What is a no negative equity guarantee?

Products which fully meet the Equity Release Council’s Product Standards are required to feature a “no negative equity guarantee”.  Put simply, this guarantee means that you, or more specifically, your estate will never owe more than the property is worth when it is sold. 

Under your equity release plan, you have the right to live in your home until you need to move into a smaller property (whereby the plan may be transferrable), or move into permanent care, or until death. Your property will be sold and the sale proceeds will be used to repay the money owed to the provider of your plan. Any money left over, at the end of your plan, will be paid to you or your beneficiaries, in accordance with your Will.  In the unlikely event that the value of your house has decreased significantly, it is possible that it might not be worth enough to cover the amount which you owe.  The “no negative equity guarantee” means that if this turns out to be the case, the remainder of the loan would be written off.

What are gilts and bonds?

Gilts or bonds are issued by the UK Government and by private companies. Buying a gilt or bond means that you lend money to the issuers for a fixed time period in return for a fixed interest rate. Gilts are considered the safest bond category as it is unlikely that the UK Government will default. Equity release interest rates are substantially lower than they were a few years ago, from over 7% to nearly 5%. Contrary to standard mortgages this was not driven by the cuts to Bank Rate. The dropping rates arise because lenders - generally insurance companies - raise the amounts they lend through diverse resources. Equity release provider rates depend on the principal returns on government bonds. These gilt "yields" have dropped since the Bank of England (BoE) started printing £375bn of "quantitative easing", to fuel the economy during the 2008 recession. For that matter, insurance companies were able to drop equity release rates.

Why are some types of property not acceptable to equity release providers?

The equity release provider is accepting your property as security for its loan: this means that the provider needs to be satisfied that your property can be re-sold on the open market – either when you or your executors come to sell it or, in exceptional circumstances, if the provider has to take possession of it (because you have failed to comply with an obligation set out in your contract) and sell it.

Many lenders/providers ask questions in their application forms about your property’s age and how it is built (brick walls/roof slates or tiles and so on).  This is because some types of construction have in the past suffered structural defects.  This doesn’t mean that they are not safe to live in – but it has led some lenders and providers to decide not to accept them for mortgage/equity release purposes, because they are concerned that if there are problems in the future which need to be put right, this may affect the property’s value and its attractiveness to a future buyer.

Properties which are unlikely to be acceptable to equity release providers include:

  • Studio or basement flats
  • Flats of maisonettes in a local authority or housing authority block of more than four storeys
  • Retirement properties
  • Static/mobile homes
  • Houseboats
  • Farms
  • Hotels
  • Guest houses/B&Bs
Can I get equity release on a static/mobile home?

No: most providers will not accept static or mobile homes as suitable security – either for a standard mortgage or an equity release loan.

Is there anything else I should be aware of?

You may have lots of questions, depending on your own circumstances but your solicitor should be happy to help.  Your solicitor may ask you security questions on the telephone, to avoid attempted fraud and you should never put your bank details on email, or send money to a solicitor following an emailed request.  Your solicitor will want to verify who you are and where the proceeds of your equity release are being paid, to ensure that your interests are fully protected at all times.  Your solicitor will not usually pay the proceeds of your equity release to a third party.

Are there any equity release plans which comply with Sharia law?

Sharia law prohibits the concept of borrowing and paying interest on loans: conventional residential mortgages therefore present a problem for consumers who wish to observe Sharia law strictly.  In 2007 the Financial Services Authority (now the Financial Conduct Authority) expanded its rules to accommodate the concept of what it described as “home purchase plans” – which are compliant with Sharia law.

There are at present no Sharia-compliant lifetime mortgage products – since these work on the basis of interest being charged to the borrower’s account and rolled up for payment at the point where the property is sold.  Home reversion plans are more likely to be suitable for consumers who wish to release equity in a way which is compliant with Sharia law, since a proportion of the borrower’s property is sold, and there is no loan involved.

There are various methods of home purchase which are compliant – the main ones being

 "murahaba" and "ijara".  Basically they work like this:

*            Murahaba - the bank buys the property and sells it back to the customer at a higher price.  The customer then pays the higher price by way of paying equal instalments, over a fixed term. 

*            Ijara - this is more common:  the bank buys the property and sells it back to the customer - on a leasehold basis - so the customer pays rent for a fixed period, at the end of which the (freehold) property becomes the customer's.  The amount of rent paid each year is assessed according to market rates, not prevailing interest rates.  

When considering an equity release plan we recommend customers talk to a specialist member of the Equity Release Council. All of our members have agreed to abide by the Council rules and have signed up to the Statement of Principles.

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