
A recent example of how the Pure Drawdown Plan can still offer a client a greater net amount, even though the maximum release is lower than a competitor, can be illustrated by a case I recently encountered: –
Pam, aged 79 was looking to move property & required a lifetime mortgage to help her with the purchase. She was in good health & needed the maximum release possible to not only help with the purchase but also the moving costs & legal fees.
The purchase price for the 3 bedroom flat in Cornwall is £140,000.
Pamela requires the maximum release possible which following extensive research would point towards the Just Retirement Lump Sum Plus plan which would release £64,400 at an annual interest rate of 6.75%. This comes with a free valuation, £600 application fee, legal costs & advice fee.
Looking further down our research table identifies the Pure Drawdown Plan with a 6.74% monthly interest rate. However, the maximum release Pure would offer would be a lower amount of £63,000. But upon delving deeper into this product & by analysing the charging structure it shows that the actual Pure Retirement net release could be higher.
Fee Type /Provider
| Just Retirement
Evidently, the Pure Retirement plan has £1700 reduced set up costs, compared to the Just Retirement plan. The next part of this calculation is then offsetting this £1700 advantage that Pure Retirement has against the £1400 extra that Just Retirement can release as their maximum.
The final result therefore shows that Pure Retirement will have a greater net release to Pam of £300 and therefore proceeds with the recommendation as the £300 would be more advantageous in her pocket.
The message therefore is never look at the top line maximum amount, but always to consider any incentives that may help improve the net offering.
Existing Equity Release Customers Looking for Additional Funds
Other areas where Equity Release Supermarket customers have already benefitted from the new Pure Retirement lifetime mortgage is under two scenarios: –
- Where they have an existing equity release plan & need further funds.
- If looking to obtain a lower interest rate, yet no lender can provide sufficient funds to enable the equity release remortgage
Following the routine check to see if any additional borrowings are available with their existing lender, it’s then our duty to research the whole of the market to see if any other equity release providers could assist.
One of the issues against switching equity release schemes is usually the set up costs that prohibit the transfer. Under the two scenarios, in the first the charges could swallow up any of the spare cash being targeted, and in the 2nd scenario the set up costs make any transfer non-profitable as these costs offset any future savings in interest.
Its therefore the case that set up costs can prevent future maneuverability with any home equity scheme.
This is where the Pure Retirement Drawdown Plan can come into its own with its lower set up costs. Under both scenarios, Pure’s reduced set up costs will help with the switching of equity release schemes. Under the 1st scenario it will lead to more funds being available to withdraw & secondly in obtaining a lower interest rate its helps bring forward the break-even point.
Set up costs are an important aspect in the consideration of accepting any equity release recommendation. However, your adviser should consider the whole picture and features necessary in your meeting your requirements. This is why any equity release adviser should be experienced, qualified and importantly independent too.
If you feel that the Pure Drawdown Plan could be of benefit to you, please contact Mark Gregory on 0800 783 9652 or email email@example.com.
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Thursday, March 28th, 2013
It’s been a long time coming, as the song goes but Scotland is at last catching up with the rest of the UK when it comes to the uptake of equity release schemes.
The reason the Scottish equity release market has not grown as quickly in the past as the rest of the UK is that a lot of Scottish homeowners have very close family ties and traditions and want to leave their property and estate as inheritance for their families and have been happy in the past to either down size or make do.
One of the common objections to equity release in Scotland was the loss of inheritance for the family. However, with the new range of equity release mortgages this loss of potential inheritance can be resigned to the past.
In the last year alone, many changes have taken place within the equity release market. All equity release schemes Equity Release Supermarket recommend still have the ‘SHIP’ standard – a ‘no-negative equity guarantee’ built into them. SHIP has now come under the auspices of the Equity Release Council in maintaining this important protection feature.
Latest equity release schemes
In addition to the no negative equity guarantee, new innovative plans have been introduced with options such as the Inheritance Protection Guarantee, where a percentage of the property value can be ring fenced to protect the family inheritance. This provides peace of mind in protecting a fixed final amount of the property value to be left as an inheritance for the family at the end of the day.
Hodge Lifetime have recently brought out a roll-up lifetime mortgage plan where they will allow up to 10% of the capital borrowed to be repaid each year by cheque, again a way to protect the loan from the effects of the roll up of interest. Not only can the interest be repaid, but additionally a proportion of the capital by paying the maximum 10%pa in repayments. Effectively this renders the Hodge Lifetime scheme a capital & repayment equity release mortgage!
