What is Equity Release?
Equity release is the terminology used for financial products which allow homeowners to access the cash tied up in their homes. It is only available to homeowners above the age of 55, and different types of equity release schemes offer varying methods for accessing the cash that is released from the property.
What are the different types of equity release?
The two main types of equity release are:
- Lifetime Mortgage
- Home Reversion
With a lifetime mortgage, the homeowner takes out a mortgage on the property but still retains ownership. With this scheme, some of the equity in the home can be earmarked to pass on to family members after your death. With regards to the mortgage aspect of your loan, you can either make repayments to this mortgage on a monthly basis or pay nothing and roll over the interest payments until the date of your death. After you die or move into long-term residential care, the amount of the outstanding mortgage loan plus any interest is repaid out of the equity in the home.
Lifetime mortgages tend to be the most popular equity release schemes on the market, with most people choosing not to make any repayments to the mortgage during it’s lifetime. This means all the unpaid interest accruing on the mortgage is added to the loan total. Different providers offer varying lifetime mortgage schemes, so it’s important to shop around for the best deal. The maximum you can borrow on a lifetime mortgage is generally 55% of the property value, but this will depend on age, health and the total value of your home. The percentage you can borrow is usually higher if you apply for a lifetime mortgage when you are older, or if you are subject to any existing pre-existing medical conditions. Some schemes offer customers the ability to withdraw their equity in small sums throughout the lifetime mortgage, which can be useful as it cuts down the amount of interest due as you only pay interest on the equity that is drawn down.
With home reversion schemes, you can sell all of your home, or part of the property, to a home reversion provider in return for a cash sum or regular payments. You can remain in your home until the date of your death, with no additional requirement for payments but you have to agree to maintain the property and continue to ensure it. If you want to ring fence a proportion of the equity in your home for inheritance purposes, the percentage you own will remain the same despite any property valuation changes that may occur. After your death the property is sold and the equity is shared according to the percentage of ownership.
In general, home reversion schemes allow you to take between 20% and 60% of the value of your home or the percentage of the home you decide to sell. Some providers will only offer home reversion schemes to applicants over the age of 60 or 65. Generally, the available percentage is higher for older applicants.
What are the benefits of Equity Release?
One of the principle benefits of equity release is that it allows you to remain in your home throughout your old age and use the cash released from your property to help fund your retirement. Many people find the cash windfall provided by equity release pays for dream holidays or home improvements, as there are no restrictions on ways to utilise the capital released from your property. Equity release can be a viable alternative to selling a property and downsizing, allowing homeowners to remain in much-loved family homes until their date of death or any move into residential care. Further advantages of equity release are that homeowners don’t have to face the stress or expense of moving home and it’s possible to remain in the neighbourhood to which they’re accustomed.
Equity release schemes do contain a “no negative equity” clause, which means that at the time your property is sold off there won’t be any requirement for your estate to repay any outstanding sums over and above the value of the home to the scheme providers.
Some additional points to consider about equity release schemes are:
- fees will need to be paid for arranging equity release
- interest rates on lifetime mortgages are generally higher than ordinary mortgages
- rates of interest on lifetime mortgages are usually fixed for the duration of the mortgage but can be variable and not always capped.
- where no repayments are made to lifetime mortgages the interest charges can soon mount up, leaving considerable sums due on the date of your death or when you move into long-term care
- property valuations for home reversion plans are nowhere near as generous as the prices that can be achieved if you sell your property on the open market or when you move into long-term care.
If you are considering releasing the equity in your home, it’s a good idea to seek expert advice from a financial adviser to source the best available deals on the market to suit your requirements.
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