28 Jul, 2023/ by Homeward Legal /Equity Release, News, Remortgage
There are several advertisements in papers, magazines and on television aimed at those in later life, who are perhaps coming to the end of their mortgage period, or they have paid it off already, including Age Partnership, Key Advice and Aviva, among many others.
But, particularly in recent times - and especially if the homeowners have already retired - any savings and pensions may be dwindling in their buying power.
The cost-of-living crisis, coupled with stubborn inflation rates, squeezed budgets for food and household bills and still-high energy prices, means that most people are looking at tightening their belts and avoiding the expense of luxuries such as holidays, extending their house, other home improvements, maybe a new car or expenditure on a hobby.
For those homeowners with children who have flown the nest, too, it may be a source of stress that they can't financially support with the ‘Bank of Mum and Dad' as much as they would want to.
These are all good reasons that people look to their property and consider whether there is any way of getting some money out of their property's equity without necessarily having to sell it.
Equity is defined as the market estimated value of the home minus any secured debt that's outstanding, such as the residual mortgage.
In recent years, as is shown in the monthly Office for National Statistics House Price Index, while there was a dip created by the financial impact of the war in Ukraine, increased energy prices and the impact of the mini-budget in September 2002, house prices are holding and have increased greatly.
The Halifax House Price Index expresses the situation perfectly, with its table of comparative price increases. Using January 1992 as the base, the current house price is some 500% higher over the space of thirty years.
So, bricks and mortar are still the best investment, and it also means that, for properties coming to the end of their mortgage term, there is likely to be a significant sum in equity.
The options for such plans are either to remortgage the home or to seek a release of some or all of the equity within it.
But which alternative is the best? And what should you look out for when investigating either of them?
Equity release
Equity release is a form of remortgaging as it is still a loan that is secured against the home. The money released in this process, after fees and loans secured against the property are sold off, is tax-free.
The other major difference is that the equity release option is only open to those aged over 55. Where a house is co-owned, the youngest participant also needs to be this age or over.
Because of this age, it is more likely that any existing mortgage (or even remortgage) is coming to the end of its duration. The less remaining to be paid on the property, the greater the amount that can be released in equity, of course.
Another difference with equity release against remortgaging is that there are (usually) no monthly repayments. The loan for the equity sum is paid off upon sale of the property, which means it needs to be considered when you want to move or if it's included in the calculation of the assets in your estate upon death.
But there is, of course, interest to be paid, which is all part of the overall calculation of the sum that can be released. And this means there are also options available to take out a plan to pay off the interest with regular or ad hoc payments. In addition, you can choose whether to opt for the full sum in one lump or to take smaller amounts.
You should ensure your choice of equity release plan meets the standards of the Equity Release Council (the provider can confirm their position on this) so that they offer a ‘no negative equity' guarantee, which means you will only ever pay what the home is worth according to the market at the point of sale, and you will continue to benefit from any rises in value of the property.
The benefits of equity release are that you can release the equity in your house and that money is not subject to any tax requirements. The money is yours to use however you wish (however, be aware that financial gifts to others may be subject to tax). The interest and the amount of the loan is repaid upon the sale of the property, with most equity release plans requiring no repayments for its duration. Ultimately, you keep ownership of the property.
As already stated, things to be aware of with equity release is that it is a loan secured against the home. You should also be very sure of what taking out equity in this way means, since your estate will be reduced by the value of the loan, which may also go on to impact any means-tested benefits you later rely on.
Remortgaging the property
The key difference between opting for remortgaging your property against equity release is, as the word suggests, that there exists a current mortgage that is being revisited, either by extending it or replacing it with a new plan (usually to get a better rate or deal).
As with any loans, the borrower must meet the affordability criteria of the lender.
Remortgaging is often seen as a way of releasing equity that has already built up in the value of the property.
What the remortgaging option gives you is the ability to release a sum of money from your home, allowing you to take advantage of the increase in value since you bought it. And it allows you to adjust your financial position in terms of repayments, the rates charged by the lender, and it might allow you to use a different lender with more favourable terms.
Because a remortgage is a new loan against the house, the lender's affordability criteria will need to be met, which might mean that your credit rating, financial position and even age (because of the planned length of the loan) could count against you. As with the original mortgage, it should be noted that the remortgage loan is secured against your home and, as such, defaulting could result in losing it to being repossessed. In addition, there may be conditions applied by the lender as to how the amount is used.
Conveyancing - what you need to know
If you have decided to opt for a remortgage, you might need to involve a conveyancer.
If you are borrowing more on an existing deal or moving to a new mortgage deal with an existing lender, you won't need to have a legal representative, since this is simply a product transfer.
If, however, you are looking to borrow with a new lender then you'll need to appoint a conveyancing solicitor.
If you opt for a straightforward equity release loan, then the Equity Release Council says that you will need a solicitor to protect your legal obligations, but not a conveyancer.
And that's where Homeward Legal comes in!
Homeward Legal will provide a quote that will not change - what you are quoted is what you pay (there are some unforeseen items that might arise during the purchase and/or sale, but the solicitor discusses these and their cost as they come up).
In addition, to protect the homebuyer further, Homeward Legal operates a “no completion, no fee” promise, which ensures that, should the purchase or sale not go through as planned to completion status, no payment is required.
Call to get your conveyancing quote started, or discuss you concerns with your plans to move.
Or you can get a quick quote, using Homeward Legal's easy-to-use quote generator.