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How To Find The Right

Equity Release Deal At The Best Price

STEP 3 : More detailed research - 11 questions to ask
After your initial research you should have a list of between 2-6 different Equity Release plans to consider, so now it's time to look into these deals in far more detail.

My advice is to print out the Equity Release Comparison Grid (PDF format) and fill it in as you ask the 11 questions listed below.

But one important point before you start - don't be apprehensive about asking what you might think is a 'stupid question'.

If you ask a 'stupid question' and it saves you money, is it really that stupid? That's why there are never any stupid questions when money and finance is involved.

This is actually one of our top 10 secrets to personal finance - secret number 6: there are no stupid questions. Read the full list here as they're the ethos of the LearnMoney.co.uk site.

Question: What is the interest rate I'll be charged and can it move (both higher and lower)

  • Most equity release deals offer a fixed interest rate but some are variable so the point needs to be checked

  • According to our research (carried out in May 2010 when the Bank of England interest rate was 0.5%) the average Equity Release interest rate was 6.5% fixed

  • The highest rate among 16 different plans was 7.38% and the lowest 4.49% but the vast majority were in the 6%-7% range

  • Out of 16 plans 13 were fixed rate and only 3 variable interest rate

A fixed interest rate looks the most prudent for most equity release holders because it guarantees the repayments (added to the loan) cannot increase.

Question: How much will the loan principal increase every year

  • With a lifestyle mortgage equity release deal you don't need to make any repayments (as you would with a mortgage) because they're added to the original loan

  • But it is important to understand how much the loan will grow by year by year

  • I would therefore suggest you get a 20 year forecast so as to get a detailed picture of exactly how the loan will grow over the years

  • If an equity release provider is unwilling to provide this simple information then the chances are they're trying to hide something and that behaviour should not be tolerated. I'd therefore advise you quickly cross them off your list

Remember, an incredible amount of money is made by the banks and finance firms because they try to hide information from their customers, don't fall for their games and demand answers to your questions.

Question: What are the arrangement fees

  • Fees and charges are where we have to remain on high alert as many lenders love to try to overcharge

  • They can often get away with this behaviour because many of their customers are far too trusting and therefore won't bother to do proper research

  • One of the main problems with fees is that they can come in many different forms, all with different names so this is why you must ask for a total breakdown of all fees and charges

  • According to our research the average application fee for an ER deal was £620 with the highest being £695 and the lowest £500 but these might not be the total sum, hence the importance of asking for a total breakdown of ALL FEES involved in the deal

  • Interestingly enough according to our research 3 equity release providers didn't charge an application fee. Whereas that looks promising I wouldn't advise people get too excited about this. They might for example be playing a classic personal finance trick which is to offer something for free while charging another hidden yet larger fee

A classic example of this is holiday money where we want to change pounds into say Euros.

Most if not all foreign exchange booths scream 'commission free' which is true but then they exchange the money at a worse rate which more than makes up for the lack of commissions. In fact I'd bet most people would get a better deal if they actually paid commission!

Question: How much are the early redemption charges and how long do they last

  • An early redemption charge (ERC) is where the lender sets a fee if you want to cancel the equity release deal within a set period of time, for example the first 1-10 years

  • What you can sometimes find with equity release deals is the ERC charges are so large they effectively lock you into the deal forever because cancelling it would be too expensive

  • Others plans offer sliding scale ERCs, for example 5% of the initial loan value if cancelled within the first 5 years then 3% for the next 5 and then no charge from 10+ years

  • Whatever the case you must look closely into ERCs as these are where the financial firms often love to play games and when they play games it's not usually good news for the consumers

  • One good rule to follow with ERCs is this - If they're not simple to understand and work out then view those equity release plans as highly suspect as it's an odds-on bet if you want to cancel the deal they're going to be expensive

  • Final point - investigate whether ERCs have to be paid if you have to move into long term care. Some plans charge, others don't

Early repayment charges are ultimately about flexibility and when it comes to financial products the best ones are normally the most flexible.

Personally I don't have a problem with a large ERC for the first 5 years but if it's significant after that period then I'd start to take note.

