Does Equity Release Affect Your Credit Score?
Many people don’t realise that when you take an equity release lifetime mortgage product, you are taking a secured loan.
The lender agrees to lend you money and you put the equity in your property down as collateral against the loan.
This makes lifetime mortgages a type of secured finance and taking an equity release product will mean a lender puts a charge against your property.
Secured finance is typically much less risky for lenders and as a result it can be easier to take a secured loan compared to an unsecured loan.
Does this mean you need a credit check with equity release? This guide outlines exactly how equity release works with credit checks.
Equity Release A Brief Overview
There are two types of equity release in the UK, Lifetime Mortgages and Home Reversion Plans.
Both are finance agreements and both result in the provider putting a charge against your property.
Lifetime mortgages are by far the most popular way to release equity as they tend to represent the best value for money.
As a result, it is estimated that 99% of the equity release market is made up of Lifetime Mortgages.
When you take a Lifetime Mortgage the lender agrees to provide a lumpsum (or regular payments) up to a maximum of 50% of the equity you hold in your property.
In order to qualify for a Lifetime Mortgage, you must:
- Be 55 years old or over
- Have no mortgage on your property on completion of the Equity Release
- Have a property that is over £70,000 in value.
- Have a property that meets the lender’s property criteria.
As the product is highly regulated, you will need equity release advice before committing to taking an equity release product.
An equity release broker will provide this advice and complete the initial application before it is sent to the lender.
You will also need legal advice from a solicitor who deals with equity release products.
When you have taken the equity release product, you will not be obligated to make monthly payments and instead the lender will look to recover the money from your estate when you pass away or go into long term care.
Does Equity Release Require a Credit Check?
As part of your equity release application, it is highly likely the lender will complete a credit check.
You might wonder why this is the case if the lender has the property as collateral and you don’t need to make monthly payments on the equity release plan.
The truth is the property is the primary collateral on the loan, but it is not risk-proof for the lender, so they require a credit check to ensure that you are a responsible borrower before completing the application.
A credit check also allows the lender to check that there is no other debt attached to the property such as a mortgage or second charge.
Because the property is put up as collateral, they want to ensure it is debt free.
Other Checks by Equity Release Lenders
A credit check will allow the lender to check any personal debt you hold against the property such as being a mortgagee.
They will also conduct checks with Land Registry and access the following registers:
- Property Register (general property checks).
- Proprietorship Register (to ensure you have the right to release the equity).
- Charges register (to see if any other lenders have charges on the property).
The charges check is important to a lender as your property may have other charges on it where you have not been the applicant.
For example, a family member may have applied for finance against your property and there may be a charge you are not party to.
After these checks have been completed the lender will assess your application and make a decision about whether to offer the product to you.
With credit checks specifically, some lenders are very strict while others accept a little more risk.
An equity release broker will be able to match your credit profile to a lender this can be invaluable as some lenders are strict and they require completely clean credit profiles.
Free consultations are available in the UK.Get Started Now
What Are Credit Scores?
Credit scores are compiled by credit reference agencies.
There are three main credit reference agencies in the UK that equity release providers can use:
- Transunion (previously known as Call Credit).
These agencies take information from financial institutions you have dealings (or dealt) with, county court records, and publicly available information to compile a credit profile.
Once they have collected this data, they use the information on your profile to create what’s known as a credit score.
Your credit score is the headline risk score for your overall profile.
The higher the score the better and a high credit score represents a good risk profile for potential lenders.
A medium score will normally be treated with caution by potential lenders and adverse (low) credit scores can cause significant problems obtaining finance of any kind.
The credit reference agencies make their scores available to lenders and other companies to complete credit checks and assess your creditworthiness.
What Are Credit Checks?
Credit checks are the process that your equity release lender will complete to obtain your credit score. In most cases the process is automated once you consent to the lender conducting a credit check.
There are two types of credit check used in the UK:
Hard Credit Checks
These leave a mark on your credit record and show any other interested parties that you have applied for finance with the lender who has conducted the check.
Three or more hard credit checks in a short period of time can negatively affect your credit score.
Soft Credit Checks
These are becoming more common and most major financial institutions now offer a soft credit check which doesn’t leave any imprint on your credit record.
With equity release you may not have the luxury of a lender that only uses soft credit checks as some lenders still prefer to use hard credit checks.
If an application requires more than one credit check, a soft check is normally conducted during the initial consultation stage and when a full application is made a hard check is completed.
Why Do Equity Release Lenders Conduct Credit Checks?
Equity release lenders are concerned about risk.
Their first way to reduce risk is to put a charge on your property and this goes a long way to helping them reduce the risk of lending to you.
It doesn’t remove the risk entirely and lenders like to reduce the risk further by checking that you take finance agreements seriously and will conduct a credit check.
