Unlocking added value

Published on Friday 5 September 2008 22:53

THE majority of lenders in the equity release marketplace are members of the Safe Home Income Plans (SHIP) association and subscribe to the code of practice of this voluntary body.

Part of the criteria of SHIP membership is that any lifetime mortgage must have a No Negative Equity guarantee, which means that the borrower will not have to pay any penalties if the value of their loan was to exceed the value of their house.

A lifetime mortgage allows the borrower to free up equity in their property through the release of a lump sum, for capital expenditure needs such as a substantial repair, or sometimes as a gift to a needy dependant.

Alternatively, where it is identified that additional income is required, (a key issue for many pensioners where the basic cost of living for items such as food and fuel bills have rapidly escalated recently) a monthly "drip-feed" arrangement can be set up. This has the added advantage that interest is only charged on each monthly drawdown payment as it is taken, and consequently the accumulated interest grows a lot more slowly than if a substantial lump sum is drawn up front.

It is usually advisable to avoid the temptation to borrow more than you actually need, as there is the possibility of borrowing more again the future, subject to sufficient equity still being available. This is because lenders increase the maximum loan to value percentages that they offer as the borrower gets older. However, this is also dependant on the future value of the property and so further advances can not be guaranteed and will always be subject to the risk of falling (or stagnant) property prices.

This can also be particularly relevant where the borrower might consider down-sizing to a smaller property in later life. Whilst many lifetime mortgages are portable, the ability to transfer the loan in full to a smaller property will depend on the then size of the accrued loan, the value of the new property, and how well the age of the borrower matches the lender's maximum loan to value criteria.

The Financial Services Authority regards equity release as a high-risk area and requires advisers in this area to have specialist qualifications. It does pay to seek specialist independent advice before making a decision that will potentially have lifelong implications.