Many people interested in equity release utilise the online and a free equity release calculator to determine what their maximum drawdown facility is. However, these calculations are based on the information you provide and are pre-programmed to calculate a set formula. The calculators have no facility to check the current market value of your home. So what happens when you proceed with your application and find that your property value is not what you quite expected?
Equity release schemes are similar to conventional repayment mortgages, in that there is a certain loan to value ratio which must be adhered to. Just as an application for a conventional mortgage would require a property survey to confirm the market value of the property, so too does any equity release application.
As soon as your application is received by your equity release lender, they will contact your solicitor to arrange a property survey. This will be conducted by a property surveyor, who will produce a report detailing whether the house is in a good condition, if there are any structural issues which may compromise the property and an estimation of the current market value. This will be determined by assessing the properties which are similar to yours which have been sold recently and by calculating the square footage of your home and times it by an appropriate price to determine the property value. Providing the survey confirms your property value as expected, the application can proceed as planned. However, if the valuation is up or down on what you anticipated, you will need to revisit your equity release calculations.
All equity release schemes are based on a certain percentage of loan to property value. If your valuation comes in lower than you anticipated, you will need to revisit your equity release calculator figures. This will affect your maximum drawdown facility and you will need to ensure that you still qualify for equity release. This will be further complicated if you have an existing mortgage on the property, since the balance of the existing mortgage will need to be deducted from the value of the property to determine the available equity. Should your property be down valued, you will need to assess your calculations with your equity release adviser or broker to determine if this scheme still represents the best possible deal for your new circumstances.
Your broker or adviser will revisit the calculations and check whether equity release is still feasible. Once this has been confirmed they will advise you of the new maximum drawdown facility which would be available. You will then need to take the time to properly consider whether this reduced sum is still sufficient for your needs and plans. If it is, the application can proceed with the new figures but if it is not, you will need to reassess your options to find a possible alternative.
Upon a down valuation, your adviser will revisit the equity release calculations. There are then a number of options which your equity release adviser will discuss with you in the event of a down valuation. These can include:
• Proceeding with the application with a lower maximum drawdown facility
• Using equity release calculators to assess whether or not other schemes or plans may now be the option which is better suited to your lower home value
• Postponing the application until you have reached another age group, which would allow a greater percentage of equity release? For example, if you are currently sixty-four years old, it may be beneficial to postpone equity release until you reach the age of sixty-five, when other schemes such as home reversion plans would now be accessible, or lifetime mortgages would offer a higher percentage of release as a maximum drawdown facility.
Your adviser will be able to guide you through these options to ensure that you make the decision which is best suited to your needs and requirements. They will check the equity release calculators with the new valuation figures to ensure that you have the most up to date information on which to base your next decision.
If you are currently applying for equity release, it is important to understand that any maximum drawdown facility figures provided from equity release calculators are subject to the property valuation report. In the event of a down valuation, you will need to revisit your calculations and assess the situation again. This can seem like the whole application has gone pear shaped, but by working with your adviser, you can be assured that you will still be presented with the deals which are best suited to your new circumstances.
A home reversion plan has reduced in popularity over the years and is not as common as the lifetime equity release plan. The home reversion scheme allows a release of equity by the homeowner selling a portion of or an entire property in exchange for money. This money is normally paid by an equity provider as one large amount or it is paid in monthly instalments. Some providers allow you to collect a large amount in advance as well as small monthly instalments. Home reversion schemes do have their advantages.
The price that the equity release providers will pay for the property will normally be significantly less than the market value of the property. This might sound discouraging but there is a reason for it. The equity release provider needs to do this because the property owner will be allowed to stay in his or her property until he dies or decides to move into long term care. Only then will the equity release provider be able to sell the property. Additionally, they will live in a portion of their property that they no longer own - rent free.
While it might seem skewed towards the home reversion provider, keep in mind that you are leaving behind no debt under this type of release of equity. A mortgage or reverse mortgage leaves behind debt your beneficiaries have to pay off when you move to a care center or die. You save money by not paying rent, a mortgage, or taking out other loans to pay your monthly expenses simply by tapping into equity you have in property you own.
The amount that the property owner receives is dependent on the value of the property and the percentage that the home owner is willing to sell. If the property owner does not decide to sell all of the property immediately, he or she retains the freedom to sell another portion of the property in the future, if there is a need to do so.
