If you are thinking of taking out an equity release mortgage, it’s important that you look closely at exactly what you’re being offered. These deals can vary quite widely. Here are some things that I think it’s worth looking out for.
1. Make sure you can withdraw money as you need it
Many people take out equity release products to give them a bigger income in retirement, and if that’s why you’re considering it, you won’t need to take out the money all in one go in a lump sum, but will be better off withdrawing amounts as you need it.
Pros: The advantage of taking out money in several chunks, rather than in one go, is that you will owe less interest.
SAVVY TIP: There’s no point in withdrawing money from your home through an equity release mortgage and being charged interest at 6%, only to put the cash into a savings account where it earns a fraction of that.
Cons: There is no guarantee that you will be able to borrow more money when you need to. So it’s a bit of a leap of faith that you’ll be allowed to withdraw all the money you need if you plan to take out money over a period of several years.
SAVVY TIP: This isn’t just a theoretical problem at least one provider of equity release mortgages wrote to customers in the aftermath of the financial crisis to say that they couldn’t take any more money out on their equity release product.
2. Find out if you can pay the interest
There are a number of equity release mortgage providers that will let you pay interest – on part or all of your equity release mortgage.
SAVVY TIP: This can be useful if you want to make sure your equity release mortgage won’t increase in value so dramatically or if you have an interest-only mortgage that you cannot repay and where you cannot remortgage.
3. Check the charges
Arrangement and legal fees on equity release mortgages can be significantly higher than for ordinary mortgages, says Ray Boulger of John Charcol. “You will have to have a separate solicitor to the equity release mortgage lender, which adds to the costs and if you’re only releasing a relatively small amount of equity, the charges could be relatively expensive.”
SAVVY TIP: Make sure the adviser explains all the charges you’ll have to pay.
4. Check when you can move penalty free
Equity release mortgages invariably have an early repayment charge, which can be quite hard to calculate in advance, in some cases. The reason is that it can be based on ‘gilt’ (government bond) rates at the time you pay off the loan early.
SAVVY TIP: Make sure your adviser gives you examples of how much you could be charged if you have to redeem the mortgage early.
You can redeem your equity release mortgage without having to pay the early repayment charge when you go into a care home or when you die.
SAVVY TIP: Some equity release providers may impose an early repayment charge if you move into a relative’s home (so you can be cared for) or if you move into a retirement home. Ask the financial adviser or solicitor to check this.
5. Make sure the lender is a member of the Equity Release Council
The Equity Release Council has its own code, which sits alongside the rules and regulations that equity release providers have to abide by.
The Equity Release Council code
The code of practice has several useful safeguards. These include:
1. A no negative equity guarantee. It means that, no matter how big your loan becomes, you’ll never owe more than the value of the property you own.
SAVVY TIP: If you take out a roll-up mortgage, where the interest is never paid, and take out one lump sum, the amount you owe is likely to double every 11 years (assuming interest rates of between 6 and 6.5%).
2. A guarantee that you can remain in your home while you’re alive.
3. A right to have an independent solicitor. Their role is to check the details of the deal you’re planning to sign up to and provide a certificate to show you understand what you’re getting (and risking).
4. The right to move to another suitable property, without paying a penalty.
SAVVY TIP: Make sure you ask whether there are any restrictions on the type of property you move into. Some equity release companies don’t lend on sheltered accommodation or retirement housing, for example.
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