Equity release for the under 55s: How does it work?

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Equity refers to the percentage of your property which is owned outright by you. It is the value of your home minus any mortgage you still owe on it.

For example, if your home is worth £280,000 and you have £150,000 remaining on your mortgage, you own £130,000 in equity.

If you have a home with equity, then one option open to you if you wish to free up some cash without having to sell your property, is to use the equity in your home to borrow.

This is known as equity release. There are two main types of equity release product; Lifetime Mortgages and Home Reversion Plans. 

As with all financial products, it is important to seek impartial advice from a qualified advisor

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Lifetime Mortgage

With a Lifetime Mortgage, you are taking a percentage of the equity in your property now, on the promise of repaying it when the home is eventually sold.

Like all other types of loan, interest is added to the borrowed amount, but unlike other types of loan, it is not paid off monthly by way of repayments, but at the end of the loan as one total sum that comes from the profits of the home’s sale (unless you opt for a type of Lifetime Mortgage where you are allowed to pay back some of the interest during the life of the loan).

Interest can build up significantly with these types of mortgage, particularly if you remain in your home for many years, as there is no set term to the loan; it becomes repayable only once the homeowner moves out and sells the property, or when the homeowner dies. 

Home Reversion Plan

Home Reversion Plans involve selling a percentage of your property to a loan provider in exchange for a lump sum or monthly income, or both.

When the property is sold, the provider will take back the same percentage they lent you, which can be a significant amount more in real terms if the value of the home has increased greatly since the loan was taken out. There is no interest build up with a home reversion plan.

What age do you need to be to qualify for Equity Release products?

Equity release products are different to standard mortgages in that they do not require any repayments to be made until the home is sold and there is a ‘no negative equity’ guarantee on them meaning that you can never find yourself in a position where you owe more than the total value of your home. 

For this reason, equity release products are only ever offered to those aged 55 or over, and in the case of Home Reversion plans, only to those aged over 60.

What options are available for under 55s?

If you wish to release a cash lump sum from your home and you are under the age of 55, then unfortunately you won’t qualify for any equity release schemes.

However, there are some alternative short term loan products which may give you options if you are nearing the qualifying age for equity release and wish to bridge the gap until such a time as you become eligible to apply for a Lifetime Mortgage or Home Reversion plan. 

The options usually offered to those under 55 years of age are remortgaging, or a second mortgage known as a ‘Second Charge’ loan.

With these methods of borrowing however, you are required to make monthly repayments until the loans are repaid in full, and you will need to go through the same kind of application process as a standard mortgage.

Your home will also be at risk if you do not keep up repayments on these kinds of loan.

If you are under 55 and decide to go down the route of taking out a Second Charge loan, or a remortgage, your broker will calculate how much you can borrow and how much it will cost per month in repayments.

The amount you are eligible to borrow will depend on how much equity you have in your home and your ability to make repayments along with your credit score. 

Second Charge mortgages are secured loans, which means they use your home as security, just as a remortgage also does.

It is important to remember this as whilst they may seem like a good solution to a cash flow shortage, they do carry heavy penalties if you are not able to make the repayments.

How does a Second Charge Mortgage work?

A Second Charge mortgage allows you to use the equity you have in your home as security against another loan, effectively meaning you will have two mortgages against your home.

With a second charge mortgage you can borrow anything upwards of £1,000. The top total percentage of your home’s equity that your loan provider is prepared to lend you will vary from lender to lender.

There are several advantages of Second Charge mortgages, but, as with any financial product, there are also some risks associated with it too.

The good things about Second Charge mortgages are that;

  • You can raise a large lump sum of money without needing to sell your home

  • A Second Charge mortgage could work out cheaper than remortgaging. If your credit rating has gone down since taking out your original mortgage, and you need to raise cash, remortgaging your entire property could mean taking out a loan at a higher interest rate than you originally secured. However, with a Second Charge mortgage, you are only paying a higher interest rate on the additional loan amount and not the entire mortgage. 

  • A Second Charge mortgage is a good option if you are struggling to get an unsecured loan such as a personal loan or a credit card.

  • If your mortgage has a high early repayment charge that runs into many thousands of pounds, you may find it cheaper to take out a Second Charge mortgage rather than pay the charge to end your original mortgage in order to remortgage with a new provider.

However, the risks associated with Second Charge mortgages are that;

  • They are secured loans and you need to make monthly repayments in order not to default. If you cannot afford the repayments, you risk losing your home. In 2014, 447 properties were repossessed by Second Charge lenders. 

  • As it is a second mortgage on your property, and you will still be paying your original mortgage payments at the same time, you risk overburdening yourself with debt. You must therefore be sure that you manage the payments comfortably and that you are likely to be able to continue to do so until the full loan amount is repaid.

  • If you use a second mortgage as a way of paying off other debt, you are increasing the amount of interest you end up paying as Second Charge mortgages are paid back over a much longer period of time; sometimes up to 25 years. So whilst it may solve a short term problem, it may create a far bigger debt for you to pay back in the long term.

If you are considering taking out a Second Charge mortgage, it is important to shop around before making any decisions, and compare the different rates offered by competing lenders. Don’t forget to ask about:

  • The interest rates charged on the loan product

  • The duration of the loan

  • The total amount you would be paying back

  • Any fees and early repayment charges 

  • The terms and conditions attached to the product

It is also essential to speak to a qualified independent financial advisor who can answer all your questions and present you with all the options available to you.

They will be able to help you find the loan that best meets your specific needs and financial circumstances. If you choose not to get advice from an independent advisor, you run the risk of ending up with a product that isn’t best suited to you. 

Remortgaging

The second option available to you if you are under 55 and you wish to release equity from your home without selling your property, is to remortgage.

This works by taking out a new mortgage that is larger than your existing mortgage.

If, for example, the value of your home has increased since you took out your original mortgage from £180,000 to £250,000, you can remortgage to cash-in on this increase in value.

If you still owe £100,000 on your original mortgage, you could remortgage to get £150,000 and you would be left with a cash amount of £50,000 (minus fees) to use to improve or enlarge your property and increase its value, or to spend on some other purpose.

By remortgaging, you will have ‘sold’ £50,000 as you will now only own £100,000 of your home’s total £250,000 value. 

Before considering a remortgage, you should weigh up the pros and cons of remortgaging.

Always remember to carefully consider whether you could comfortably manage the new.

Larger mortgage repayments and how much the total cost of the new bigger mortgage will cost you over the lifetime of the debt.

With the interest, fees for exiting your current mortgage and the arrangement fees for the new loan all taken into account, as these could all eat into your equity and cost you more over time. 

Conclusion

In conclusion, equity release is currently only available to over 55s, so if you are under 55 and wish to release some equity from your property without having to sell, you will need to look at Second Charge mortgages or remortgaging.

As with all financial products, it is important to seek impartial advice from a qualified advisor before making any decisions and carefully consider the possible costs to you as well as the advantages of each product. 

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