A Guide to Equity Release: What is it and how could it help you?

by | May 13, 2020 | Mortgages

What is equity release?

Equity release refers to a range of products letting you access the equity (cash) tied up in your home. You can take the money you release as a lump sum or, in several smaller amounts or as a combination of both.

Who is eligible for equity release?

Most lenders will offer equity release to those aged over 55. You also have to own the property you wish to release equity on, but you do not have to have paid off the full mortgage.

What equity release options are there?

There are two equity release options to choose from. A mortgage advisor will be able to assess your situation and suggest the best solution for you.

 

How much can you borrow?

The amount you can borrow depends on your age, financial circumstances and the equity release option you choose.

What are the main reasons for equity release?

  • Release a lump sum cash amount
  • Provide a gift or inheritance to family members
  • Carry out home improvements
  • Pay off outstanding debt or mortgages
  • Travel and enjoy retirement.

     Option 1: Lifetime Mortgage

    A lifetime mortgage means you can take out a mortgage secured on your property while retaining ownership, as long as it is your main residence.

    Lifetime mortgage considerations:

    • You can ring-fence some of the value of your property as an inheritance for your family.
    • You can make repayments or let the interest roll-up. The loan amount and any accrued interest is paid back when you die or when you move into long-term care.
    • Most lenders don’t require you to make any repayments while you’re alive and the interest is added to the loan. However, now offer the option to pay all or some of the interest and capital.
    • Age 55 is minimum age you can take out a lifetime mortgage.
    • Most lenders will allow you to borrow up to 60% of the value of your property. The amount you can release depends on your age and the value of your property.
    • Interest rates must be fixed or, if they are variable, there must be an upper limit which is fixed for the life of the loan.
    • You have the right to remain in your property for life or until you need to move into long-term care, as long as the property remains your main residence and you abide by the terms and conditions of your contract.
    • A Lifetime Mortgage has a “no negative equity guarantee”, which means when your property is sold, the agents’ and solicitors’ fees have been paid. Even if the amount left is not enough to repay the outstanding loan to your provider, neither you nor your estate will be liable to pay any more.
    • You can move to another property providing the new property is deemed by the lender as acceptable security for your equity release loan.
    • If you can make repayments, the mortgage will be less costly. However, with a lifetime mortgage with monthly payments, the amount you can repay might be based on your income and lenders will need to check you can afford the regular payments.
    • Some lenders will all allow you to withdraw the equity in small amounts when you need it, while others will require you to take it as one lump sum. The advantage of being able to take out smaller amounts is you only pay the interest on the amount you’ve withdrawn. 

    Option 2: Home Reversion

    Home Reversion means you sell part or all of your home to a home reversion provider in return for a lump sum or regular payments.

    Home Reversion considerations:

    • You have the right to continue living in the property until you die, rent free, but you must maintain and insure it.
    • You can ring-fence a percentage of your property for later use. The percentage you retain will always remain the same regardless of the change in property values, unless you decide to take further cash releases.
    • At the end of the agreement, the property is sold and the proceeds of the sale are split across the remaining proportions of ownership.
    • It is normal to receive around 20% and 60% of the market value of your home (or the part you sell).
    • Some providers will allow you to release equity in several payments or in one lump sum.
    • For most lenders, age 60 is the minimum age at which you can take out a home reversion plan.
    • The percentage of the market value you will receive will increase the older you are when you take out the plan and vary from lender to lender.
    • You can remain in your property for life or until you need to move to long-term care, subject to the property being your main residence.
    • You have the right to move to another property providing the new property is deemed acceptable as the security for your equity release loan.
    • A Lifetime Mortgage has a “no negative equity guarantee”, which means when your property is sold, the agents’ and solicitors’ fees have been paid. Even if the amount left is not enough to repay the outstanding loan to your provider, neither you nor your estate will be liable to pay any more.

    Ramsay & White is a specialist mortgage brokerage serving the specific finance needs of property investors across the UK.

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