Equity Release Jargon Terms
Here at Age Partnership, we want to be sure you are clear about the equity release process so you are able to make an informed and confident decision about the choices you make.
Although we try to use plain English where possible, our A to Z guide below should clarify some of the most commonly questioned words and phrases about equity release.
1AER (Annual Equivalent Rate)
Shows the rate of interest earned in a year on savings or investments. The higher the AER, the better the return. All adverts for interest-bearing savings accounts quote the AER, so you can compare returns.
2APR (Annual Percentage Rate)
Shows the overall cost of borrowing on a credit card or loan. Generally, the lower the APR, the better the deal for you. Use it to compare different credit and loan offers.
3Compound Interest or roll up of interest
Any interest you owe is added to the original amount that interest is calculated on. You are effectively paying interest on interest. Therefore, the balance owed will increase more quickly year on year.
4CPI (Consumer Price Index)
Measures the changes in price levels of a selected sample of everyday items and services. Lenders will look at changes in the CPI to determine amendments to the interest rates of variable rate equity release plans.
The charges that solicitors pass on to their clients from third parties. These charges are in addition to the basic fee charged by most solicitors; such as mining surveys and the Land Registry. The charges for these services are invoiced to you as disbursements.
Downsizing is when you sell your home, to buy a smaller one, or one that is of lower value. This is a method of releasing any money tied up in your property, and can often be an alternative to equity release.
A drawdown plan is a type of lifetime mortgage that allows you to access the funds you release more flexibly over time, as and when you need them. You take a lump sum of cash to meet your immediate needs while benefitting from a reserve facility to draw from in the future. This can give you peace of mind while also saving you money by reducing the amount of interest that you pay.
8Early Repayment Charge
If you choose to, there is the option to repay your lifetime mortgage at any time. However, if you decided to do so there could be a fee to pay in addition to paying back the money you released.
Generally speaking early repayment charges can be ‘defined’ or ‘gilt based’.
If they are ‘defined’ charges, the percentage charge which applies each year will be clearly set out and will typically reduce over time.
If the charges are ‘gilt based’ they will vary during the term, between a defined minimum and maximum figure, to reflect changes in the interest rates on government borrowing or ‘gilts’.
There will be certain circumstances in which an early repayment charge will not apply, which will vary dependent on the plan selected.
Should you have received advice about an equity release plan, please see your Key Facts Illustration (KFI) for more details.
The percentage of your home you own, over and above any mortgage that may be outstanding on the property.
10Equity Release Council
The Equity Release Council (ERC) are an industry body responsible for ensuring its members act with integrity and transparency in dealing with its customers. Age Partnership are members of the Equity Release Council.
This is a way to access the money tied up in your home to help fund your retirement. There are two types of equity release plan: home reversion and lifetime mortgage.
Your estate is anything you own when you die (after any borrowing has been deducted). Please remember, equity release will reduce the value of your estate.
13Fixed Interest Rates
Fixed interest rates, when considered in relation to equity release, are interest rates which are fixed for the life of the plan.
14Variable rate plans
Generally offer a lower rate of interest initially but variable rates can vary year on year, based on changes in market conditions.
15Home Reversion Plan
This type of equity release plan works by you selling part, or all of your home to a reversion plan provider.
Equity release plans continue until the money is repaid or until the last policyholder dies or moves into long term care. By having a joint plan means that your spouse or partner would not need to move home if they outlive you or you move into care.
17KFI (Key Facts Illustration)
A document provided by the lender which breaks down the terms and conditions of your plan. All lenders must provide a KFI in the same format, so that if you have two KFIs you can easily compare them.
This type of equity release plan works by you borrowing, a percentage of your home’s value, and is secured against your home.
19LTV (Loan to Value)
Refers to the percentage of a property’s value which is being borrowed. For example, if £30,000 were borrowed against a property with a value of £100,000, we would say the LTV was 30%.
Most equity release plans will allow you to take your money as a one cash amount which is known as a lump sum.
21Means Tested Benefits
Some benefits offered by the Government are only paid to those who can demonstrate their income and capital is below specified limits. In order to establish who does and doesn’t have the ability to support themselves in these instances, the Government will assess their means.
22No Negative Equity Guarantee
This feature of most lifetime mortgage equity release plans means you will never owe more than the value of your property.
Once a case is accepted by the lender and a valuation has been completed, an Offer Document will be issued to all concerned parties. This gives a thorough breakdown of the plan, including any changes which have occurred since the KFI was issued.
Prevailing rates refer to the interest rates available at the time you come to draw down on a reserve facility. These could be higher or lower than your initial interest rate. The prevailing rate available at the time you come to draw down will be applied to the extra funds being released. These funds will therefore accrue interest at a different rate to the initial release.
All of the plans recommended by Age Partnership are portable. This means that should you wish to move home and the property meets the lender’s criteria, then the plan can be moved with you. The plan is then secured against the new property. However, depending on the values of the properties it may be necessary for you to repay part of your existing plan.
26Property Survey (Valuation)
Once your application is received by the lender a property survey will be completed to ensure the estimated valuation is accurate and, in turn, the amount of funds which can be released in line with the LTV agreed. This survey is completed by an independent and unbiased chartered Surveyor.
27Retentions and Undertakings
If the surveyor identifies what they consider to be essential works in the property, they may recommend the Lender retains some of the funds until said works are completed. The Lender may opt to do this or they may simply place an ‘undertaking’ as a condition of your offer, stipulating that the works must be completed within a set period of time.
28Right to Remain
This guarantees that you are able to continue living in your property until the termination of the plan, generally in the event of your death or moving into long term care. This is, however, subject to you following the conditions of the plan (e.g. keeping the property in a good state of repair). Please refer to your T&C’s for further details.
Should the property be valued higher or lower than the amount estimated, it may be referred to as an ‘up’ or ‘down valuation’. Depending on the amount you require and the maximum LTV offered by the lender, this may result in changes to the amount which can be released or the rate at which interest is charged on the plan. We will always contact you, should this be the case, to explain any changes.
30Waiver of Occupancy
This is a document which may need to be signed by anyone aged 17 or over, who is permanently residing in the property and isn’t party to the equity release plan being proposed. It confirms that, should the condition of a termination of the plan be met (i.e. all parties pass away or move into long term care), the occupant’s right to reside there will cease. This is so that the property may be sold and the plan repaid.
Equity release may involve a home reversion plan or lifetime mortgage which is secured against your property. To understand the features and risks ask for a personalised illustration.
Equity release requires paying off any existing mortgage. Any money released, plus accrued interest would be repaid upon death, or moving into long-term care.
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Things to consider
As multi-award-winning equity release specialists we provide informative impartial advice covering your options as well as explaining how equity release will affect potential inheritance and how your entitlement to means-tested benefits could be affected now or in the future.
We provide initial advice for free and without obligation. Only if you choose to proceed and your case completes would a typical fee of 2.25% of the amount released be payable (minimum £1,695).
Equity release requires paying off any existing mortgage. Any money released, plus accrued interest to be repaid upon death, or moving into long-term care.