If you are over the age of 65, equity release refers to a set of products that allow you to access the equity (cash) in your house. You can release the funds in one large sum, multiple smaller installments, or a combination of both.
People release equity for several reasons.
Borrowers may desire to get their hands on the money locked up in their property for a variety of reasons. It will be a way for some to supplement their existing pension savings in order to have a more comfortable retirement. Others may want to make house improvements, maybe to make their home more fit for their requirements as they age, and will require finances to do so.
Another common reason people employ equity release is to give a monetary gift to their loved ones, effectively an early inheritance. Some seniors, for example, use these loans to assist their children or grandchildren in purchasing their first home.
Equity release is also a possibility for persons who have an interest-only mortgage but no solid plan in place for repaying the capital borrowed when the mortgage expires, other than selling the home. These borrowers can utilize the money they get from an equity release contract to pay down their debts and stay in their own homes.
What is the process of equity release?
You can utilize an equity release scheme to unlock some of the equity built up in your property if you are 55 or older and either own it outright or have a mortgage on it. Unlike traditional loans, you won't have to make monthly payments; instead, you'll only have to pay back the money when the property is sold - usually after death or a move into care.
The manner in which the procedure is carried out is determined by the sort of scheme you select.
Which Equity Release Schemes Are Available?
There are a number of equity release schemes available in the UK. These vary in terms of what they cover, how much equity is released, and how long the repayment period is. However, there are some key factors that will affect the amount of equity that you can release. These include the size of your home, the age of the property, the loan amount, and the interest rate.
The Home Assurance Scheme is one of the most popular schemes in the UK. It is designed for people who have owned their property for at least five years and it covers the full market value of the property. The scheme offers a lump sum that you can use to buy another property with, or you can leave it in your estate to provide for your beneficiaries. The interest rate is fixed at 5.75%. This means that if you take out a Home Assurance Scheme loan, you won't have to pay any extra costs. There are also no application fees and there is no exit fee. You will want to make sure you use one of the
best equity release companies available if you go this route.
Mortgages that last a lifetime
A lifetime mortgage is used by the majority of persons who take out an equity release loan. You usually don't have to pay anything back while you're living. Instead, the unpaid interest is 'rolled up,' which means it is added to the loan. This means that the debt might grow quickly over time.
Some lifetime mortgages, however, now allow you to pay all or part of the interest, and some even allow you to pay off both the interest and the capital. Lifetime mortgages differ from one lender to the next, just as regular mortgages do.
When considering a lifetime mortgage, find out the answers to the following questions.
How old do you have to be to get a lifetime mortgage?
It's usually around 55 years of age but will differ depending on the lender requirements.
Because we're all living longer lives, the earlier you start, the more it'll cost you in the long run, especially if you opt not to pay interest during the lifetime mortgage's term.
What is the most you can borrow in terms of a percentage?
You can borrow a proportion of your home's worth, but this is contingent on a number of conditions, including your age and the value of your home.
When you take out a lifetime mortgage, the percentage normally grows with your age, and some providers may provide bigger sums to those with particular past or present medical issues.
Is it possible to fix the interest rate?
Yes, but if they're variable, there must be a "cap" (upper limit) that remains constant during the loan's life.
Other Key Factors To Analyze When Considering An Equity Release Loan
• Check for a "no negative equity guarantee" on the goods. This implies that even if the money left over after paying the agents' and solicitors' fees is insufficient to satisfy the outstanding debt to your supplier, neither you nor your estate will be obligated to pay any more.
• Ensure you have the option to move to a new property as long as the new property is acceptable to your equity release loan provider as continued security. Different providers of lifetime mortgages may have slightly different policies.
• Whether or not you are able to pay none, some, or all of the interest. If you are able to make payments, the total amount of interest payable when the property is sold will be reduced.
• The amount you can repay on a lifetime mortgage with monthly payments may be determined by your income. Providers will need to verify that you are able to make these recurring payments.
• Whether you can take the equity you're releasing in little increments as and when you need it, or whether you have to take it all at once. The benefit of being able to withdraw lesser amounts of money is that you only pay interest on the amount you've removed. Check to see if there is a minimum amount whether you can take smaller lump sums.
Interest rates and fees for equity release
You must consider the impact of interest charges on the amount you owe if you have a lifetime mortgage. Unlike a typical mortgage, which you pay off over the course of the loan, a lifetime mortgage has an open-ended interest period that ends only when you die or enter long-term care.
Lifetime mortgages have a higher average interest rate than traditional repayment mortgages. This means that the debt will grow faster, especially if you are accruing interest instead of paying it off. When you take up a home reversion mortgage, keep in mind that if the value of your home doubles, so does the mortgage provider's portion.
With equity release mortgages, there are a variety of set-up fees. To begin, you will have to hire a consultant. The good news is that equity release experts are required to hold a particular qualification, ensuring that the advice you receive is comprehensive and up to date. Your counsel is also expected to inform you if there are better options for you or if equity release is not appropriate in your situation.
Separately, lenders will usually impose an equity release product set-up fee, which can be relatively cheap. There can be other legal fees as well. The lender will want to make sure there are no other liens on the property; it doesn't want to discover after you've passed away that you weren't the sole owner or that there are other lenders with a stake in it.
You may also need to register the property with the Land Registry, depending on when you bought it. Registering a property's deeds was not usually required until the 1980s, therefore it could end up becoming a last-minute administrative task.
Final Thoughts
For people who know exactly how much equity they need to pull out and want the certainty of a fixed interest rate, a home equity release loan may be a better financial option than a HELOC. While consolidating debt or financing home renovations, borrowers should use prudence when taking out home equity loans. If too much equity is taken out on a mortgage, it is simple to fall behind on payments, leaving a borrower with wrecked credit and a home in foreclosure.
