How Flood Zones Affect Equity Release
When it comes to equity release, one of the less obvious, but increasingly important factors for both advisers and homeowners is the property’s risk of flooding.
With climate change and global warming getting worse year on year, the weather across the world and even across the UK is getting worse and more unpredictable.
In this article, we will explore how being located either in or near a flood-zone can influence whether or not you get approved for an equity release loan and how much you might be able to borrow should you get approved for a loan.
Why flood risk matters when it comes to equity release
At its core, equity release, and specifically lifetime mortgages, is based on the value of the homeowner’s property home and the lender’s confidence that the property will repay the loan when the homeowners pass away or moves into a care home.
Flood risks have a huge impact on the value of a property in today’s world. If a house is in a zone where flooding is more likely, the lender considers several issues that they will consider a risk to the home’s value.
The resale-ability of the property might be reduced if future buyers are worried about their property getting flooded.
Likewise, insurance may be higher or harder to get in the first place. In addition to this, the structural integrity of the home may be compromised or subject to repeated and ongoing issues, which may reduce the value of the property.
The forecast for climate change suggests more frequent extreme weather events, which increases uncertainty for long term loans such as equity release.
For example, the Met Office has estimated that the UK is now more than 7% wetter than in previous years [1], putting more homes at risk of flooding over the next few years and decades.
In short, while age and health remain central to many equity release decisions, location and particularly flood risk is now firmly part of the qualification conversation for most equity release lenders.
Understanding flood zones in the UK
One of the first steps in assessing flood risk is to understand the flood risk classification set by the Environment Agency.
The lowest risk of a flood zone is Flood Zone 1, which is considered as a low probability for flooding. Generally, homes and properties in Flood Zone 1 have less than a 0.1% chance of flooding each year from rivers or the sea [2].
However, Flood Zone 2 suggests a medium probability of flooding. Here, there is roughly a 0.1 – 1% chance of river flooding and 0.1- 0.5 % from sea water, in any given year [2].
Finally, Flood Zone 3 highlights a high probability of flooding. However, it is important to understand that lenders look at more than just flood zone classifications. There are a number of other factors that matter too, such as past flooding history, property condition, mitigation measures, and insurance that is in place [2].
What this means for equity release homeowners and advisers
If you are a homeowner looking to release equity from your home, or an adviser wanting to help homeowners to release equity, then there are a number of things that you should look out for [3].
1. Early identification of flood-risk property
When looking into equity release, early identification of flooding risks is incredibly important. You should look to assess whether the property is in a recognised flood zone, whether the property has flooded in the last 5 – 10 years, and what the condition of the current and pre-existing flood defences are currently like.
The earlier you know the answers to these questions, then the better you can map out what you need and what advice your homeowners need.
2. You need to understand lender criteria
Not all equity release lenders treat flood risk the same, which is why it is important to understand the lending criteria. Some equity release lenders will outright decline in any properties that are within the Zone 3 flood risk, whilst others may consider it, but want to carry out extra checks.
Some equity release lenders will accept properties in Zone 2, but only if no recent flooding history and good insurance in place. Likewise, certain products may require a bespoke flood-risk report which can cost hundreds of pounds and take a number of weeks to take place.
3. Factor in selling the property on
Because lifetime mortgages may last many years, until the homeowner passes away or moves into a care home, the lender will be concerned with what might happen in the future.
Flood zone properties may suffer from reduced interest when they are on the market, higher maintenance or repair costs and even possibly insurance withdrawals or escalating premiums if the property were to suffer from flooding in the future.
Practical advice for advisers
If you are an equity release adviser worried about the risk of flooding and what that might mean for your clients, then here are some practical steps for advisers working in equity release who encounter flood-risk properties.
- Build a flood zone checklist
- Pre-screen with your lender
- Prepare documentation templates such as a flood risk report
- Educate clients on the risks of flooding
- Monitor insurance renewals and advice on the risk of flooding
- Review information on a regular basis
If you are ever in doubt, then it is always best to check with the equity release lender who will have more information on whether or not a property is eligible for equity release if it is at risk of flooding either now or in the future.
Final thoughts
The world of equity release is evolving and more and more properties, towns and villages across the UK are feeling the effects of climate change and flooding. This has a direct impact on who might be eligible for equity release and how equity release advisers should be operating.
At Equity Release Warehouse, the good news is that we can still support clients in flood zone areas and properties.
Our advisers will ask you a number of questions up front about the risk of flooding in your area, and it is incredibly important that you are open and honest, so that our team can assess whether or not you might be eligible for equity release in the first place.
To talk with a member of our team about all things equity release, then call our friendly and helpful team for free by calling us on 0330 058 1579 or by visiting us online by searching for us online at www.equityreleasewarehouse.com.
References
[1] https://www.metoffice.gov.uk/research/climate/maps-and-data/about/state-of-climate
[2] https://www.gov.uk/guidance/flood-risk-assessment-flood-zones-1-2-3-and-3b
