Equity Release Mortgages
Equity Release: Tax free cash in your home
Equity Release is available for two main uses. It can be used to make up the shortfall on a property purchase in the same way as a standard mortgage. The benefits of an Equity Release product instead of a standard mortgage is that the borrowing amount is determined by age i.e. the older the client, the more can be raised. Income, credit, affordability etc are much less important, if at all.
Release some of the value in your home
Equity Release is however more commonly used as the process for releasing equity (tax free cash) from a home whilst continuing to live in the property. Equity release mortgages are designed for people who are aged 55 or over and who either own their own homes outright or have a small mortgage. Equity Release is only a very small part of the overall mortgage market but is incredibly useful for customers who would be described as asset rich and cash poor.
The two main types of Equity Release products are Lifetime Mortgages and Home Reversion schemes. Income, credit rating or reason for the advance is not important with Equity Release mortgages. The maximum loan amount available is instead determined by age, gender and property value. Both Lifetime Mortgages and Home Reversion products can be used to release additional regular income or a one-off lump sum. A reserve amount can also be implemented which will allow further amounts to be taken in the future without the need for another application. Once an Equity Release scheme is in place, the client continues to live in the property for life or until they chose to leave i.e. sell or go into long term care. The client will continue to be responsible for most of the day to day upkeep on the property although help could be available for large maintenance.
Professional advice is recommended to explain the differences between the two main Equity Release schemes. This can be provided by an expert brokerage such as UK Property Finance and will enable you to select the most appropriate product for your needs.
Equity Release – Lifetime Mortgages
Lifetime Mortgages enable a borrower with minimum income to obtain a mortgage which will release equity stored up in their homes in exchange for cash. Monthly interest payments are rarely required with this type of product and instead the payments are rolled up and paid when the mortgage is redeemed (see example below). With a Lifetime Mortgage you are not selling your house as you retain full ownership. When a client dies or moves, the property reverts to the estate and is usually sold. The Lifetime Mortgage and accrued interest is then repaid and the balance returned to the estate.
Example: Clive and Ellen are in their early 70s and have a house valued at £300,000 with no mortgage. They take out a lifetime mortgage of £100,000 at a fixed interest rate of 3.6% where the monthly payments are rolled up i.e. no monthly payments required. Clive and Ellen now have £100,000 to spend how they wish. They have the right to remain in the house until their death or when they sell at which point the £100,000 plus rolled up interest is repaid from the sales proceeds and the remainder goes to the estate.
Equity Release – Home Reversion Plans
The main difference between a Lifetime Mortgage and a Home Reversion scheme is that effectively with a Home Reversion scheme you sell a percentage or all of your property to a third party and with a Lifetime Mortgage you retain full ownership. The remaining criteria is similar however health issues are also a major factor in determining the suitability of a Home Reversion scheme because if a client is terminally ill from the outset, this product can be overly expensive. When the customer either dies or leaves the property it is sold by the Home Reversion company. Depending on the scheme, the balance (if any) is then paid to the customer or their estate. As mentioned with this type of Equity Release product the client loses full ownership of the property and a nominal rent (usually about £12 a year) is standard.
Clients tend to choose Home Reversion schemes when a higher loan amount is required.
Before selecting an Equity Release scheme, we will help you consider the following:
How Equity Release will affect your current income. Some schemes could reduce your entitlement to certain state benefits leaving you with less disposable income.
Future restrictions – taking out an Equity Release plan could limit your options to move to a smaller property in the future. This is due to the reduction in the equity left in the property once the lender has been repaid.
Many local authorities offer various schemes for home improvements that could be used instead of Equity Release.
You may wish to invest a lump sum of the money received into a guaranteed fixed income or variable income scheme. The rate of interest received from the investment should favourably compare with the rate of interest received from the plan chosen.
If you prefer to keep the amount received from your Equity Release plan in a savings account the interest obtainable is very important. If interest is being accumulated through the Equity Release scheme at 3.6% it would not be wise to withdraw the money and invest into a savings scheme where you would receive only 1%.
Inflation could also be a concern if your investment has a long-term fixed rate. This may depreciate the real value of your money in times of growing inflation.
Fees and Costs
Depending on the scheme, arrangement and application fees for Equity Release schemes are either free or added to the loan amount.
The valuation fee is also usually free but if not, it is payable in advance.
Legal costs can be free depending on the scheme although if not these fees will also be payable in advance.
As with most home ownership, buildings and contents insurance is an annual cost that requires payment.
Early repayment fees are normally payable if a lifetime mortgage is repaid early.
All fees & costs are listed on your quotation at commencement, so you can choose not to proceed if you prefer.