Stonehaven have also moved into Scotland with an interest only lifetime mortgage. The Stonehaven Interest Select plans operate on an interest only basis with a balance that remains constant throughout the mortgage term. This continues so as long as the monthly payments are made, resulting in a loan that will never be more than the initial amount at the start of the plan.
These Stonehaven equity release schemes in Scotland are eventually repaid from the sale of the property. The interest rates are currently the lowest we have seen from Stonehaven since they started over 6 years ago at just 5.99%.
Scottish interest only mortgage enquiries
From the number of interest only lifetime mortgage enquiries Equity Release Supermarket now receive in Scotland, many people have also noticed this, and taken advantage of these low interest rates which are then fixed for life. Providing security, not only for inheritance purposes, but also in fixed lifetime monthly payments is something that the over 55’s in Scotland are looking for.
Equity release plans are not only weathering the economic downturn, they are offering a much needed lifeline to homeowners in this time of austerity. It may not be the best option for everyone in Scotland and by seeking independent financial advice it is important you also consider any alternatives beforehand.
Nevertheless, if you are sitting with a lot of equity in your home and you are over 55 years of age why deny yourself a good lifestyle in retirement, when unlocking some of the equity in the home could help make life a lot more comfortable for you, or your loved ones.
In this growing equity release market with new providers and new plans coming along it is more important than ever to get the correct advice from a specialist dealing in equity release such as the Equity Release Supermarket.
If you wish to find out more about any of the plans mentioned then do not hesitate in making contact with the author of this article – Nigel Hall who would be more than happy to help.
To request a free initial consultation on the range of equity release schemes available in Scotland call Nigel Hall on 07553 408010 or email firstname.lastname@example.org
Saturday, August 18th, 2012
If you are considering taking equity release and early repayment maybe on the horizon, then selecting the right equity release plan is essential to avoid potentially high penalties. Here we illustrate the pitfalls of early repayment of an equity release scheme and what to look out for, if one day you are considering paying off your plan early.
Equity release schemes are in simple terms a mortgage that runs for your lifetime & commonly has NO monthly repayments. The principle reason for the growing popularity behind equity release schemes is that they enable you to free up the equity tied up within the bricks and mortar of your home.
With hindsight, once we all reach retirement age we should all have sufficient income & capital in the bank to meet our retirement objectives. However, such forward planning doesn’t always materialise for one reason or another; ill-health, redundancy or poor investment return can always interrupt anyone’s best laid plans. So what contingency plans can one put in place, or how can one minimise the risk of achieving retirement age without the funds to enjoy the longest holiday of your life?
Equity release schemes
We have witnessed the virtues of equity release mortgages & how they have come to the rescue of many retirees over the past 15 years. However, what can be a life saver initially can become a financial liability in the future unless professional equity release advice is provided by a qualified & experienced lifetime mortgage adviser.
One of the fundamental advances in the emerging equity release market is the protection this industry is now affording to its customers. With FSA (Financial Services Authority) regulation, trade bodies such as the newly formed Equity Release Council (formerly SHIP) & in-built protection features such as the no-negative equity guarantee, equity release clients have never been more re-assured of the improvements in these lifetime mortgages for the over 55’s.
What are the potential pitfalls of equity release schemes?
One area that hasn’t seen much improvement in the equity release marketplace would be the impact of early repayment charges (ERC’s). As equity release providers are lending over a potentially long duration; in some cases in excess of 40 years, they need to set their long term borrowing plans accordingly. Equity release on the face of it may seem very profitable to lenders, however for a large initial outlay it can be many years before they receive their capital & interest in return. To ensure that their profitability & future of the plans remains they must make contingencies in case of early surrender.
Hence, like any mortgage the lender, equity release providers need to include a penalty on early repayment of an equity release plan. To many this would not be seen as an issue as we may have all experienced some form of ERC with our mortgage companies in the past. The difference between residential penalties & equity release penalties are the basis of, the size, & duration that the penalties can be levied over.
What kinds of penalties are charged?
Whereas all residential mortgages charge some form of fixed penalty over a fixed number of years, equity release schemes in general are nothing like. The majority of lenders have now reverted to the old Norwich Union formula of using government gilts as the basis for their early repayment charge. Companies that have now followed suit are Just Retirement, more2life, Partnership, Stonehaven and more recently New Life Mortgages switched from a fixed rate basis onto gilts also.
