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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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Schedule of Articles

property investing
property refurbishment
buying overseas property
moving house
home letting
buy to let
home improvements

top 10 celebrity areas
6 up & comming areas
5 signs that an area is up & comming
city types yearn for the country in town
your place in the sun
equity release
planning permissions & extensions
estate agents
rent or buy
buy to let
mortgage overpayment
mortgage endowments
mortgage protection
stamp duty
self build your home
electrical surveys
the cost of moving in
the perfect neighbourhood
council tax
house price league
good neighbours
stamp duty land tax
top 20 towns 2003
cut the cost of moving
interest rates
buying in scotland
dream homes
first time buyers
the worth of uk homes
bad estate agents
keeping up appearances
home improvements


Please note that articles on this site & any other 'planning-approval' related web site does not constitute professional advice. All articles are intended to provide a general view of many subjects. We suggest you to consult a solicitor before making any important decisions.  The author is not an expert in any given field.

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