You might decide that you would like to borrow more money at some stage after taking out an equity release plan. This is known as additional borrowing but is also called a ‘top-up’. Rules will apply to any additional borrowing you request, but they will differ from lender to lender, so check the details carefully.
An equity release advisor is someone who is qualified to provide advice and sell equity release products, including lifetime mortgages. When finding an advisor, it’s a good idea to look for one who’s a member of the Equity Release Council. You can read more about how to find a qualified advisor in our article Where can I find equity release advice?
If you’re looking for somewhere to start, you can get expert advice from a Rest Less Mortgages equity release specialist. They are active members of the ERC and can advise on equity release mortgages from the whole of the market. They’ll listen to your needs and talk you through your options, so you can decide if equity release is the right option for you.
AER – Annual equivalent rate
The AER you see advertised on equity release products, such as a lifetime mortgage, shows the actual rate of interest you’ll pay on your borrowing, taking compound interest into account. So, if your interest rate (or APR) is 4.20% that’s the amount that you’ll be charged on the money you’re currently borrowing, but as interest is added to this, you might find the annual rate is actually 4.30%.
APR - Annual percentage rate
APR is the interest rate you’ll pay on your equity release product. Unlike AER, it doesn’t account for compound interest.
Much like any other type of mortgage, when you take out an equity release plan, you may need to pay an arrangement fee to your lender. The fee is used to pay for the set up of your equity release mortgage and the admin involved in this. It’s also sometimes known as the product or completion fee.
A beneficiary is a person(s) who will receive money or another asset from you when you die. When you pass away and your house is sold, anything left once the equity release product has been repaid will pass to your nominated beneficiaries.
When you apply for an equity release mortgage, you might need to pay a booking fee. This fee is essentially a deposit that you pay to show that you are serious about applying for the mortgage, and that you intend to follow through with your application. It’s also sometimes called an application fee or reservation fee.
This is a type of insurance that covers the cost of rebuilding or repairing your property if it’s damaged or destroyed. As with any other type of mortgage, if you take out an equity release mortgage, you are legally obliged to have adequate buildings insurance against your property.
Compound interest is made up of the rate of interest you pay on your original debt, and the interest that builds up.
For example, if you take out an equity release plan for £100,000 and pay 4% interest, the total interest in the first year would amount to £4,000. This is added to your mortgage sum, increasing it to £104,000, and the following year you would pay 4% on this new amount, and so on.
Unlike a standard mortgage, you don’t have to repay this interest during the mortgage term on an equity release plan. Instead, the interest accumulates and is only repaid when you either pass away or move into care. This means that the interest owed on an equity release plan can rack up into a large sum over the years.
Sometimes seen as an alternative to equity release, downsizing is where you sell your home and move to a smaller or less expensive property. You may do this to release a lump sum of equity from your home’s value instead of taking out an equity release plan, for example. If this sounds like something you’d like to explore, have a look at our article Five questions to ask yourself if you’re considering downsizing your home.
Drawdown is a feature of some lifetime mortgages. Rather than taking the equity you release as a lump sum, you can draw down money from your mortgage as and when you need it. You will usually only be charged interest on the amount you’ve drawn down, but normally have to take out an initial sum to get the ball rolling. For more on Lifetime mortgages and drawdown, have a look at our article Lifetime mortgages explained.
Early repayment charge (ERC)
Nearly all mortgage products will have something called an ERC, which is essentially a fee your lender will charge if you repay your mortgage early. The charge effectively represents a portion of the interest your lender will lose if you close your account and it’ll apply to most equity release products.
Equity release plans are designed to only be repaid either when you die or move into care. Some plans, however, don’t have ERCs so it’s always worth checking your fine print.
This is a type of lifetime mortgage that offers more money or better interest rates to those with lower-than-average life expectancies due to a medical condition, or certain lifestyle factors such as being a smoker.
Equity is essentially how much of your home you own outright. So, for example, if your home is worth £200,000 and you have an outstanding mortgage of £100,000, you have 50% equity as you own £100,000 outright.
Equity release is a way of unlocking some of the wealth tied up in your property without having to sell your home. There are different types of equity release products, including lifetime mortgages and home reversion plans. You can read more about equity release in our article Equity release – what is it and how does it work?