However, there are a couple of exceptions to this rule who come from the likes of: –
- LV= (Liverpool Victoria) – who still use a fixed penalty of 5% of the capital borrowed in the first 5 years to 3% in the next 5 years, then nothing thereafter.
- Hodge Lifetime – who use a combination of a fixed rate penalty over 5 years and swap rates which relate to the long term effect of interest rates. However, they do have the advantage that if you move after 5 years, then no ERC’s will apply. Additionally, they permit 10% overpayments each year without penalty.
Is it all gloom and doom?
The answers to this could be both yes and no; depending if you have an existing equity release plan or not.
For equity release customers who took out a gilt related plan in the past it could be bad news. However, remember this is only bad news if you intend to repay early! If you have no intentions of early repayment, then no ERC’s would be applicable. All equity release schemes will NOT apply any penalty on repayment of the equity release due to death or long term care. Additionally, with the Equity Release Council (SHIP) rules in place if you are moving or downsizing you can take your existing scheme with you with no penalty. Equity release schemes have clearly made it known they are a lifetime mortgage. Therefore, the plans are not designed to provide short term borrowings.
You could however hedge your bets on occasions, but as the phase goes…let the buyer beware. For instance, with gilts rates currently at such low levels, unprecedented in the years that equity release has been around, could now be a good time to consider a gilt related equity release plan over the medium term?
The reason for taking out such a plan now would be the fact that these gilt related ERC equity release providers will not levy an ERC should the gilt rate have risen since the mortgage was taken out. In fact companies such as Aviva won’t charge an ERC if the gilt rate remains the same or even falls by a margin of 0.12%.
It is a gamble, as there is still much uncertainty in the economy, but the markets would expect that gilts are sure to go back up in the future when interest rates maybe rise. When though is the golden question.
So, gauging which equity release scheme is the best doesn’t all boil down to interest rates. A combination of assessing your future plans and how much, and when you actually require these funds can be just as important.
Afterall, what is the point of taking out an equity release plan with Aviva an interest rate of 5.66%, when upon early repayment you could be charged an enormous penalty of upto 25% of the amount you originally borrowed! It may be better to pay a slightly higher rate, with the knowledge that you either have no penalty or at least a known penalty from the outset.
Having an experienced equity release adviser is paramount in helping to decide which is the best equity release scheme, for your particular circumstances. By not only looking at your current situation, but also your future plans; your requirements now and also in the future will help your adviser assist in making the right equity release decision for you.
Equity Release Supermarket provide independent equity release advice from the whole of the market. Having the experience of actually working with the likes of Aviva, Prudential, NatWest and Norwich Union, gives our advisers the advantage of knowing the ins and outs of lenders early repayment charges and being able to give quality advice.
If you have any questions about equity release early repayment charges then please call one of our specialists on 0800 678 5159 or email email@example.com.
Sunday, July 8th, 2012
Equity release schemes have become increasingly safer over the past few years with inheritance protection options becoming more available. It is becoming apparent that equity release plans are now evolving further and diversifying. In today’s market a number of different providers have entered the arena with a variety of different equity release schemes. Although equity release plans prove to be a great option for many people, it is important to understand the concept & implications of equity release before going ahead with it.
You’re possibly wondering – is equity release a good idea?
If so then you need to understand the main reason for people being anti-equity release, which is the effect it has on their beneficiary’s inheritance. You therefore need to gather more information on equity release mortgages and the role they have to play in the retirement planning process.
One of the most common concerns that people have with equity release schemes is whether it will affect the amount of inheritance they leave behind. An equity release mortgage allows you to release some of the equity that is built up on your home, thus devaluing the property initially by the same capital amount. Over time however, this amount significantly increases as compounded interest gathers momentum, thus reducing the value of the estate. This essentially means that you’re using up some of the equity of the home, and leaving a devalued property behind.
There are different types of equity release schemes, and the two most common types are home reversion and lifetime mortgage schemes. A lifetime mortgage is a loan taken against the value of the property, which is repaid only when the owner has died and the house can be sold. A home reversion plan is the process of selling a part of the house to a reversion company, the proportional value of which is recovered once the owner has died. By selling a small part of the home, you can ensure that you leave something behind. This is one of the main advantages of home reversion plans over lifetime mortgage schemes, However, lifetime mortgages have come a long way in design & functionality over the past couple of years.
