Equity Release Jargon: it is a term that leaves many homeowners bewildered, frustrated, and feeling left out of an important conversation about their financial future. 

If you are among those struggling to decode financial language, you are not alone – and we are here to help.

Welcome to this essential guide that promises to break down the complicated lexicon that surrounds this crucial aspect of personal finance. 

From interest and rates to mortgages and loans, down to legal and debt handling, we will unravel these terms, giving you the confidence and knowledge to make the best decisions for your financial wellbeing. 

Let us start this journey together and turn confusion into clarity!

Let's Talk About Equity Release

Want to know all about equity release?

Equity release is a means for individuals to transform the equity accumulated in their homes into cash, helping meet financial needs without selling the property.

Your A-Z Dictionary of Equity Release Jargon

Interest and Rates

Understanding interest rates is key to making informed decisions about equity release. 

Here is a rundown of the crucial terms.

Accrued Interest

Accrued Interest refers to the interest amount that builds up on the unpaid portion of a loan or mortgage over a specific period, whether it is calculated on a daily, monthly, or annual basis.

AER (Annual Equivalent Rate)

AER (Annual Equivalent Rate) represents the hypothetical annual rate of interest, taking into account compounding over the year. 

It is a useful measure for comparing different financial products with varying interest compounding frequencies, providing a standardised way to see the annual cost or gain on an investment or loan.

APR (Annual Percentage Rate)

The Annual Percentage Rate represents the overall cost of a loan, including interest and fees, allowing for easier comparison between products. 

By taking into account not just the interest rate but also any additional charges, the APR provides a more comprehensive view of how much a loan will cost over its entire term. This making it a critical tool for consumers to evaluate and compare various loan offers.

Compare With: Go Compare Mortgage Comparison

Capped Interest Rates

A guarantee that the interest rate will not exceed a specified level during a particular period.

Compound Interest

Compound interest is often referred to as "interest on interest," and it can significantly increase the value of an investment or loan over time. 

What does that mean?

Unlike simple interest, where interest is calculated only on the principal amount, compound interest takes into account not only the initial principal but also the interest that has been added to that principal during previous periods, leading to exponential growth.

Fixed Interest Rates

An unchanging interest rate that remains the same over a part or the entire loan period.

Monthly Equivalent Rate (MER)

The Monthly Equivalent Rate (MER) is the interest rate expressed on a monthly basis, offering a standardised figure to aid consumers in evaluating various loan products. 

How does this help me?

By translating annual interest rates into a monthly format, it provides a more immediate and relatable understanding of the costs, allowing for an easier comparison between different equity release plans or mortgages.

Prevailing Rates

The current interest rate in the market.

Variable Interest Rates

Interest rates that can change according to the lender's terms or market conditions. The Equity Release Council notes that variable rates must be capped.

Fees and Charges

Equity release comes with various fees and charges, including for advice and a property valuation.

Advice Fee

The cost of professional guidance on equity release products.

Arrangement Fees

Charged by the lender to cover administration costs.

Completion Fee

The completion fee is typically charged by the lender to cover final administrative tasks and legal work associated with finalising the equity release. 

This fee may vary between providers and is usually detailed in the offer document, allowing borrowers to understand the full costs involved.

Early Repayment Charges

Early repayment charges are fees that a borrower must pay if they decide to pay off their equity release loan before the end of the agreed term. 

What are these for?

These charges are typically stipulated in the loan agreement to compensate the lender for potential loss of interest income, and their amount can vary widely depending on the lender's specific terms and the timing of the repayment.

Early Repayment Charge Exemption

A situation where you may not have to pay the early repayment charges under specific conditions.

Valuation

The fee for assessing the value of your property.

Mortgages and Loans

Products come in different forms, and understanding these terms is vital.

Buy-To-Let Lifetime Mortgage

Buy-to-let lifetime mortgage is a specialised type of lifetime mortgage designed for property owners who rent out their property to tenants. 

This allows the landlord to release equity from the rental property while retaining ownership, providing an additional income stream or capital for investment.

Conventional Mortgage

A standard residential mortgage.

Drawdown Lifetime Mortgage

A drawdown lifetime mortgage provides flexibility by enabling homeowners to access a portion of their property's equity as and when needed, up to a pre-agreed limit. 

How does this help me?

This approach can be useful for managing ongoing expenses, as interest is only charged on the amount withdrawn, potentially reducing the overall cost of the loan.

Interest-Only Lifetime Mortgage

Only the interest is paid monthly, and the capital is repaid at the end of the term.

Lifetime Lease

A legal agreement providing the right to live in the property for life.

Lifetime Mortgage

A loan secured against your home that does not need to be repaid until you die or move into long-term care.

Loan-To-Value (LTV)

Loan-to-value is a crucial metric in determining how much you can borrow, expressed as a percentage of the property's appraised value. 

A higher LTV often means more risk for the lender, and it may affect the interest rate and eligibility for certain loan products.

Optional Payment Lifetime Mortgage

Allows voluntary payments to reduce the impact of interest roll-up.

