If you are one of those people looking into equity release, one of the most vital things that you have to do is to be able to find the best plan that will be most suitable for you and your financial needs. Because the financial market is such a broad one and you will find yourself in front of so many choices on equity release plans, it is imperative that you exercise critical thinking before you make any financial move.
To guide in your search for the best UK equity release plan, here are some pointers to keep in mind:
1. Study about equity release. Before making any move in the financial world, the smart thing to do is extensively research this field you plan to go into. Given you already know that equity release is a way of unlocking the value of your home without having to leave it, you should still study about the many aspects that go around this concept.
For instance, you must also learn about the many types of equity release plans. Generally, there are two types of plan: lifetime mortgages and home reversion. Lifetime mortgages, the more popular form of equity release are loans against the value of your home. When you die, the lender would sell your home, take back the money you borrowed and leave the rest to your family.
Reversion schemes on the other hand would sell all or part of the house to a Reversion Company. The company will give you a lump sum of the money and still allow you to live in the property for free as long as you live or until you enter a retirement home. In this scheme, you should have little or no mortgage, you should own the home and it should be in top shape and worth at least £50,000.
2. Know the pros and cons of different types of equity release plans. This will make it easier for you to decide which one is the better route for you.
Lifetime mortgages advantages
• This type of loan can be availed by people as young as 55.
• Any increase in house prices during your mortgage will be beneficial for you.
• There may still be enough money to give as inheritance after mortgage is paid off.
Lifetime mortgages disadvantages
• Your debt accumulates over time.
• If the entire equity is depleted, your heirs will be left with virtually nothing.
• Early repayment charges may be required if you pay the loan early.
• This may affect your eligibility to certain state benefits.
Home reversion advantages
• You can leave a portion of the house’s equity to your heirs by not selling the whole house to the reversion company.
• There are flexible home reversion deals that allow you to release some amount today while have other cash releases in the future only if you need it so.
Home reversion disadvantages
• You do not own your home anymore.
• Increase in house prices will only apply to the portion of the house that you still own.
• Early repayment charges may also apply.
• You have to take care of the house’s maintenance and all of its property-related bills.
• This may affect your entitlement to some state benefits.
3. Go to an IFA. Choose your adviser carefully because the wrong advice on equity release can leave you off-tracked. A good Independent Financial Adviser will guide you in every step of the way, study your situation to the best of his ability, ensure that you perfectly understand all the features of the plans available and not pressure you into making a decision.
4. Choose the right company. Rely only a company duly registered with the FSA and SHIP. The FSA or the Financial Services Authority is an independent and non-governmental body that oversees financial services industry in the UK. It sets standards, which organizations and companies should comply with, otherwise they will be sanctioned.
SHIP on the other hand is the Safe Home Income Plans a company devoted to the protection of plan holders. Equity release providers who are members of this organization must adhere to the following rules:
• Provide fair, simple, clear and complete presentation of equity release plans.
• Allow the client’s legal work to be performed by the solicitor of his choice.
• State all the costs and charges covered in the plan.
• Provide a “No Negative Equity” guarantee, which means the borrower will never owe.
5. Compare different plans. Before you sign up for any plan, be sure to read and understand thoroughly each plan’s features. Read the different plans many times and compare them carefully. If there is something that you are not sure of, do not hesitate to ask your IFA.
6. Study the costs, fees, penalties of each plan. Most lifetime mortgages would involve a valuation fee and legal fees that will depend on the value of your home as well as arrangements fees ranging from £200-£500. Meanwhile, with home reversion fees, there will also be a valuation cost and fixed application fee both of which depend on the value of your home.
7. Watch out for equity release pitfalls. If you are not careful, you may encounter various problems in the future. So be sure that you keep full ownership of your home for as long as you live, that you are allowed to move home after applying for an equity release plan and that any outstanding debt after the sale of your property will not passed on to your family.
Be wary of extra charges and penalties such as early repayment fees. Look out for those that are hidden in fine print. Don’t forget to look at the interest rate either. The difference between 0.5% and 1% may not seem like a lot but it will after 10 years or more.
Now that you have gone through all the ways on how to get the best UK equity release plan, make sure you keep all these in mind. Good luck!
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