Diane Fish is an Independent Financial Adviser with Smith & Pinching, Chartered Financial Planners, advising on Equity Release and Lifetime Mortgage arrangements.
I took out Equity Release on my home 10 years ago as most of my money is tied up in my house. I only took a small amount of what the house is worth – about 10pc of its value – but I wish I had taken more. Do I have to use the same company to get more? The interest rate I’m paying on what I took the first time around looks high when compared to today’s low rates.
Diane Fish of Smith & Pinching responds:
Equity Release (ER) has indeed changed over the past 10 years, so it is certainly worth reviewing your current arrangement and long-term needs. Interest rates for ER arrangements are generally in a good place at the moment. You can switch to another to get a better deal, but you must be careful to consider all the implications – many arrangements will have an early repayment charge. Getting advice at this point is critical to ensure you are not penalised.
Many ER lenders will allow you to set up a pre-arranged drawdown arrangement where your property is assessed and the maximum amount that is available to you is established – known as your lifetime allocation or reserve. You can then draw against this reserve as and when needed. This solution saves interest and is convenient, so is the most common route we recommend. The interest applied to any future drawing will be at the prevailing rate at the time, not the original rate applied at outset.
It is always a good idea to get independent advice about setting up an ER arrangement. An adviser will look at all the available options and recommend a plan that is suitable for your needs. When choosing an adviser, you should make sure that the advice firm has signed up to the Equity Release Council Code of Conduct.
There are two types of ER: Lifetime Mortgages and Home Reversion Plans. Costs will be involved when setting up any Lifetime Mortgage or Home Reversion Plan, as well as any interest payable. In all cases, there will be requirement to fully repay the outstanding debt when the house is finally sold.
What you must remember is that taking out a Lifetime Mortgage arrangement will mean that the value of the estate you leave to your family when you die will be reduced. It may also affect your entitlement to any means tested benefits both now and in the future. ER can be more expensive when compared to a normal residential mortgage. In addition, you will still be responsible for maintaining the property. To understand the features and risks, ask for a personalised illustration. There will be a fee for mortgage advice. The precise amount will depend upon your circumstances, but we estimate that it will be a minimum of £700.
Any opinions expressed in this article do not constitute advice.
For more information please visit www.smith-pinching.co.uk
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