Are you a homeowner, over the age of 55, who is asset rich but has limited income? If so, you may be interested in an equity release scheme.
There is no easier way to access the equity you have tied up in your current property, however, is equity release right for everyone?
After factoring in all the potential downsides, you can decide if you should release equity in your home, or consider alternative options?
What is Equity Release?
In a nutshell, equity release is a tax efficient way to access the money tied up in your current property, by using a ‘lifetime’ mortgage or loan. Essentially a specialist mortgage product is arranged and secured against your home in exchange for a lump-sum cash payment, a series of regular tranches or a combination of the two. You can also obtain a guaranteed facility, which will be held in reserve and enables you to access additional funds in the future, without having to submit a further application.
One of the benefits of an equity release scheme is that no monthly payments are required. Instead the interest generated by the equity release lifetime mortgage is added to the outstanding loan balance each month and repaid when the property is either refinanced or sold after the mortgage holder dies or moves into long-term care. Following sale, any remaining funds, once the equity release mortgage is repaid, will be forwarded to your estate, unless other arrangements have been made.
Other benefits include:
- a guaranteed fixed rate during the term of the loan
- you can live in the property for as long as you like without monthly payments
- no matter how long you remain in the property, the loan will never increase to more than the property is worth
- income is unimportant to qualification
- most credit issues are acceptable
- the funds raised can be used for any legal purpose etc.
After raising a lifetime equity release mortgage, you can continue living in the property as normal, however, the equity release company, as with any other mortgage company, enter a charge in their name at Land Registry stating that the equity release mortgage must be repaid as part of the future sale or refinance of the security property.
You are only able to borrow against the actual ‘equity’ in your home i.e. the market value minus the current outstanding mortgage balance. Additionally, the lifetime equity release mortgage can only be arranged on a first charge basis meaning that any mortgage already registered against the property at time of application will have to be repaid either prior or as part of the equity release transaction.
For example, if your home is valued at £200,000 and you still have a £20,000 outstanding mortgage to repay, your equity is £180,000. In this instance, the equity release mortgage will repay your current mortgage and an additional amount would be raised, depending on factors such as age, health, gender etc.
Downsizing to Release Equity
Before proceeding with an equity release mortgage, it is worth considering whether you can achieve your financial objectives by downsizing.
If the prospect of moving into a smaller home is acceptable, you could free up a significant amount of money tied up in your current property via this route.
One of the primary benefits of downsizing is that you retain complete ownership of the property, which will go to your estate when you inevitably pass or move into permanent care and the property or proceeds of sale can then be passed to your chosen beneficiaries.
There are many reasons why downsizing may be impractical or impossible. You may already live in a small home or flat or own a property with a relatively low market value meaning that unless you decide to rent, purchasing another property, may be impractical. It could also be that you prefer not to leave the home where you have great memories and where you have invested so much time and effort over the years.
If downsizing to release equity is not acceptable, then equity release may be worth considering.
How Much Does Equity Release Cost?
This is perhaps the most important consideration of all, as equity release, like any property finance product, is not a free service. Equity release interest rates are normally higher than a comparable standard mortgage, but they are arranged over a long-term and with a guaranteed fixed rate of interest, so in the long run, they may be cheaper.
Arrangement fees and various other administration fees may also apply, as with other finance products, and depending on the service provider can vary. It is therefore essential that you discuss your individual case with an independent broker ahead of time, to establish the affordability of your preferred equity release scheme.
Important Guidelines from the Experts
If you have decided to proceed with an equity release scheme it is important to do so in a strategic and mindful manner. A few important tips and guidelines from the experts:
- Remember that the earlier in life you borrow, the more time there is for the interest on your lifetime mortgage to accumulate, which could reduce the amount that is eventually allocated to your estate.
- The older you are, the more you can raise.
- Compare all available options with the help of an independent broker to ensure you get the best possible deal.
- Calculate the extent to which your equity release scheme could affect your entitlement to benefits.
- Ensure you understand how an equity release scheme could reduce the overall value of your estate and the inheritance your beneficiaries will receive.
- Never work with an equity release provider that is not a member of the Equity Release Council, the UK’s official equity release trade body.