Advantages of home reversion plans
• The payment that the property owner receives is tax free.
• The property owner is allowed to remain in his or her property although he or she has sold it or a portion of it.
• There is a guaranteed inheritance to pass to one’s heirs if less than 100% of the property is sold.
• Rent is free.
Disadvantages home reversion plans
• The property owner will be selling his property for less than the market value.
• If, for any reason, the property owner wants to buy back the portions of his or her property that were sold he or she needs to buy it back at the current market value. This is a clear loss.
• You must be 65 years of age or older.
Age can be an advantage or disadvantage depending on your income situation. Someone who is retired, has an illness and no income, or a disability at an earlier age than 55 will be unable to take advantage of this type of release of equity. However, if a person can wait until 65 or even older there is a potential of gaining a better value for the portion of home sold. The scheme can work up to 80 with most providers, and some might allow for an age past 80.
If you need money for short term purposes and uses, you should not consider a home reversion plan. There are other forms of equity release schemes that can provide you with the money that you need for short term use without requiring you to sell your house.
One example is the lifetime mortgage release of equity. Like the home reversion, you have some benefits to this type of equity release. You are not subject to payments and instead gain a lump sum or instalment of payments based on the equity you take out of your home. The difference is in the debt on the home. Unless you are able to pay the mortgage back, your beneficiaries may have to sell the home after you die or move to a long term care centre.
Home reversion schemes are not to be confused with sell & rent back schemes, as home reversion plans are fully regulated by the FSA (Financial Services Authority, now the FCA) and the providers will also be members of SHIP (Safe Home Income Plans). Make certain you check providers’ qualifications before you sign for a release of equity scheme.
Despite the fact that home reversion plans have been regulated by the Financial Conduct Authority since 2007 (formerly the FSA), the number of new business cases written only now stands at 3% of all equity release sales. This percentage is dwindling and counter responsive given the fact that home reversion schemes have some protective advantages.
Home reversion schemes have a higher starting age, 65, than lifetime mortgages. Lifetime mortgage schemes will consider many factors like the age of a person, sex and the value of the property to determine the amount that can be released. Lifetime mortgages present many options e.g. inheritance protection and drawdown facilities than home reversion plans do.
Additionally, lifetime mortgages have the advantage of being available from the age of 55 and can also now take account of the health of the individual. This is something that home reversion plans have failed to offer since Partnership offered their enhanced home reversion scheme. However, they do benefit from the guarantee offered in that a proportion of the property will always pass to dependents and other beneficiaries.
Reversion schemes work on the premise that you sell part or all of your property. If you sell 50% of your home, then 50% remains with your beneficiaries once you pass away. At this point the provider will sell the home to gain their funds paid out to you when you were alive. Your beneficiaries receive a fair portion of the value based on the amount of property left under their ownership.
Home reversion plans do not accumulate interest, so you do not have to worry about an uncontrolled increase in debt which can apply to lifetime mortgages. There is the other advantage of the fact that you will benefit from the increase in value on your share of the property. People who are much older could even release more cash with a home reversion plan, so it helps a lot in the raising of money compared to a lifetime mortgage.
The disadvantages of a home reversion plan are few, including the fact that you will not own your home 100%. This is perhaps the main reason that has contributed to the dwindling number of home reversion plans. If you choose to sell your home, your estate will not benefit and neither will you retain any property price escalation on the proportion of the property sold.
It is not easy for a reversion company to release money on a property so they tend to be very selective. Lastly, people who die immediately after taking out a home reversion plan could lose a lot more on their estate, unless some protection options are built into the scheme.
The FCA has helped in recent years to provide better protection under home reversion plans in that someone who dies within 4 to 5 years after starting one of these plans may not have to worry about loss of value in their estate. While the property is often sold, the beneficiary can retain a higher portion of the value than they might otherwise gain.
There is also the protection of the lifetime tenancy agreement that states anyone named in the plan and in the tenancy can remain in the tenancy for their lifetime. Even if one person on the agreement passes away early, the remaining family member is able to live out their life in the home before the provider can sell the property.
A main advantage to remember regarding home reversion plans is the lack of increased debt. In fact, you can use the money you obtain on the partial sale of the home to pay off other debts you still have such as personal loans, car loans, or credit card debt. You also do not take out a new loan to gain money for expenses unlike lifetime mortgages.
