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.
Bankruptcy is a legal process that can write off someone’s debts if they have little hope of repaying them. While it can provide a fresh start, bankruptcy has significant implications and should not be undertaken lightly and is not right for everyone.
4Compound 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.
5County Court Judgement (CCJ)
A CCJ is a Court Order registered against someone who has failed to repay money they owe.
6CPI (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.
7Debt management plan
A debt management plan is an informal arrangement to repay debts such as credit cards, loans and store cards with one set agreed monthly payment. The plan is managed by a provider that deals with the creditors rather than the individual in debt.
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.
Downsizing protection is a feature that, subject to certain conditions, allows customers to pay their equity release back early when they move home, without incurring any early repayment charges. The exact details of downsizing protection can differ from lender to lender.
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.
12Early 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.
13Early Repayment Charge (ERC) exemption
Some plans offer an ERC exemption that allows joint customers to repay their equity release in full free of any early repayment charge if one of them passes away or moves permanently into long‑term care within a certain period of time. The exact details of the ERC exemption can differ from lender to lender.
This is an amount of money available to cover unexpected financial expenses such as large unexpected bills or repairs.
15Enhanced Lifetime mortgage
An enhanced (or “impaired”) lifetime mortgage potentially allows a larger release or a lower interest rate dependent on your health as, with equity release, you can receive enhanced terms if your health is poor.
The percentage of your home you own, over and above any mortgage that may be outstanding on the property.
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.
18Equity 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.
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.
20Fixed Interest Rates
Fixed interest rates, when considered in relation to equity release, are interest rates which are fixed for the life of the plan.
Freehold this is a type of property ownership where you have outright ownership of the property and the land on which it is built.
If you need further funds in the future, it may be possible to release an additional amount from your home from your existing equity release provider – this is known as a further advance. To obtain a further advance, advice must be taken again and a new valuation will be required. The additional funds will have its own interest rate although the terms and interest rate on the original release remain unchanged.
23Home Reversion Plan
This type of equity release plan works by you selling part, or all of your home to a reversion plan provider.
24Individual Voluntary Arrangement (IVA)
A formal and legally binding agreement between someone in debt and their creditors to pay back their debts over a period of time. An IVA has to be approved by the Court and there are costs and risks involved. An IVA is an alternative to bankruptcy. There can be costs involved and implications by taking out a debt management plan.
Certain plans provide the flexibility to ring‑fence a percentage of your home’s future value, which can then be passed on to your beneficiaries when you die and the house is sold, regardless of how much is outstanding on the loan.
26Interest Only Lifetime mortgage
You choose to make repayments on a regular basis which will reduce the effect on the value of your estate. Some plans allow you to make repayments that are equal to or less than the amount of interest that is charged. As with any lifetime mortgage, the balance and the interest accrued is paid off from the value of your estate once you have died or have moved into long‑term care.
27Interest Only mortgage
With a standard interest only mortgage, you only pay back the interest on the money you’ve borrowed each month. At the end of the mortgage term, you’ll still owe the same amount that you borrowed but you will have to find a way to pay off this amount.
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.
With a joint tenancy, two people have equal rights to the whole property and on the death of one of the joint tenants, the property automatically goes to the other owner.
30KFI (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.
Leasehold is a form of property ownership where you own the property for the length of the lease agreement but not the land on which it is built. To be eligible to undertake equity release, the lender will require the lease agreement to be of a minimum number of years.
This type of equity release plan works by you borrowing, a percentage of your home’s value, and is secured against your home.
33LTV (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.
35Means 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.
36No 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.
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.
39Power of attorney
A Power of Attorney is a legal document where one person gives another person the right to make financial and/or medical decisions on their behalf. You can only set up a Power of Attorney if you have the mental capacity to do so. Not having one in place can cause significant problems if mental capacity is lost a later date. Rules differ between England, Wales, Scotland and Northern Ireland.
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.
41Property 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.
42Retentions 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.
43Retirement Interest Only (RIO) mortgage
With a RIO, you only have to pay back the interest to the lender each month. They are similar to standard interest‑only mortgages but with most RIOs, the loan is only repaid when you sell your property, move into residential care or die. You have to prove that you can afford to pay the interest each month.
44Right 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.
45Tenancy in common
With a tenancy in common, two (or more) people own the property and each can own a different share of the property. Upon the first death, their share of the property goes to their estate and does not automatically pass to the other owner.
If you want us to deal with someone else on your behalf, that person would be known as a third party. You would need to give us permission to do so, and there are only certain aspects of the advice process that we can complete with someone else.
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.
48Variable rate plans
Generally offer a lower rate of interest initially but variable rates can vary year on year, based on changes in market conditions.
49Waiver 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 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 £1,795 be payable.
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.