Equity Release Council
The Equity Release Council (ERC) is the trade body for the equity release sector, which ensures certain standards and practices of the industry, such as a ‘no negative equity guarantee’. Members commit to particular standards and safeguards on equity release plans, and customers are fully informed of all the potential benefits, risks and downsides before they take out a plan. To understand more about this, read our article Equity release – what are the risks?
Members of the ERC include equity release providers, advisors and solicitors.
Your estate is made up of your assets, including cash, investments, properties and so on, minus any liabilities, such as mortgages and loans. Considering your estate when it comes to equity release is important, as taking out a plan can have a significant impact on the value of your estate and any inheritance when you die.
Financial Conduct Authority (FCA)
The FCA is the UK’s financial regulator. It’s a government body that regulates, sets standards and supervises thousands of financial institutions and bodies, including equity release providers and advisors.
A fixed rate is an interest rate that’s fixed for a defined period of time. Lifetime mortgages often have rates that are fixed for life, whereas standard mortgages are typically fixed for a number of years.
Home Reversion plan
This is a type of equity release plan enabling you to release wealth from your home by selling part or all of your home to a home reversion provider in exchange for a lump sum. You will not need to leave your home or pay rent on your home, and will be able to live in it until you either die or move into care. You can read more about this in our article Home Reversion – what is it and how does it work?
Inheritance protection is a feature of some lifetime mortgages that enables you to protect a certain percentage of your property to leave as inheritance for your loved ones. It’s aimed at tackling one of the key risks of equity release, which is that it can eat into the value of your estate, and dramatically reduce inheritance. Inheritance protection is sometimes called ‘ring-fencing’, as it protects some of your property’s value.
Key Facts Illustration (KFI)
Also known as a personalised illustration, a KFI is a document that you will be provided with during the equity release advice process which outlines the product’s main features. The aim of this document is to help you understand how different mortgages work and compare them easily using the same criteria across the board. This document must be provided under FCA rules. It will always follow the same format, and includes:
- The mortgage amount
- Mortgage term – how long it will run for
- The interest rate
- Any fees you’ll be expected to pay, such as an arrangement or booking fee, for example.
A lifetime lease is a feature of a home reversion plan that essentially means you can stay in your home for the rest of your life, or until you go into care.
A lifetime mortgage is a type of equity release product that enables you to release a lump sum or regular payments from the value of your home, with the debt repaid only when you die or go into long-term care. They are the most popular type of equity release plans and allow you to access some of the wealth that you’ve built up in your home. You can read more about this in our article Lifetime mortgages explained.
Loan to value (LTV)
Loan-to-value is the ratio of the amount you intend to borrow against the property’s value, and is usually expressed as a percentage. For example, if the property you intend to buy is valued at £100,000 and you plan to put down a £5,000 deposit (or equity), the amount you would be looking to borrow would be £95,000, which would make your LTV 95%.
Market value is the estimated amount that a property is worth, based on the current property market.
Negative equity occurs when a property’s value is less than the amount owed on the mortgage. Homeowners may fall into negative equity when property prices fall significantly.
No Negative Equity Guarantee
The no negative equity guarantee is an assurance that you’ll never owe more than your home is worth. Any member of the Equity Release Council will offer this as a standard feature on equity release plans. It gives you peace of mind that when you die or go into care and your property is sold, you or your loved ones aren’t left owing money to the equity release provider.
Some equity release plans are portable which means that if you move, you’ll be able to transfer the plan to your new property, provided you meet your lender’s specific criteria.
You do not need to pay tax on any of the money you receive through equity release. However, there could be some tax implications, depending on how you use the money received from equity release. For example, if you placed the lump sum from equity release into a savings account, you may need to pay tax on any interest received that breaches your personal savings allowance (PSA). This allowance enables you to earn £1,000 interest on your savings tax-free as a basic-rate taxpayer, or £500 as a higher-rate taxpayer.
Before your equity release lender will give you any money, they will carry out a valuation survey to make sure your property is worth the money you think it is.
Many people assume that because you’re releasing equity that you’ve already built up in your home, you don’t need a valuation, but your lender will seek assurance that when you die or move into care, your loan can be repaid.
Waiver of Occupancy
If there is anyone over the age of 17 living in your home who isn’t named on your equity release plan, they’ll need to sign a ‘waiver of occupancy’. This waiver essentially means that when the named individuals die or move into care, other occupants will have to move out.
Whole of market
‘Whole of market’ equity release providers, as their name suggests, offer products spanning the entire UK equity release market.