Question: What are all the other fees
An application fee is not the only cost associated with equity release so make sure you investigate all of them, including fees such as -
  • Survey fee - An official valuation of your property will need to be carried out and this is often about 1% of its value

  • Legal fees - Paid to a solicitor, usually a fixed fee around £500

  • Broker/Advice fees - Some brokers will charge their clients directly so take note. Usually between £500 and £2,500
Question: Can money released via drawdown

  • Drawdown is where you agree to release say a total of £50,000 but you only take £10,000 today

  • Another £10,000 is taken in 18 months time and another £10,000 a year after that, and so on till the full £50,000 has been taken

  • The facility to drawdown money is a major advantage and it's something you should be on the lookout for

  • It's all to do with interest because as interest is charged only on money actually withdrawn this in turn means the total value of the loan will accrue at a slower rate than if the full sum is taken on day one

  • Important: Look to see how long the drawdown facility is available and how much can be taken out each time. Some plans allow you to withdraw money with no time limit (up to the original agreed amount) while others have a cut-off point after several years. As always favour those plans that offer more flexibility
Question: Does the plan offer a monthly income option

  • Most plans won't offer a monthly income option

  • But what does this mean? It's where a lump sum is not initially released, rather that the equity release provider will pay the homeowner a monthly income

  • If the plan does offer this feature then look to see if there are any strings attached to the amount paid, the most important one being 'can the fee ever be reduced over the years and why and how might this happen'
Question: Is the Plan portable

  • Portable means if you want to move property the equity release plan can move with you

  • A portable equity release plan also means the deal has flexibility and flexible financial products are normally always better than inflexible ones as who knows what your financial circumstances will be in the future.
Question: Minimum age (plus any interest rate increase depending on age)

  • The minimum age for equity release is 55 but some providers insist on at least 60

  • The interest rate can also be affected by age, for example somebody aged 75 might pay a higher rate than somebody aged 65

  • Although this doesn't happen that much it's worth researching
Question: Is the Equity Release plan covered by the SHIP code of conduct

  • SHIP stands for Safe Home Income Plans and it is a code of conduct that most Equity Release providers sign up to

  • It lists via its code of conduct a number of different guarantees to help protect for consumers, the most important being their 'no negative equity guarantee'

  • As its name suggests it means the customer will never owe more than the value of their home and no debt will ever be left to the estate

  • Point 1 of their code of conduct also states this - To allow customers to remain in their property for life provided the property remains their main residence

Important: Not all Equity Release providers sign up to SHIP, although the majority do, so check if certain guarantees are important to you.

But here's an interesting point to consider. If an equity release provider doesn't sign up to SHIP, and you're potentially interested in a deal they're offering, ask them why? I'm sure they have good reasons and it would be interesting to hear them. Perhaps for example they offer their own set of no-negative equity guarantees.

Question: Will your spouse be allowed to live in the property if you pass away

  • If you're currently married then a joint equity release plan should be taken

  • This means the spouse will continue to be allowed to live in the property after their partner dies

  • This question is obviously of critical importance so make sure you look into it in detail
An example of a comparison form which has been filled out
Towards to top of this page I suggested you print and fill out the Equity Release Comparison Grid. Below is an example of how it might look if filled in. Note, I have only entered information for one equity release deal.
Broker/Lender's name
XYZ Equity Release Company
What is the interest rate I'll be charged and can it move
6.59 fixed
How much will the loan principal increase every year
See detailed notes for yearly breakdown
What are the arrangement fees
How much are the early redemption charges and how long do they last
5% for first 5 years
3% for next 5 and then 0% for 10+ years.
What are all the other fees
Valuation 0.75%
Legal £600
£750 misc.
Can money released via drawdown
Does the plan offer a monthly income option
Is the Plan portable
Yes, but with heavy restrictions
Minimum age (plus any interest rate increase depending on age)
n/a as I'm 65. No higher rate due to increasing age
Is the Equity Release plan covered by the SHIP code of conduct
Will your spouse be allowed to live in the property if you pass away
n/a because I'm signing a joint plan
What this step has accomplished
Think back to how much you knew about equity release, including the nuts and bolts, before you carried out this step?

Now, not only are you far more knowledgeable about the general equity release market place but you should also be far more confident about what you're trying to achieve.

Plus, with the knowledge you've gained it's going to be hard for any professional to pull the wool over your eyes when it comes to the all-important fees and charges.

What's needed now is some time to mull over the different deals and that's what the next step is about.

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