The Salary Calculator

The ins and outs of Equity Release

by Madaline Dunn

According to research, the number of new and returning equity release customers reached 93,421 in 2022, meaning more people are choosing these products and it’s likely that the cost of living crisis has something to do with it.

Legal & General, for example, which is one of the UK’s largest equity release lenders, outlined that 25% of those taking out loans are now doing so to supplement their income; this is reportedly up from 19% in the previous year.

You might be wondering whether equity release is a good option for you, or you may be new to the term and keen to learn more; either way, at The Salary Calculator, you’re in good hands. This week, we’ll explore the following:

• What equity release is and the different types
• The advantages of equity release
• The drawbacks
• The Equity Release Council’s new guidance

What is Equity Release?

Equity release products enable you to access the equity (money) tied up in your home as you get older. There are two main types of equity release, the first being Lifetime Mortgages, which allow you to take out either a lump sum or instalments of cash against the value of your home, while retaining ownership. Typically, you can borrow between 20% and 50% of your home’s valuation, and the amount you can take out, will depend on your age.

You can begin to access these plans from age 55. Interest is applied on an increasing sum, meaning that your interest is added to your debt on a continual basis. That being said, you’ll never pay more than the value of your home. The loan and any interest will be paid off by selling the property when you either pass away or move into long-term care. Statistics show that these kinds of equity-release products make up around 95% of the market.

Home reversions, on the other hand, are offered to those aged 60 and up, and with this product, you don’t retain ownership of your home, or at most, only part of it (between 25% – 100% is sold). While you give up full ownership of your house with home reversions, you maintain the legal right to remain in your home until you die or move into long-term care. Likewise, your lender will pay you less than the market value of your home.

To find out which equity release product best suits your needs, it’s worth speaking with an equity release advisor; if you choose to take one out, you’ll have to do it through a financial adviser, too. The former will take into consideration a number of different factors in their recommendation to you, including:

• The value of your property
• Your current and future financial and lifestyle requirements
• Your age

The advantages of equity release

When it comes to assessing the advantages of equity release, it’s worth noting that in both versions of equity release, any of the cash that you receive is tax-free, and you won’t find yourself in negative equity because, when your property gets sold, additional debt not covered by the property sale will be written off. Likewise, you can take money out of your home when you need it, and aren’t required to make monthly repayments.

Further, you also have the right to move home, and take your mortgage with you, so you’re not bound to one property.

Similarly, with both, you can opt to pay back your loan or buy back your home, however, it’s worth bearing in mind that this can cost you quite a bit. The same goes for paying your loan off early, it is doable, but you may be hit with early repayment charges.

The drawbacks

While there are undoubtedly some attractive qualities to equity release, there are some downsides, too, which are worth taking into consideration. With lifetime loans, for example, you could end up in a position where you owe more than you borrowed when the home comes to being sold. Although, there are ways out of this, and you can decide to pay off the interest each year as you go. To make things more bitesize, you can also opt for a series of smaller lifetime mortgages.

When it comes to equity release, you may also impact your entitlement to mean-tested state benefits, this includes Pension credit, savings credit and council tax benefit, so be wary. You will also encounter lender fees, solicitor fees, and equity release advisor fees; expect to spend between £2,000 and £3,000.

More generally, opting for equity release also means that you might leave behind less inheritance for your family when you pass on.

With home reversion, on the other hand, you can only receive a maximum of 60% of the market value of your home, and in more cases than not, it will actually be much less than this.

Equity Release Council releases new guidance

When thinking about pursuing equity release, you can be safe in the knowledge that all firms that either advise on or sell equity release are regulated by the Financial Conduct Authority (FCA). That being said, it’s wise to make sure you go with a company that is a member of the Equity Release Council. Members follow a voluntary code of conduct, which ensures certain product standards.

There have been recent updates in this area, too. The council recently released its consumer guide, which advises potential customers on fees, enabling them to understand what they mean and compare fees and charges across different equity release deals. The council is also recommending that equity release advisors adopt the language in the guide to simplify things for customers and make it more accessible. The guide can be found here.

Speaking about this, Jim Boyd, CEO of the ERC, explained that customers are often presented with unfamiliar terms and definitions, and to complicate matters further, different firms often use slightly different language, which can complicate things for customers.

He outlined: “The council’s guidance describes all the fees and charges that could be relevant to an equity release application, depending on its complexity. Our aim is to establish a set of standard definitions to help consumers to understand their options as they explore the equity release process with a regulated adviser.”

He added that the council understands that adopting changes takes time, but that the arrival of the “Consumer Duty” is a chance for the industry to take stock and “move towards a standardised approach.” “We hope all firms will take this guidance on board when they next revisit their approach, so it becomes the standard across the equity release market,” he said.