Lifetime mortgages might be seen as more flexible because of the payment options and age; however, you have to be concerned over the debt you leave behind. In trying to save one’s inheritance you might actually put it into jeopardy under this scheme; that is, if the remaining person has to sell the home to pay the lifetime mortgage.
Before equity release in any form including home reversion plans is undertaken, it is important to get financial advice from a qualified equity release adviser who provides free initial advice via telephone, or even meet you at your own home. You will be presented with many equity release solutions from the range of home reversion plans and lifetime mortgage schemes offering their products in the market.
The home reversion plan has had a noticeable decline in recent years, mainly due to the rise in the popularity of new equity release schemes. The main culprit for their demise has been the introduction of newer style lifetime mortgage plans. In particular, you now have a range of lifetime mortgage schemes which are drawdown lifetime mortgage, enhanced lifetime mortgage and the interest only lifetime mortgage. For one reason or another these have become advocates in the lifetime mortgage market.
Home reversion entails selling some or all of your property to a reversion provider in exchange for a tax free lump sum. When you die or move into care, the provider is able to recoup their money when the property is sold. They receive their percentage that they own and your beneficiaries receive the percentage (if any) you didn't sell. This is attractive because there are no monthly payments like in the case of a residential mortgage or personal loan.
You are also able to protect your inheritance as you are only selling a portion of the property. A home reversion plan is only available to those who are over 65 years of age and with a minimum property value of £75,000 (Bridgewater Flexible Release Plan). However, there are more modern and flexible lifetime mortgages which are appealing more to the home owner. A variation to the ordinary lifetime mortgage is the previously mentioned drawdown lifetime mortgage.
A drawdown lifetime mortgage scheme offers you greater control over when to take your money as it can be taken in stages, rather than all at once. Instead of releasing all of your money at once like a home reversion plan, a maximum facility is created. This means that you are able to take a smaller amount at first and then drawdown when extra money is needed. Also, the interest that is charged is only charged on the amount that has been taken and not the entire facility.
You are able to apply for a lifetime mortgage at an earlier age compared to home reversion; usually they can be applied for at age 55 years. However, the maximum facility that you are able to form is usually smaller than the lump sum you would get from a home reversion scheme. You will be able to keep more equity in your property with a drawdown lifetime mortgage which can be a great advantage for any beneficiaries.
A problem with home reversion plans is that people are now more reluctant to lose full ownership over their property, as you have the right to live effectively in their part of the property for the rest of your life. Also, the reversion provider will not give you the full market value and you won’t benefit from any house price inflation on the portion of the house you sold.
Lifetime mortgages are therefore proving very flexible and there are many different types of lifetime mortgages on offer that will suit your lifestyle more easily. You exert more control with a lifetime mortgage and still remain the owner of your property, which is more appealing to many people nowadays.
• Retaining ownership of your home is done through a lifetime tenancy agreement that can include anyone living in the home.
• The provider may require anyone not 65 or older to sign a release of occupancy; it is an occupancy deed stating that the younger person gives up their right to remain in the house once you move on.
• You do not have a monthly payment, thus there is certain flexibility to use the money in more ways than just living expenses.
A drawback to lifetime mortgages is the loan you have out that must be repaid after you move out or move on. The loan will have interest added to it the longer you remain alive and leave the loan unpaid. It can become a costly scheme if your life expectancy is higher than you planned for. It can also put the inheritance in jeopardy.
Despite home reversion plans becoming unpopular, it is a good idea to remember the disadvantages of lifetime mortgage schemes while you consider which equity release scheme is most beneficial to you and your current financial situation since it can make reversion plans a more suitable option for some.
Nevertheless, do not forget the virtues of a home reversion as they still have a part to play in providing independent and complete equity release. Advice: - guaranteed inheritance & security of tenure for the rest of your life.
Older homeowners are able to get their wealth by getting what they have in equity release schemes which are also known as lifetime mortgages or home reversion schemes. These schemes are especially attractive to those who have equity, but need liquid cash. When an individual uses their savings, or the pension fails to deliver as per expectations, one can request and apply for equity release through the property they already own.
Equity experts have seen more elderly people using equity release to ease their financial concerns, since many of them are not comfortable with their current income. The cost of living has gone up, and they need to dig deeper into their pockets to finance their daily living expenses, which include energy, fuel, and food costs.
