Equity Release Charges

Equity Release - What's The Cost?

PROPERTY ADVICE BLOG - Equity release - What’s the cost?

It all depends on the type of plan you opt for, the amount of equity you hope to release and related terms and conditions. Read on to compare the different types of plans and fees which Property Advice Blog has summarised below. These examples will give you a rough idea about each type of mortgage plan and scheme but are not definitive examples. Remember to take the property advice of your mortgage lender or reversion company before choosing a plan. The Financial Services Authority regulates a number of lifetime mortgages, and you can find their policies in a document entitled ‘Key Facts Illustration.’

How does a lifetime mortgage work? - There are two types currently available: An Interest – Only Mortgage and a Rolled-Up Interest Loan.

An Interest-Only Mortgage - In this scheme you can borrow a lump sum of money which is secured against the value of your property. You should only invest in this method if you can pay interest on a loan each month from your salary or pension. When your home is finally sold you have to pay back the original lump sum to the lender. When it comes to an Interest – Only Mortgage the interest rate could be variable or fixed. The variable option is more risky if you have a fixed income or pension, as you may not be able to afford rising interest rates.

Some homeowners opt to invest their lump sum into an annuity which provides a regular income. By doing so, the regular income pays for the interest rate and there may be money left over. However, this type of loan is most suitable for the elderly homeowner, as good annuity rates are often dictated by age.

An example of an Interest - Only Mortgage. - You own a property valued at £100,000. You then borrow £30,000 with a fixed interest rate of 6.5%. £162.50 would be your monthly interest rate payment. You will have paid £29,250 of interest rates alone after 15 years. However you must still pay the original £30,000, which could be recovered from selling your home. If your property has increased in value, any extra money would belong to you or your beneficiaries.

A Rolled-Up Interest Loan - In this example homeowners can choose a lump sum of money, a regular income or both of these options from the lender. The amount of money is based on the value of your property and there is no need to pay a penny back until you die or sell your home. However, interest is added to the amount you borrow each year and then ‘rolled up’ or added up when your loan comes to an end. The amount of money you can borrow is dependant on the value of your property and your age. Older homeowners can borrow more of their property’s value than younger people. The interest rate also depends on whether you have chosen a fixed or variable rate loan. If you do opt for a variable interest rate, look into capping it so that the amount never rises above a fixed level. In this way you’ll feel more confident about making repayments at the end of your loan term.

An example of a Rolled- Up Interest Loan. - You own a home valued at £100,000. You then borrow £30,000 with a fixed interest rate of 6.5%. Instead of making monthly payments your interest continually mounts up over the period of the loan. After 15 years you would owe the lender £77,155, which includes the £30,000 you borrowed at the start. If you sold your home after 15 years you would pay the lender £77,155. The value of your home may have increased during this time, so if you make any extra money this amount belongs to you or your beneficiaries.

If your home decreases in value you could be covered by a ‘no negative equity guarantee’ depending on whether this was written into the contract or not. With a ‘no negative equity guarantee’ you wouldn’t have to pay back more than the original value of your home, even if your home sells for less than the initial value. However this all depends on whether you have fulfilled your part of the mortgage contract throughout and that you maintain your home to a reasonable standard.

An example of a Rolled – Up interest Loan with no negative equity - Your home is valued at £150,000. You decide to borrow £45,000 at a fixed interest rate of 7%. You do not make any monthly payments. After 20 years of ‘rolled up’ interest over the loan’s lifetime you owe £174,136. This figure includes the £45,000 you borrowed at the start. You sell your property for £150,000. You do not have to pay back any more than this amount.

Shared and Protected Appreciation Mortgages - This type of lifetime mortgage is not available at the moment, but could become available in the future. This method allows you to borrow a lump sum of money related to the value of your home. In this example you don’t have to pay back a penny until you move house or die. You are liable to pay back the original amount of money you borrowed, as well as an agreed amount which is a percentage of your property’s increase in value.

This basically means that if your home’s value rises steeply you will have a higher level of interest to pay back. On the other hand, if it’s value has gone up more slowly, you will pay back a lower rate of interest. By taking out a Protected Appreciation Mortgage you pay back an agreed rate of interest, so you have a better idea of how much money you will eventually have to repay.

Some Examples of Shared and Protected Appreciation Mortgages. - Your property is valued at £100,000. You then borrow £30,000 and agree that the lender will receive 50% of any rise in your property's value. You decide to sell your home and pay back the original £30,000, plus half of your property’s increased value. For example, if you sell your home for £150,000, you will have made £50,000 more than the original value. At this point you owe the lender £55,000 which consists of £30,000 for the original sum you borrowed, as well as £25,000 which is half of your property’s profit. If your property sells for £120,000 you would owe the lender £40,000. This is made up of the £30,000 you originally borrowed, plus half of your £20,000 profit which is £10,000.

If your property does not increase in value, or if the value decreases, you still only have to pay the original £30,000 which you borrowed.