Equity release
- are you considering the mortgage of a
lifetime?
Equity release is currently all the rage as cash-strapped pensioners rush
to unlock the equity in their homes.
However, there are fears that these schemes are being missold. Lifetime
mortgages, the most popular form of equity release, are currently unregulated
but will be within the Financial Services Authority's remit from October
2004. Despite a change in view by the government, accepting that home reversions
need to be regulated, it is unlikely that they will be by October and possibly
not for some time to come.
Lifetime mortgages involve you taking out a mortgage against the equity in
your property. You continue to live in your own home and don't have to pay
any interest at all during your lifetime because the interest is added to
the loan and paid off from the sale of the property when you die.
Because compound interest rolls up very quickly, it is important to use a
lender who is a member of the trade association Safe Home Income Plans (SHIP)
as these providers give a "no negative equity guarantee."
This means that the provider guarantees that it will accept the proceeds
from the sale of your property in full and final settlement of your debt.
If there is no "no negative equity guarantee" in place, the lender would
be within its rights to pursue your heirs for any debt which exceeds the
proceeds of sale.
There is also a number of hidden costs associated with lifetime mortgages.
If you wish to repay the full loan early (usually during the first 5-10 years
of the loan), most lenders will charge you an early redemption charge or
ERC, based on a percentage of the outstanding loan.
For instance, Standard Life charges an ERC if you want to pay off your loan
at any time during the first 10 years, costing you 7% of the loan amount
outstanding in the first five years, 6% in year six, 5% in year seven, 4%
in year eight, 3% in year nine and 2% in year 10.
The Portman Building Society will charge you 6% of the loan if you pay it
off at any time in the first five years.
Norwich Union has such a complex formula for calculating its ERC that it
has now capped it at 25% of the original loan, plus a £300 admin fee.
Even so, NU's average ERC is £1,650 - a lot of money to most pensioners!
The Prudential's Standard Option charges 4% of the original loan (but not
on loans of £25,000 or less) and charges no ERC at all on its Cash Plus
Option.
You will also have to pay a valuation fee, which will include a non-refundable
application fee of around £200, which covers the lender's administration
costs if you decide not to go ahead.
The level of the valuation fee will obviously depend on the value of your
property, but some lenders charge a minimum of £300.
Lenders also charge a mortgage completion fee of typically £300-£600
which is either deducted from the money you receive or added to the loan.
This fee covers the lender's legal costs.
It is best to ensure that the completion fee is deducted from the money you
receive, rather than being added to the loan as this will mean that you pay
compound interest on the fee for the entire term of the loan.
The interest rate charged on lifetime mortgages can vary considerably and
is normally set at between 3% and 4% over the Bank of England base rate.
This means that with base rate at 4.25%, fixed rate lifetime mortgages are
currently being charged at around 7%-7.75% and a typical capped rate is 6.5%,
with a cap of 9%.
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Please note that articles on this site do not constitute regulated
financial advice, which recommends a course of action based upon the specifics
of your personal circumstances. The articles are intended to provide general
personal financial information. We urge you to consult an Independent Financial
Adviser (IFA) before making any important decisions about your finances.
Call 0800 085 3250 for details of IFAs in your local area. Any statement
regarding financial services products and tax liability is based on legislation
and tax practices as at 1 January 2004, which is, of course, subject to
change.The value of any tax benefits or reliefs depends upon the individual
circumstances of the investor.When investment performance is mentioned you
should remember that past performance is no guarantee of future performance.
Where products have an underlying investment content, in many cases the value
of the investment can fall as well as rise. For with-profit based investments,
there is no guarantee as to the level of bonuses that will be declared, if
any. Where mortgages or secured loans are explained do remember that your
home is at risk if you do not keep up repayments on a mortgage or other loan
secured on it. All mortgages are subject to underwriting, status and are
not available to people under the age of 18.
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