Conversely, like with the common residential mortgages, you do not have to maintain loyalty to one lender only. Home equity release schemes are more flexible these days, and are now more competitive with small changes in interest rates that make a big difference to borrowers. Today people are looking outside of their current equity release deals more often when their early redemption penalty period has expired. Many actually look forward to increasing the amount of money they release out of their remortgaged equity release plan.
The other common practise is home reversion plans, where you sell a percentage of the home to a lender who in turn gives you a lump sum. However, you do not have a fixed period within which to pay the money, and the valuation can be lower than the current market value. This kind of a scheme can also be expensive if you want to redeem it earlier, and you have to get back the property at the current market rates. You also have to pay additional fees that include legal fees and stamp duty.
Home reversion is not always a great way to begin your retirement. This is because if you want to switch you need to be worried about buying back the home before you can make a clean switch. You only receive a portion of the current value on your home. This portion is based on how much you sold, the value, and the percentage the provider is willing to give you for the home. When you buy it back or even after you pass and your family wants to buy it back, they will have to pay market value which is always more than you received in the payment.
However, a lifetime mortgage does not have a term, and all the payments roll out to the point when the house finds a buyer. The size of the loan depends on the property value, as well as the sex and age of the owners. Additionally, the loans have a redemption penalty for a fixed time, which makes them cheaper.
Bear in mind you have plenty of choices with lifetime mortgages if you find the home reversion option is something you do not like. With lifetime mortgages you were able to start at the age of 55, but with home reversion you had to be 65. If you are new and have yet to make a choice, these ages will also factor in to the choice you make.
If you have no issue with paying an interest payment each month for the availability of cash there is an interest only option. You can always roll this into a different product later based on your age and the home value. Always be aware that your choices are limited when the housing prices or values in the UK plummet.
The housing market is tricky because it can fluctuate. It is one of the reasons you may be seeking money now. You may have found that your house is losing value and you do not want to wait until it is undervalued by too much. The great thing about the lifetime mortgage is the negative equity clause you can make sure it has. This clause needs to protect you against the undervaluation of your home during the lifetime mortgage. If you do not have this clause, refinance to get it.
Before you make that equity switch, consider how much you will be saving, the redemption penalties, and the difference in the two. Consider the possibility of switching equity within the current lender prior to the big switch. Equity release schemes are designed to make your retirement easier, but you also want to make certain the changes you make to current schemes you have are proper.
Taking an interest only mortgage out may offer a cheaper way to purchase a property or even a remortgage of your current abode than with the conventional capital and repayment mortgage. The reason being is that borrowers are only paying off the interest charged and not the capital. Low cost endowment policies such as interest only mortgages can be beneficial for a certain type of homeowner. The trick is to use these products with an eye towards repayment rather than just existing. The following will look at certain aspects like calculations of these mortgages to help you better understand them.
An example of interest only mortgage calculations would be as follows - someone borrowing £150,000 at 5% interest rate over 25 years would cost them £624 per month on an interest only basis, and £878 per month on a capital and repayment mortgage. The difference in monthly payments is plain to see. But, you don't get something for nothing and this is what some interest only mortgage holders have found to their cost.
The eventual repayment of the mortgage at the end of the term on the interest only loan will have only paid off the interest charged which would still leave the original £150,000 outstanding. Additionally, this debt will still need to be repaid; hence, a means of savings should have commenced many years ago to counter this. In comparison to this, as long as payments have been met then a repayment mortgage would have guaranteed to clear the debt.
Interest only mortgages have been around many years and have been very common in the heyday of low cost endowment policies predominantly during the 1980’s which were sold as repayment vehicles alongside them - more info found here.
Some time ago the regulators removed the requirements stipulating that if borrowers took out interest only mortgages then the lender would have to ensure a suitable repayment vehicle was taken at inception and that monthly premiums were maintained. This was in the shape of low cost endowment policies.
The lenders even took the bold steps of taking possession of the endowment policies and keeping them in safe custody with storage facilities provided. Additionally, the mortgagee would put a charge on the endowment policy itself so that encashment could not take place without the knowledge of the lender.
However, as poor performance of these endowments became evident from 2000 onwards the sale of these life assurance policies declined.
People then began gambling on future housing price increases with the hope of this being a repayment possibility over increasingly longer terms. People with interest only mortgage deals and with no repayment of capital can have the major risk in time of falling property prices. This will result in their debt being greater than the value of their home. This can be dangerous.
