Time to Review Your Equity Release ?
£ 120,325 The total amount of interest accured over the 5 years is £ 20,325
By year 10 the interest accrued is £ 44,782 so as illustrated above , a lower interest rate makes a great deal of difference over time .
What do I need to know ? Of course there are things you need to be aware of before you take out any Lifetime Mortgage for example :
If you have a Lifetime Mortgage ( sometimes called an equity release roll-up mortgage ) that is over 10 years old there is a good chance that it is now past the period where early repayment charges might be applied if you repay , move or change lenders . That means that just as you review your other finances to make sure they are working as hard as possible for you you should be doing the same with this area of your planning .
How do I know if this is what I have ? Lifetime Mortgages are where a lender lends you a lump sum of money against the value of your home . You make no repayments throughout the life of the loan so the interest that is due is added , year on year , on a compound basis , until you either sell and repay , you pass away or you leave the property for a care home setting .
With a Lifetime Mortgage you still retain ownership of the property , so it is up to you to look after it , insure it and so on . This also means of course that if you sell up the proceeds , minus the amount of the loan , all belong to you .
The amount you can borrow will depend on the age of the youngest owner . Not surprisingly the lender won ’ t want to offer too much to someone who potentially has many many years left in the property ! The calculation they use is based on a percentage of the value of the house and they will instruct a surveyor to come and visit the property and assess its market value .
With a Lifetime Mortgage the rate is fixed for the duration of the loan . Average interest rates in 2006 were up as high as 6.94 % pa whereas now they have dropped significantly and there are providers who are offering as low as 3.77 % pa , with no upfront valuation fee and arrangement fees of just £ 5.00
How much of a difference will that actually make ? Lifetime Mortgages have their interest added on a compound basis , so each year it is the original loan plus any interest from previous years that attracts the annual interest rate .
Let ’ s work an example where the loan amount is £ 100,000 and the rate is 6.94 %
At the end of year 1 you will owe £ 106,940 By the end of year 2 that has gone up to £ 114,361 By year 5 the amount outstanding is £ 139,862 The total amount of interest accrued over the 5 years is £ 39,862 By year 10 the interest stands at £ 95,362 – almost double the original borrowing .
Using the same sums but an interest rate of 3.77 % the figures look like this :
At the end of year 1 you will owe £ 103,770 By the end of year 2 that has gone up to £ 107,682 By year 5 the amount outstanding is
• Lifetime Mortgages are not designed to be repaid early so there may be an early repayment charge y period unless you have to leave your home to enter a longterm care setting .
• A Lifetime Mortgage may affect your eligibilty for welfare benefits and / or it may affect your tax position
• Anyone not on the deeds but who is over the age of 18 and living in the property ( whether at outset or if they move in subsequently ) may need to sign to waive their rights to stay in the property when the loan is due for repayment
• Property prices may fluctuate and your home may be worth more or less than the starting valuation when it is time to repay
• Be sure you are using a lender who offers a guarantee that even if the loan value ends up exceeding the property value your estate will not have to pay the difference . This is known as a ‘ no negative-equity guarantee ’
• The loan will be secured against your property and your lender will have the right to re-possess the property in certain circumstances .
Most reputable lenders will only accept applications that come via a suitably authorised Independent Financial Adviser ( IFA ) so that they can be sure you have been given all the facts and information that you need to make an informed decision so always make sure that you receive a full illustration from the mortgage company .
Many lenders will pay a procuration fee to the IFA and if this is the case it will be on the lender ’ s illustration and your IFA may offer to offset some of their fees against this figure , so it is definitely worth asking !
By Anna Webb Independent Financial Adviser - BBA DipPFS CertCII ( MP ) antrams . com
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