This helps them understand your overall approach to money and finances and will tell them if they need to be worried about recouping the money in the event something unexpected/untoward happens with the property you have used as collateral.
As you can probably imagine there are many unforeseen circumstances that could mean a charge on a property can’t be collected. A good example is if your house is destroyed by a fire.
What Our Clients Have To Say
What Happens if My Score is Low?
If your score is low, some lenders will decline the application and will not lend money to you.
Other lenders are more favourable. It is for this reason it is so important to discuss your financial situation with an equity release broker as they can signpost and advise on the best route of action.
It is worth noting that equity release/lifetime mortgage lenders are generally more lenient on low credit scores than standard mortgage lenders.
The key reason for this is that they do not consider your income when assessing your borrowing capacity.
Instead, they base how much you can borrow on your age (or the age of the youngest borrower) and the valuation of the property.
However, in spite of this, they will still assess your credit score when deciding whether to lend.
Will My Credit Score Affect the Amount I Can Release?
When you take any mortgage product in the UK, there is always a human underwriter that gives the final stamp of approval.
It may seem in today’s day and age that technology does all the work without human involvement.
This human element can be crucial for borderline applications on an equity release product as the underwriter might re-assess the risk and offer a reduced amount of money instead of a computer otherwise declining the application altogether.
In rare cases this can occur, and an underwriter will discuss options with your equity release adviser to see if a reduced amount of borrowing is acceptable to you.
Your adviser might seek out a different lender to obtain the original amount you wished to borrow or if the lender is best for your circumstances your adviser may advise you to consider the existing lenders’ offer.
Are There No-Credit Check Equity Release Lenders?
Currently, most of the equity release market is overseen by the Equity Release Council.
The Equity Release Council allows members to join in return for upholding a set of high standards.
90% of the equity release market is subscribed to the Equity Release Council as of 2022.
That leaves 10% (or 1 in 10) of equity release providers offering products that don’t always meet these high standards.
This 10% of the market can be uncompetitive and unscrupulous and even offer products that leave you with negative equity.
Negative equity means you owe more than the total property value when the loan is due for repayment and can leave your next of kin saddled with a financial burden.
Within this 10% of providers, there may well be lenders who don’t perform credit checks.
It goes without saying that the industry standard is to perform credit checks and you should expect them if you’re using a lender registered with the Equity Release Council.
Equity Release with Bankruptcy
It is very rare that bankruptcy and equity release come into the same equation because part of the bankruptcy process will include your property.
If you have previously been bankrupt and the bankruptcy has been discharged, then you could look at equity release if you subsequently bought a property and now own it completely.
You will need to pass the credit check at that point and be subject to the same credit check criteria as everyone else.
Because of the previous bankruptcy, your lender may have further questions or request additional information from you normally to check the property status in relation to the bankruptcy agreement.
Equity Release with a CCJ
County Court Judgements (CCJs) will normally have a large impact on your overall credit score.
It is important to clear any CCJs you have, and you may need to wait 6 years for the CCJ to drop from your credit record.
Applying for equity release with a CCJ on your record could cause your application to decline.
You should discuss this with your equity release broker who will be able to advise about how your CCJs could impact your equity release.
Equity Release with Defaults
Defaults are treated seriously by equity release lenders, and they will typically want the default to be paid.
Defaults are registered when you have failed to make at least three payments against a financial commitment.
They raise red flags for equity release lenders, and they may have further questions about the default.
Defaults can cause some equity release lenders to decline an application and once again it is important you discuss the situation with an equity release broker to understand what options are available to you.
Equity Release with Missed Payments
Missed payments can lead to defaults being registered. It is important you clear any arrears you have with a creditor as this will go a long way with an equity release lender.
As mentioned, some lenders are strict with equity release and even a single missed payment can cause a decline.
Your equity release broker will advise the best course of action if you have missed a payment to a creditor.
Equity Release and IVAs
Independent Voluntary Agreements (IVAs) are important tools for people looking to clear debt.
Unfortunately, like an active bankruptcy they are not compatible with some equity release lenders.
First and foremost, some lenders will almost certainly decline an equity release application if you are subject to an IVA.
Secondly, if you find a lender that does release equity, you should be aware that any payment made by the equity release provider can be claimed by your existing creditors to repay your existing debt.
Equity Release Advice
Equity release is a highly regulated product and credit checks are part and parcel of the application process with the majority of lenders.
If you’re concerned about your credit score or any of the aspects, we have discussed in this article you should first speak to an equity release broker that is a member of the Equity Release Council.
Boon Brokers is a whole of market mortgage, insurance and equity release broker.
Boon Brokers is also a proud member of the Equity Release Council.
Boon Brokers offers fee FREE equity release advice.
Contact us today to discuss your situation and get tailor made equity release advice.