Properties, unless they are sold or put up for rent, provide little by way of financial assistance for their owners. But there is a way in which you can utilise the money caught up in your home without having to sell up and move.
If you are over the age of 55, there are a range of products which allow you to unlock the cash or equity which is tied up in your home which gives you one lump sum of cash, several smaller instalments, or a combination of both.
What is Equity Release?
If you are over the age of 55, there are a range of products which allow you to unlock the cash or equity which is tied up in your home which gives you one lump sum of cash, several smaller instalments, or a combination of both. Such products are referred to as equity release.
Types of Equity Release
There are two options when it comes to equity release:
If the home that you live in is your primary residence, you can take out a mortgage on the property and still retain its ownership. It is possible to set aside a certain percentage of your house’s value for the future inheritance of your family.
You can let the interest accumulate over time or make repayments. Upon your death, the accrued interest along with the loan amount will be repaid by your estate.
A home reversion provider buys the whole or a part of your home and gives you regular payments or a lump sum in return. If you agree to insure and maintain it, you can continue living rent free in the property until your death.
Similar to lifetime mortgage, you can reserve a percentage of your property’s value which you can transfer to your family upon death as inheritance. Irrespective of the fluctuations in the value of your property, the percentage of your property’s value that you reserve will remain unchanged. If you decide to release further cash, this percentage changes.
Your property is sold when the plan ends and the proceeds from the sale are distributed amongst the provider and beneficiaries according to the proportion of ownership that remains.
Most people opt for a lifetime mortgage when taking out an equity release product. With these, the interest keeps adding up while you’re alive as you are not required to make any repayments. Any interest which is unpaid gets added to the loan amount. The only disadvantage of using a lifetime mortgage is that the debt increases quickly within a short space of time.
Nowadays, however, there are many lifetime mortgage providers who give borrowers the option to pay a part or whole of the interest. Some providers may also allow you to pay off the capital and interest. Just like the terms and conditions of normal mortgages differ from lender to lender, lifetime mortgages too are offered with varying conditions.
The following are certain things that you must keep in mind when considering a lifetime mortgage:
- There is a minimum age when it comes to taking out a lifetime mortgage and it is usually set at 55. As the average life expectancy is longer, the mortgage will cost you more in the long run if you start early.
- In most cases, there is maximum percentage that a person is allowed to borrow and generally it is up to 60 percent of the property’s value. The value of your property and your age determines how much of the equity can be released.
- When you opt for a lifetime mortgage, the percentage of value that you can withdraw increases according to your age. If you have a present or past medical condition, there may be some providers that could be willing to offer you a larger sum.
- According to a regulation laid down by the Equity Release Council, the interest rates charged by providers must be fixed. For variable interest rates, there should be an upper limit in place which it cannot exceed.
- Another such regulation states that you must abide by the terms and conditions laid down by your contract. The property should continue to be your primary residence and you have the right to continue living in it until death or until the time you are moved into long term care.
- A lifetime mortgage comes with a ‘no negative equity guarantee’. When a property is sold, the proceeds from the sale are first utilised to pay the fees of agents and solicitors. From the amount that remains, the outstanding loan debt is paid off. The no negative equity guarantee ensures that if the sale proceeds prove to be insufficient to pay off the loan, your estate and its beneficiaries will not be liable to pay anything from their own pockets.
- You also have the liberty to move into another house on the condition that your provider for the equity release loan accepts the new property as continuing security. Different providers of lifetime mortgages have varying thresholds.
- Most people tend to have some level of confusion about whether they will be allowed to pay all, some or none of the interest. The mortgage will naturally prove to be less costly if your lifetime mortgage provider allows you to make repayments. If you can make monthly payments, your income will determine the amount that you can repay each month. Providers will try to ascertain if you have the financial ability to make these regular payments.
- Generally, lifetime mortgage providers offer both options to their customers, which is to withdraw the whole amount in one lump sum or to release it in small instalments according to their requirement. But taking out money in small instalments is generally advisable as you are only required to pay interest on the amount that you have withdrawn and not on the whole value of your loan. They may also offer you the chance to take smaller lump sums in which case you must know what the minimum amount is.
- There is no fixed date or term by which your lifetime mortgage provider expects you to repay your loan. Also, the rate at which interest is charged will change only if you borrow additional money. The higher rate of interest will only be applicable to the additional percentage that you borrow.
A home reversion plan allows you to sell a part or all of your home to a home reversion provider in exchange for a lump sum or regular payments. Generally, you may receive somewhere between 20 to 60 percent of your property’s market value.
If you are considering opting for a home reversion plan, you should take the following precautions:
- You should ask your home reversion plan provider whether your equity will be released in one lump sum or in several payments.
- Different providers have different age limits when it comes to using a home reversion plan. Some providers make the loan available only to those who have reached 60 or 65 years of age.
- Similar to a lifetime mortgage, the percentage of market value that you can release from your property increases with age. However, the exact percentage of home equity that you can borrow will vary depending on your provider.
- Until you are required to move to long term care or until your death, you reserve the right to occupy your property without having to pay rent. The only condition that you need to follow is that the property must continue to be your primary residence and that you shouldn’t violate any of the terms and conditions mentioned in your contract.
- A home reversion plan also comes with a ‘no negative equity guarantee’. When a property is sold, the proceeds from the sale are first used to pay the fees of agents and solicitors. From the amount that remains, the outstanding loan debt is paid off. The no negative equity guarantee ensures that if the sale proceeds prove to be insufficient to pay off the loan, your estate and its beneficiaries will not be liable to pay anything from their own pockets.
- Similar to a lifetime mortgage, even with a home reversion equity release plan you have the liberty to move into another house on the condition that your provider for equity release loan accepts the new property as continuing security. Different providers of lifetime mortgage may have varying thresholds.
- How well you should maintain your property and how frequently your property will be inspected will be specified in the agreement that you enter into with your equity release provider.
- The amount of money that you can borrow will be significantly lower than the true market value of your property. For instance, if 20 percent of your property’s value corresponds to £40,000, you may only be given £20,000.
- Irrespective of whether you opt for a lifetime mortgage or a home reversion plan, you will be required to pay arrangement fees which can cost you approximately £1500 to £3000, depending on the plan that you select.
- The state benefits that you are entitled to receive may be affected by the money that you receive from equity release.
- You should also take into consideration the fact that you may not be able to use your property for any monetary purpose such as retirement costs, once you release equity from your home.
It is natural to be tempted by the immediate boost to your finances that equity release can provide but it is important that you take this step only after carefully considering the implications of releasing equity from your home and speaking to an adviser if you have further questions about whether it is right for you.