If you are aged 55 years old or more and you own your home, you might be able to access a range of financial products to free up some money tied into it. This is known as equity release, and allows you to take the money as a lump sum or in smaller amounts.
What are the options for equity release?
There are two main options available to you for equity release. Each has its pros and cons, and so it makes sense to research which option is best for you.
The first option is a lifetime mortgage. This is where you take out a mortgage secured against your home, but you are still the property owner. It’s fairly flexible in that you can put aside some of the property’s value as an inheritance for your loved ones.
You’ve got the option to make monthly repayments as you would a regular mortgage. Or, you can choose to let any interest accrue for the duration of your ownership. A lifetime mortgage gets repaid when your property is sold, often when moving into long term care, or when you pass away.
The second type of equity release is home reversion. This is where you agree to sell part or all of your home to the finance company. You can still live in your home, and you get a lump sum cash amount or a series of regular payments.
You’re allowed to live rent-free in your home until you die. But, you must insure and maintain the property as normal. At the end of the plan (i.e. when you pass away), your home will get sold and the equity release provider takes their percentage share of the property depending if you sold all or part of it to them.
For instance, you may have agreed to ring-fence part of your home’s value for inheritance purposes.
Is a lifetime mortgage equity release right for me?
A lifetime mortgage is the most popular kind of equity release scheme. The advantage of a lifetime mortgage is that you don’t usually have to make any payments to the company financing the equity release. However, the downside is that interest will continue to build up and gets added onto the loan. As a result, the interest could significantly increase the debt owed in some cases.
One of the reasons many people opt for lifetime mortgages is the flexible options on offer. These days, it’s possible to pay back the capital and interest as you would a regular mortgage. In some cases, you can opt to only pay back the interest charged on the loan, decreasing the total amount owed.
If you are thinking of getting a lifetime mortgage, it’s worth bearing the following points in mind:
You have to be 55 or older
The reason for that requirement is down to the simple fact that we are all living longer. If you took out a lifetime mortgage earlier on in your life, you would end up with a greater debt to pay back.
You can borrow up to 60% of your home’s value
There’s never a fixed percentage you can borrow because it depends on your age and the value of your home. You will also find that some providers of lifetime mortgages may offer larger lump sums to people with certain medical conditions.
Interest rates are fixed or capped
When you take out a lifetime mortgage, your interest rates are either fixed or capped. That applies to the duration of your loan.
There is no negative equity with lifetime mortgages
One of the most interesting features of a lifetime mortgage is that you don’t have to worry about negative equity. Let’s say that your property sells when you’re no longer living in it and there isn’t enough money to pay off the loan. The company financing the lifetime mortgage cannot request you or your ‘estate’ to pay any more money.
You can move to another property
It’s possible to live elsewhere and make that other property your home. But, you must meet certain conditions as set out by your lifetime mortgage provider. So, if you decide to sell up and move to another location, your lifetime mortgage provider should be okay with that.
Is home reversion a better fit for me?
With home reversion, you can sell a part of your home or even all of it to a home reversion provider. By doing so, you can get a lump-sum payment or regular payments in return. The amount you can receive is often around 20% to 60% of your home’s market value. There are some differences between lifetime mortgages and home reversion products.
For instance, the minimum age requirement is higher for home reversion plans. Providers will usually ask that you’re at least 60 to 65 years of age. Lenders will also require you to maintain and insure your home so that its resale value won’t decrease due to property issues.
You don’t have to worry about negative equity, and you have the right to live in your home or sell it and buy another property elsewhere.
Is equity release right for me?
You might be wondering whether an equity release product is right for your needs. The thing is, you’re making quite an important decision so it pays to know exactly what is going to happen before you agree to anything.
For instance, you may find that a conventional mortgage product is better suited to your needs. This might be because you are younger than the minimum age requirement for an equity release mortgage. Or you may prefer to pay the loan back; if that’s the case, you should bear in mind interest rates are higher for equity release mortgages than for standard ones.
There are other factors involved when it comes to determining whether equity release is right for you or not. You’ll need to think about why you want the money and your plans for the future. You might find that your existing income is sufficient enough to cover a conventional mortgage, especially if you don’t need to free up vast sums of money.
It’s easy to think about the potential cash payments you’d receive if you took out an equity release mortgage. But, you need to think about how it will affect your future before you make a decision to take such a financial product out.
How to make equity release work well for you
If you’ve thought about it and decided that equity release is still something you wish to pursue, there are some tips you can follow to get the best deal possible. For instance, it can make sense to borrow as little as possible rather than opting for a large cash lump sum. That’s because the interest will compound, and can make it potentially expensive if that interest compounds over a long period.
You might not know it, but it’s possible to take out more money as and when you need it. So, you could borrow what you need now, and extend your borrowing at a later date under the same equity release plan.
Are there any other alternatives to equity release?
If you want to free up some money in your home, it’s likely you want to use the money to fund a project. Should you live alone or with your spouse or partner, and you have a big home, one thing you could do is consider downsizing.
It’s a worthwhile consideration to make if you have mobility problems, for example, and find it hard to go up and down the stairs. You may wish to consider moving to a smaller property and one such as a flat or bungalow.
Doing so could give you the freedom to still live mortgage-free and also free up some cash you could use for other things in your life. Of course, you might wish to remain in your home if you’ve lived there a long time, or remain close to friends or family.
Weighing up the options
Taking out an equity release plan is a big decision to make in your life. That’s why it pays to do your research first and think about whether it’s right for you or not. Also, if you are on state benefits, you should take professional advice first before making a decision. That’s because the money you borrow could affect your entitlement to things like pension credit, universal credit, for example.
At Ascot Mortgages, we provide equity release advice to help you make the right decision on what’s best for you and your family.