Reverse Mortgage

A reverse mortgage is a financial product that enables older homeowners, usually aged 55 or over, to tap into the value of their home without selling it. 

It is also the term used by those outside of the UK to refer to a lifetime mortgage.

Roll-Up Lifetime Mortgage

A roll-up lifetime mortgage allows the interest to accumulate on the loan without the need for regular repayments. 

What does that mean?

This means that the overall debt grows over time, as interest compounds, and the total amount is typically repaid when the property is sold, either upon death or moving into long-term care.

Retirement Interest Only Mortgage (RIO)

Retirement interest only mortgage is designed specifically for older borrowers, often retirees, allowing them to make monthly interest payments without reducing the principal. 

The capital is ultimately repaid when the property is sold, usually after the homeowner's death or move into long-term care, providing a flexible option for those seeking to maintain control over their monthly expenditures.

Secured Loan

A loan backed by collateral, typically property.

Property Types and Ownership

The type of property and its ownership can affect the equity release process.

Downsizing

Selling a larger property to move into a smaller one, often to release equity.

Freehold

Freehold ownership means that you have complete control over the property and the land it is built on, without any time limit on ownership. 

It contrasts with leasehold, where the land is owned by someone else, and you lease it for a number of years, decades, or even centuries.

Leasehold

Leasehold means owning the property for a set term but not the land on which it is built. 

This type of ownership usually involves paying ground rent to the freeholder and can come with various restrictions, such as limitations on alterations or extensions to the property.

Tenancy in Common

A form of joint ownership where each party owns a separate share of the property.

Title Deeds

Legal documents showing the ownership of a property.

Equity

The value of ownership built up in a property.

Home Reversion

Home reversion is a type of scheme that allows you to retain the right to live in your property rent-free, even after selling a portion or all of it. 

This option may appeal to those looking for immediate access to funds without losing the ability to reside in their home.

Advisors and Providers

Professional guidance is vital, and these terms define those involved in the equity release process.

Advisor

A professional providing advice on the best products for your needs.

Direct Provider

A company that offers equity release products directly.

This means that you do not need to be referred by a broker or advisor to access their products.

Independent Advisor

An advisor who offers products from the whole market, not tied to specific providers.

Lender

The institution providing the loan or mortgage.

Mortgage Broker

A professional specialising in finding suitable mortgages for clients.

Provider

A company offering equity release products.

Restricted Advisors

Advisors who can only recommend products from specific providers.

Whole Market Financial Advisor

An advisor who can access and recommend products from the entire market.

Regulations and Authorities

Regulatory bodies ensure that the market operates fairly and transparently.

Equity Release Council

The Equity Release Council sets the standards and principles for industry providers to ensure consumer safety and transparency. 

Members of the Council commit to a code of conduct, which offers additional protections and guarantees to homeowners considering equity release.

Financial Conduct Authority (FCA)

The Financial Conduct Authority ensures that financial markets are honest, fair, and effective so that consumers get a fair deal. 

It also provides protection by regulating firms, setting standards, and supervising conduct to foster integrity within the financial industry.

Financial Conduct Register

The Financial Conduct Register is a comprehensive database managed by the Financial Conduct Authority in the UK. 

It includes details about the regulated firms, such as their: 

• Trading names 
• Services 
• Regulatory status 
• Permissions they hold

This enables consumers to verify the legitimacy of financial providers.

Financial Ombudsman

An independent body resolving complaints between consumers and financial service providers.

Taxation and Benefits

Equity release can affect taxation and benefits, so it is crucial to understand these terms.

Capital Gains Tax

Capital gains tax is charged at different rates depending on your overall income and the type of asset being sold. 

In the context of property, it may apply to second homes or investment properties, but the main residence is typically exempt if certain conditions are met.

Deprivation of Assets

Deprivation of assets refers to the intentional reduction or transfer of assets, such as property or savings, to qualify for means-tested benefits, such as local authority care funding. 

What does that mean in equity release?

In the context of equity release, it could potentially affect eligibility for certain government assistance, and intentional deprivation can lead to penalties or disqualification from receiving those benefits.

Inheritance Tax (IHT)

A tax paid on an estate when someone dies.

Means-Tested Benefits

Means-tested benefits are government-provided financial assistance programs tailored to those with limited income and assets. 

Eligibility for these benefits requires an assessment of an individual's financial resources to ensure that aid is directed to those who need it most.

State Benefits

Financial support provided by the government.

Tax-Free

Income or gains that are not subject to tax.

Protection and Guarantees

These terms ensure that consumers are protected in various equity release scenarios.

Beneficiary

Someone who receives assets or benefits from a will or policy.

Downsize Protection

A feature that allows you to move to a smaller property without incurring early repayment charges.

Heirs

Those entitled to inherit property or assets.

Inheritance Protection

Inheritance protection allows homeowners to safeguard a portion of their property's value to pass on to their heirs, ensuring that a fixed percentage of the home's eventual sale value will be left as an inheritance. 