As equity release schemes have evolved they have endeavoured to become less risky. One of the characteristics of new equity release plans is that they come with a no negative equity guarantee. This means that whatever is left over after your debt is repaid goes to your beneficiaries, but if your debt is larger than the sale value of the property, the negative equity is cancelled out, and does not get carried over to your family. This is particularly relieving to those who want to release the equity on their home but are concerned about its repercussions on those they leave behind. Of all schemes this would be beneficial for would be the roll-up lifetime mortgage scheme whereby the borrower has taken the maximum advance possible.
Modern lifetime mortgages also have a new security option built into them which is called the ‘inheritance protection guarantee’. Equity release providers such as Aviva, Stonehaven, more2life all offer this safety feature available. By selecting a percentage of the property value you wish to protect, allows a fixed percentage of the property value to remain on the eventual sale of the property. The higher the percentage inheritance guarantee selected, reduces the maximum loan amount available from inception of the plan.
Equity release schemes have their advantages and disadvantages. While they may not work for some, they may be the perfect option for many others. As far as protecting your loved ones goes, modern equity release plans provide both a no-negative equity guarantee and an inheritance protection guarantee so as not to affect your family. However, always bear in mind taking out the equity from your house automatically reduces the value of the property you do leave behind.
Therefore, ensure you speak to a qualified equity release adviser who can explain both the pros and cons of equity release. Equity Release Supermarket provide a free initial consultation to discuss all issues around all aspects of inheritance protection including interest only lifetime mortgages.
Call the team today on 0800 678 5159 or email firstname.lastname@example.org
Sunday, January 8th, 2012
Those researching equity release will find the use of an equity release calculator and lifetime mortgage calculator as really helpful basic starting points in conducting their research. These online tools are excellent for understanding what the potential maximum amounts of equity release that can be withdrawn. They also prove that research is paramount in establishing whether lifetime mortgages, home reversion or equity release schemes are the most suitable option.
The best equity release websites will provide multiple calculator options that answer the most common question – What is the maximum release available?
Always try & find an equity release website that offers a calculator for each type of equity release mortgage option. This is vitally important, as the equity release calculators on most sites only provide you with ONE answer. These sites are not painting the whole picture & may lead you to believe that equity release plans may not be able to help your situation. They maybe just trying to capture your contact information & are basically not providing the answers you require.
What is the Use of Knowing the Maximum Lump Sum?
The more comprehensive equity release calculators will advise the maximum lump sum. This is an important figure which can be used to understand what the total amount of equity release loan is available, based on the specific information included in the lifetime mortgage calculator. The reason of this importance is down to the fact that you may have a predetermined lump sum in mind & unless an equity release scheme can fulfil this shortfall, then your dreams can’t become reality.
Both equity release calculators & lifetime mortgage calculators require a certain amount of information regarding your current situation. More in depth calculators will go that one step further & can even tailor your answer, dependent upon health. The main two elements required for input are the value of the property & the age of the youngest applicant. This equity release calculator can then provide the total equity release maximum lump sum for both a standard & impaired life arrangement.
Different Types of Equity Release Calculators
These will be a lifetime mortgage calculator, home reversion calculator & an interest only mortgage calculator. Of these, the lifetime mortgage calculator should provide two answers – good health & poor health (enhanced).
For an enhanced maximum calculation i.e. where there has been a history of ill-health, then further information will be required to determine whether eligibility will exist. The enhanced equity release calculation will offer a higher lump sum than standard. The assumption by the lender is that due to the ill-health, the term of the equity release mortgage will be shortened. Therefore, as the interest roll-up period will less, then the lender can release more & thereby protecting itself from the no-negative equity guarantee.
When looking at this equity release maximum lump sum provided by equity release calculators such as the one above, it is important to note that there are a variety of options available to the customer, from that point. Within that maximum, a customer could find an interest only mortgage or one of the many other equity release products that are currently available on the market.
Equity release schemes often provide these calculators because they provide such important initial research for customers. People over 55 years of age who have invested in property may find that interest only mortgages and other equity release products are excellent for the release of equity from their homes without having to sell. This keeps the property in the family or inheritance chain, but also allows the ability to recover some of the money invested or grown in value over the years. There are a range of equity release products available, and it is best to discuss needs with an independent financial advisor. However, before doing so, it is useful to do some background research on what options are available and an equity release calculator, or a lifetime mortgage calculator, is a great place to start.
To access the Equity Release Supermarket calculator click here or call freephone 0800 678 5159.