Tags: Consumer goods, Equity release, home, Loans

Credit scores unpacked and myths debunked

by Madaline Dunn

With the cost of living crisis shooting up rent, food and fuel prices, an increasing number of people are turning to loans, credit cards, and overdrafts. Of course, a good credit score is often required to qualify for a low-interest-rate loan, so many people are now trying to determine what their credit score is and find ways to improve it. In fact, MoneySuperMarket’s data reveals that searches for ways to increase credit scores have increased by 506% in the last ten years alone.

However, despite so much hinging on a credit score, many people in the UK believe that the current system is not “fit for purpose.” Nearly 40% (39%) of people believe it’s unfair to judge a person based on financial decisions that they made up to five years ago, while 38% believe that credit scores don’t reflect their current livelihood and 34% believe that credit scores, in general, aren’t a good measure of a person’s creditworthiness. In general, credit scores can cause people a lot of concern and there are a lot of myths and misconceptions out there.

At The Salary Calculator, in this article, we’ll:

• Explain what a credit score rating is
• Dispel some of the myths that exist around credit scores
• Explore some of the ways you can improve your credit score

What is a credit score rating?

A credit score rating, at its core, is a way of measuring how much of a risk a person is when it comes to lending them money. FICO and VantageScore are the two main consumer credit scoring models, while Experian, TransUnion, and Equifax are the three national credit bureaus that offer different ratings. The former, for example, considers anything above 881 to be a good score, while the latter considers anything above 531 ‘good.’ TransUnion, on the other hand, considers scores above 720 a good rating.

A credit score rating is determined by a number of different factors, including:

• Your payment history – This means looking at whether you pay your bills on time and whether you’ve ever filed for bankruptcy. This is arguably the most important factor considered when calculating your score.
• Credit usage – This includes how much you owe in loans and how many of your accounts have balances.
• Length of your credit history – Money lenders like to see that you have a long history of paying on time.
• New credit – Applying for new credit can lead to a hard inquiry and lower the average age of your accounts.

Myths and misconceptions

When it comes to credit scores, many people are truly in the dark, and due to the myths and misconceptions floating around, just the mention of credit scores can cause people to spiral. Below we’ve compiled a list of the top myths:

Checking your credit score will negatively impact it – False

You can check your credit score as much as you like without it negatively affecting it. In fact, it can even be an indicator of financial responsibility.

Your credit score is impacted by your income – False

Your credit score is not impacted at all by your income and, in fact, only considers information found in your credit report, so, as outlined above: Your payment history, credit usage and length of your credit history. That said, if you were to lose your job or take an earnings hit, this could affect your rating indirectly in that it could detrimentally impact your ability to pay back your loans.

Paying off debt means it won’t affect your credit score – False

Unfortunately, even if you’re proactive in paying off your debt, the record of it can remain in your credit history for seven to 10 years.

My loan application will be rejected if I have a low credit score – Not always

You won’t always get a loan application rejected if you have a low credit score. However, you might be offered higher interest rates or a smaller loan.

How can you improve your credit score?

If you have a low credit score and you’re concerned that it’s going to detrimentally impact your future financial decisions, don’t worry, there are a few things that you can do to boost it.

First of all, it’s a great idea to keep up-to-date with how things are looking, so the experts suggest signing up with a tool like MoneySuperMarket’s Credit Monitor. This way, you’ll be able to check whether or not you’re veering into the red, and employ some of the below steps to steer you back on track.

Likewise, it’s important to keep your accounts up-to-date. So, if you’ve got an old bank account that hasn’t been used for years, it’ll be better for your rating if you close it. On the other hand, keeping open a bank account that you regularly use will positively impact your credit score.

Of course, paying bills on time is a big must for boosting your credit score, but be sure to check which ones count towards it – as only some of them do. And, also don’t forget to try and keep balances low on your credit cards, and try your best to pay more than the minimum required on your credit card, too.

Tags: Credit card, Credit score, Economy, Loans

Interest rates in the UK

by Madaline Dunn

When it comes to borrowing, be it for a mortgage or a loan, an interest rate will be applied to the amount you borrow. The same goes for any savings you accumulate. That said, it can be tricky to get your head around the ins and outs of interest rates.

According to a study conducted by MoneySuperMarket, 70% of those polled didn’t know what the base rate was. That means there are lots of people out there that could do with a helping hand.

At The Salary Calculator, we’ll give you the rundown of interest rates in the UK and make sure you’re updated with the latest. This article will explain:

• What an interest rate is
• What the base rate is 
• What the current interest rates are
• The different types of interest rates
• Whether or not interest rates will rise
• The pros and cons of the current low rates

What is an interest rate?

