Spotlight

Your equity release questions answered

Stuart Wilson, corporate marketing director at more2life, answers the most common questions advisers ask about equity release

How do early repayment charges (ERCs) work

and when are customers not required to pay them?

Lifetime mortgages are designed to last a lifetime and, as such, are typically subject to ERCs if a customer wishes to repay their loan early, either in full or in part. The size of ERCs can vary depending on a range of factors, but there are two main types.

Fixed-rate ERCs are a fixed percentage of the total outstanding balance and usually reduce on a sliding scale over a set number of years, after which there is no charge at all. The other main type is gilt-based ERCs. These are linked to the movement of 15-year gilts against a ‘benchmark’ rate set at the start of the loan, and are typically seen as quite complex to track.

There are many features that lenders build into their plans which allow for the exemption of ERCs. Standard exemptions include porting a loan from one suitable property to another, the repayment of the loan following a move into long-term care, or repayment following the death of the final borrower. There are other instances when customers may be exempt from ERCs, but these can vary from lender to lender.

Some providers have introduced partial capital repayment policies on their products, offering increased flexibility for customers. Others have started to offer customers the option to repay their loan within three years of the death of their spouse or partner without being subject to ERCs. In addition, some plans now allow customers to downsize to a property that does not meet the lender’s specific criteria without having to pay ERCs – this product feature is commonly referred to as ‘downsizing protection’.

What happens when a client dies? Does their family have an opportunity to purchase the property?

When a client – or the second borrower in the case of a joint loan – dies, the property must be sold to repay the outstanding balance. This includes the borrowed capital and any rolled-up interest.

The death of a family member can be a difficult time and as part of their commitment to treating customers fairly, lenders are keen to work as closely with the family as possible to help with the process. In the months following the customer’s death, providers expect to see positive action being taken to market and sell the property, within a reasonable timeframe and at a fair market value.

However, there are no restrictions around who can purchase the property and most lenders are happy to agree a deal with any immediate family members, should they wish to buy the home before it is listed on the open market. If they do wish to purchase the property, the loan must be repaid in full and come directly from the acting solicitor representing the previous homeowner’s estate, or where a suitable grant of probate exists. This process can be made more complicated in cases where probate is not established, so it is important that advisers speak with clients and their family members about this when equity release policies are initially taken out.

Can tenants in common be accepted for an equity release loan?

Tenants in common means that two or more individuals own ‘shares’ of a property, which can be in varying proportions – unlike joint tenants where each party has an equal claim. For example, one tenant could own 25% of a property whilst the other could own 75%. Naturally, this can complicate an application for a lifetime mortgage as the tenants may have different aspirations for the property. For instance, one may wish to gift their share to a loved one upon death, whilst the other may not. As such, lenders would be more cautious of offering a plan where other owners have a share of the property. However, that’s not to say it’s impossible. Normally in these cases, a lender will ask that all interested parties are included in the loan, so it becomes a joint policy and the agreement is held between the customers.

Can clients make interest repayments on an equity release loan?

Your equity release questions answered

as ‘interest served’ plans. These products are designed for clients who have the means and desire to continue servicing their lifetime mortgage. These could include customers who have taken out an equity release plan to help existing debt as an interest-only mortgage. Although some providers offer ‘repayment holidays’, it’s common for lenders to transfer the plan over to a standard roll-up model, should the customer wish to stop making repayments. It’s also important to note that if customers wish to stop their interest repayments, it may not always be possible for them to restart these at a later stage.

Historically, interest served plans were more common. However, the requirement to check the affordability of interest repayments, introduced as part of the Financial Conduct Authority’s (FCA) Mortgage Market Review, made access to these types of policies more difficult for customers. This requirement has since been rescinded, but still means that there are fewer of these plans on offer today than there once were.

However, more recently, modern lending features like partial capital repayments have emerged, giving clients more flexibility in terms of managing their actual loan. Customers can set up a regular plan to repay the loan capital whilst avoiding any ERCs. This typically ranges from 1% to 10% of the initial loan amount each year. Clients can use these policies as an interest served type arrangement which applies to the capital as well, and with the added flexibility of starting and stopping their repayments at any point.

For customers who are married, do both of them have to be over the age of 55 to qualify for an equity release loan?

Yes – for joint loans, both applicants must be over the age of 55. Currently, there aren’t any equity release plans available in the market to individuals aged under 55.

For customers who are already divorced or getting divorced, can they be accepted for an equity release loan if their estranged partner is still on the title deeds?

With over 90,000 divorces in 2018, this is a fact of life for many people and we do find that the older age groups are not immune to this trend. Someone who is divorced and owns their own property will have no trouble getting equity release, but it will be more complex if they are getting divorced or their partner is

Stuart Wilson

still on the title deeds. That said, this can be sorted out and we do find that some people use equity release to give their former partner their share of the equity without needing to sell the property. Advisers should speak to the lender to see how they can help. M I