It can also be an issue at the time repayment is required. If someone does not have the funds then a house has to be sold or a new mortgage has to be attained. The person has to be in a good financial situation for this conversion to a traditional mortgage and wish to pay out more interest on the same principle balance. It is not a very comfortable position to be in.
When someone gets closer to retirement and is starting to see less income, there is added concern over being able to pay off their debts. The only hope someone has in this situation is to have an endowment policy or savings plan that will get better over time or to sell the property and get what they can out of it.
There is another type of interest only mortgage to discuss that would also benefit from low cost endowment policies, but rarely sees them. The interest only lifetime mortgage is set up for retirees for anyone 55 or over. It is usually put into effect for the life of the person; however, the FCA has started regulating these tighter too thus many providers have switched to a time limit of 10 years or 75 in which repayment is due.
The best part about the lifetime mortgage is only paying interest, but knowing that until you and your spouse decide to sell or one or both of you dies you can live in the home. It is only at death that you usually have to repay the full amount, which does not have interest tacked on since you have been paying it. Still, consider low cost endowment policies as a means of saving the home from sale.
Benefits of life cover for interest-only lifetime mortgages exist. It would mainly provide peace of mind, knowing that should the worst happen the mortgage can be repaid in full and thereafter NO monthly mortgage payments are required. The interest only mortgage lenders will let the surviving partner remain in the home for the rest of their life; this is part of the terms and conditions. Therefore, your tenancy cannot be curtailed, nor can you have your house repossessed as long as the monthly mortgage payments are kept up.
The life cover premiums for the over 65’s pro rata will certainly be higher than those of younger applicants. However, given the loan sizes are usually much smaller then the overall cost is marginalised. The payments are usually fixed from inception which is similar to having a fixed rate on the mortgage, in that payments are guaranteed for the duration and you can budget accordingly.
The term of the plan is usually the key here as there are two options in the protection of an interest only lifetime mortgage. As the balance will remain level throughout, some form of protection whereby the life insurance also remains level throughout is therefore recommended.
The best advice in this situation would be to opt for a whole of life assurance policy. This will provide a level amount of life assurance for the rest of your life. Therefore, it has to eventually pay out, once the first person has died.
Post retirement, depending on the amount of life cover required, whole of life policies can prove expensive. You could have the option of a renewable whole of life plan where the cost is kept down initially, but would be subject to a review of premiums in the future. However, to maintain cover, the cost is likely to increase in the future. The other option on review would be to reduce the life cover but maintain the same premium.
A more cost effective proposal would be to consider a level term assurance plan. This wouldn’t be the ‘Rolls Royce’ solution, but could give a temporary reprieve at a time when finances won’t permit or a temporary measure is only required anyway. The level term assurance plan provides a level amount of life cover for a fixed term. As such the premiums are usually lower than the whole of life plan as they will cease at a pre-determined date in the future. There is no savings element; therefore, once the policy has expired there is no cash sum or money to be paid out.
Nevertheless, a term assurance policy does provide a cost effective means of protecting the interest only mortgage & should either party die during its term, then the lifetime mortgage will be repaid in full. This will leave the survivor with no mortgage balance and more importantly no further monthly payments to make to the lender.
As you may already notice there is a disadvantage to the term assurance policy in that someone named in the policy has to die for it to be accessed. When someone lives beyond the expiration date, this can put you back to a troubling situation with your interest-only lifetime mortgage plan.
It does not mean you are out of options. It is quite the opposite since you are in retirement. You can still convert a mortgage as long as you are under 75. This means you could change your interest-only lifetime mortgage to one without an expiration date like a roll-up or drawdown option. In this case interest accrues on the principle, but payment is not due until death. This can save you from having your home repossessed.
The second option is to speak with a home reversion provider if you have enough value in your home to get the interest only lifetime mortgage principle paid off by selling a piece of your home. You may even have enough to get a lump sum for your retirement. It all depends on the home appraisal and the willingness of the company to offer a good percentage on value.
Assurance policies are certainly an important guarantee whether it is whole life or term to avoid having your home repossessed when a person named in the policy dies. It is worth paying on if you have the funds and wish to protect your home. It should not be your only consideration of course since you may out live the term or whole life policy.
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