This option can be particularly appealing to those who wish to provide financial assistance to family members or ensure that specific assets are preserved for the next generation.

Take note

This will affect the final amount of money you are able to access, as you are setting a portion aside for inheritance.

No Negative Equity Guarantee

The No Negative Equity Guarantee ensures that homeowners or their estates will never owe more than the property is worth, even if the home's value decreases over time. 

It is a standard feature in many equity release plans, providing peace of mind and protecting both the borrower and their heirs from unexpected financial liabilities.

Right to Remain

The right to live in the property for life or until you move into long-term care.

Waiver of Occupancy

A clause allowing the property to be left vacant for a certain period without affecting the equity release plan.

Financial Planning and Assessment

Effective planning and understanding these terms can lead to a successful equity release.

Affordability Checks

Assessment of whether you can afford the loan.

Annuity

A financial product providing a regular income, often used with equity release to enhance retirement income.

Cash Reserve Facility

A cash reserve facility is often part of a drawdown lifetime mortgage, enabling homeowners to access pre-agreed funds as needed without taking it all at once. 

What does it offer me?

It provides flexibility and can be a strategic way to manage funds while potentially reducing the interest that accrues over time.

Collateral

Assets pledged as security for a loan.

Consultation

A professional meeting to discuss your financial situation and options.

Discretionary Income

Income left after paying for essential expenses.

Disbursements

Payments made by a provider on behalf of a client.

Drawdown

Drawdown refers to the act of accessing funds from an agreed cash facility, usually a drawdown lifetime mortgage. 

This option allows homeowners to take money in stages rather than as a single lump sum, providing flexibility and often reducing the overall interest cost.

Drawdown Reserve

The amount available to be drawn down in the future.

Enhanced Lifetime Mortgage

Enhanced lifetime mortgage is a specialised type of scheme tailored for individuals with certain health conditions or lifestyle choices that may reduce life expectancy. 

How does that affect my options?

By considering these factors, lenders may offer a larger sum of money or more favourable terms, recognising that the loan is likely to be repaid sooner than a standard plan.

Further Advance

Additional borrowing from your existing lender.

Impaired Life

An individual with health conditions that may affect life expectancy.

Income

Earnings from various sources, including pensions, investments, and employment.

Long-Term Care

Care provided for those with chronic illnesses or disabilities.

Lump-Sum

A single payment rather than regular smaller payments.

Negative Equity

When the property value is less than the outstanding mortgage.

Personalised Illustration

A document showing the features, risks, and costs of a specific equity release product.

Retentions and Undertakings

Holding back part of the loan for specific purposes or requirements.

Self-invested Personal Pension (SIPP)

A pension where the individual chooses and manages the investments.

Significant Life Event Exemption

The significant life event exemption allows for a waiver of early repayment charges if predefined significant life events occur, such as severe illness, death of a spouse, or moving into long-term care. 

Is this a universal thing?

These exemptions are subject to individual lender policies, and terms may vary, so understanding your provider's specific guidelines is crucial.

Surveyor

A professional assessing the value and condition of a property.

Third-Party

An individual or entity that is involved but not part of the main parties in an agreement.

Threshold Income

Minimum income required to afford a particular product.

Top-ups

Additional funds added to an existing plan.

Up/Down Valuation

A revised valuation of a property, which could be higher or lower than the original.

Legal and Debt Handling

Legal aspects and debt management play a crucial role in the equity release process.

Bankruptcy

A legal status for those unable to pay their debts.

Debt Management Plan

A debt management plan (DMP)¹ is a structured repayment plan set up with the assistance of a licensed debt management provider. 

By negotiating with creditors, it aims to reduce monthly payments to a manageable level, helping individuals regain control of their finances without taking on additional loans.

Fraud

Deception intended for personal gain or to cause a loss to another party.

Individual Voluntary Arrangement (IVA)

A formal agreement to pay back creditors over time.

Offer Document

The formal offer from a lender outlining terms and conditions.

Reversion Company

A company specialising in home reversion plans, in which you sell all or part of your property to the company in exchange for a lump sum or regular income. 

Solicitor

A legal professional assisting with the legal aspects of equity release.

Trustpilot

A website where customers can review financial service providers.

Remortgaging

This term refers to changing your mortgage deal, either with your current lender or a new one, potentially to release equity from your property.

Common Questions

Conclusion

In the evolving landscape of personal finance, understanding the terminology associated with equity release is more than just a convenience—it is a necessity. 

From the intricacies of interest rates and fees to the regulations that govern property types and providers, the world of equity release can seem overwhelming. 

However, this comprehensive guide has aimed to demystify these complex terms, providing you with the knowledge to navigate this significant financial decision with confidence. 

Whether you are considering tapping into your home's equity for retirement, long-term care, or other financial goals, a firm grasp on this subject is essential. 

If you have any further questions or need personalised advice, do not hesitate to reach out to a regulated advisor in the UK. 

The right guidance can make understanding equity release jargon a straightforward path to financial security.