An interest rate refers to either the percentage an individual is charged for borrowing money or earned through saving. It is typically expressed as a percentage of the amount you borrow or save over a year.

What is the base rate?

The base rate or bank rate is the most important interest rate in the UK and refers to the rate at which banks and lenders are charged for borrowing. Currently, this rate is 0.1% which influences borrowing and saving interest rates.

Current rates

Interest varies from bank to bank, but often it can cost more to borrow less. According to MoneySavingExpert, the best interest rates for loans of between £3,000 – £4,999 range from 7.3% rep APR and 8.4% rep APR.

For larger amounts, for example, between £15,001 – £20,000, the best interest rates range from between 2.8% rep APR and 2.9% rep APR.

When it comes to savings, easy access accounts with best rates range from between 0.4% AER variable and 0.5% AER variable.

The different types of interest rates

There are a few different types of interest rates, these are:

Fixed Rate of Interest – With this interest rate, the amount you are paid, or the amount you owe, is at a set rate that remains unchanged throughout the term of your account. 

Variable Rate of Interest – Also known as a “floating rate,” with this interest rate, the amount of interest you are paid or the amount of interest you owe can change depending on the base rate.

When exploring loans and savings, you will likely run into two other terms, APR and AER. But what exactly do they mean? 

APR – Annual Percentage Rate: This refers to the total cost of borrowing money in a year (loan or credit card). Included within this are interest and standard fees.

AER – Annual Equivalent Rate: This type of interest applies to saving accounts and is the amount you earn in a year.     

Will interest rates rise?

It is difficult to determine for sure whether interest rates will rise. However, considering the current state of the economy, having shrunk by 19.8% in 2020, interest rates are unlikely to rise any time soon.

The pros and cons of the current low rates

When it comes to low interest rates, there are, of course, advantages and disadvantages. These are as follows:

Pros:

• Lower interest rates make it easier for people to borrow money
• When borrowing is made more accessible, this can drive investment
• Low rates can also make housing more affordable by lowering mortgage payments

On the other hand…

Cons:

• Lower interest rates can detrimentally impact savers because they earn less through interest
• As a result, this can reduce the incentive to save
• Low interest can also lead to people taking on more debt than they can afford 

Tags: interest rates, Loans, Mortgages, savings

Debt consolidation loans

by Admin

I’m sure you will have seen adverts on TV and online for debt consolidation loans, which are meant to make it easier for you to handle debt. But could such a loan help you? Is it worthwhile? Fortunately The Salary Calculator can help you find out.

If you have multiple debts, like credit card balances, overdrafts, car loans or store cards, it can be difficult to keep track of them all and to make sure you make the right payment each month. Some of these debts may have high interest rates which mean it will take you even longer to pay them all off. A debt consolidation loan is designed to put all of those debts into one overall debt, with one interest rate, and one monthly payment. If the interest rate is low enough, your total monthly payment can be lower than it was when you were paying separately. How low does that interest rate have to be? The Debt Consolidation Calculator can help you work that out.

Enter the details of your outstanding debts, like the amount you owe and the interest rate you’re paying on each debt. Then choose how quickly you’d like to pay them all off, and click “Go!”. The calculator will work out what your total monthly payment would be if you were to pay them all off individually – and also the overall interest rate you’re paying. This means that if you can get a debt consolidation loan at a lower interest rate, it would save you money each month (please note this does not include any charges the loan company may apply).

There are other things to consider, so before finding and using a debt consolidation loan, talk to an expert advisor.

Tags: credit cards, debt, debt consolidation, Loans

Time to make some changes

by Admin

2010 beckons and the start of a new year is for many people the time to sort out their career or their finances. The Salary Calculator is here to help you if you want to make some changes to your financial situation.

It might be time to look for a new job – the Christmas break gives one time to consider career plans, and you might think that in January you’ll start looking for new employment, or talk to your employer about a promotion. Use The Salary Calculator when comparing salaries so you know how much extra it would make to you each month if you got that pay rise.

If you need some extra money each month, to save up for a holiday or a new car say, then use the Required Salary Calculator to work out what salary you need to look for to get that extra take-home. There’s hope that early in 2010 we’ll hear that the UK has finally left recession and things will start to pick up – including the job market.

If you’re not interested in a new job, you can consider sorting out your finances. Use the Mortgage Repayment Calculator to get an idea of the effects of remortgaging in 2010, or the Debt Consolidation Calculator to see what you could save by taking control of all of your loans. Why not try to get debt free in 2010?

Here’s to a great new year for everyone, I hope that The Salary Calculator will help you with your money in 2010!

Tags: 2010, careers, debt, Economy, job hunting, Jobs, Loans, Mortgages, Pay As You Earn, pension, recession, recovery, tax rates, The Salary Calculator