What is an Equity Release Mortgage?
The prospect of being able to take a sizable tax-free chunk of money from the value of your home, yet continue to live in it, provides freedom for countless elderly individuals.
Known as equity release, the concept has been around for several decades now, but it’s only in recent times that new, more impressive products, have come on the market.
In fact, equity release is becoming more popular as time goes on. And no wonder. Rapidly rising house prices means many homeowners have fairly substantial chunks of equity in their bricks and mortar investment.
So why not release some of it and use it while still young and active enough to enjoy what it can buy?
Certainly, that’s what many individuals and couples in their 50s are thinking today. And who can blame them? They’ve worked hard enough to pay off the majority of their mortgage.
Why shouldn’t they enjoy the wealth their property has accumulated for them? It’s time to go on that holiday of a lifetime you always fancied, buy a better and bigger car, get a conservatory or even pay off the remainder of your existing mortgage.
You can also help your children or grandchildren put down a deposit for their own home. Considering rising property prices this is something younger generations struggle with.
Before we go on to explain ‘lifetime mortgages’ or ‘later life lending’ as it’s also known, in more detail we just wanted to dispel a few myths first!
Equity Release Myth Busting
Myth 1 - My home will no longer be mine with equity release
Yes, you will still own your own home. It’s just that you are borrowing against it. The lender won’t be able to ‘possess’ it whenever they like.
Your lifetime mortgage will indeed last for your lifetime. Your home can only be possessed when both of you pass away or the last person remaining goes in to long-term nursing care.
Myth 2 - I'm not eligible for equity release as I'm still paying off a mortgage
Provided you have equity in your home – whether you are still paying off your mortgage or are mortgage-free – you can apply for equity release. In fact, many people use some of the equity lump sum they receive to pay off their existing mortgage.
This means they never have to worry about whether they’ll be able to make mortgage payments when they retire, if they lose their job, or get ill and find they can’t work. You can make monthly payments on a later life lending scheme if that’s what you prefer.
You can also go for the ‘interest roll-up’ option where the interest is paid when the house is sold on, the last householder enters long-term nursing care or both pass away.
Myth 3 - only pensioners can sign up to a lifetime mortgage scheme such as equity release
Some equity release schemes start from a minimum age of 55 years, but by far the majority of later life lending schemes are for homeowners aged 60 to 85. How much equity you can release depends on the value of your home and the age of the youngest applicant (i.e. between yourself and your partner)
Myth 4 - I'll owe more than the value of my home
If the borrowing scheme you choose is recognised by the Equity Release Council then you will never end up in a negative equity situation. If it is the case that the property is sold for less than the value of the mortgage then the remaining balance will simply be written off.
Myth 5 - There will be nothing left for my family
As well as being able to ringfence some of your cash to give to your loved ones when you die, you can also ‘gift’ them money while they are young (and need it most, as a down-payment on a house, for instance) by using some of the equity you receive.
What about lifetime mortgages or a home reversion plan?
What is a Life time mortgage?
Referred to as ‘lifetime mortgages,’ these are offering better rates of interest and mean you only pay the remaining sum on the mortgage when it’s due. That’s usually on your death or if you have to go into a care home and it’s used to pay for your fees.
And yes, like most things in life, there are drawbacks. Naturally, if you spend the money you take from your equity release deal then that will eat into any funds your loved ones will receive on their death. But, to make sure they do receive something, it’s possible to ‘ringfence’ or keep back a portion of your cash. This is achieved by taking out ‘inheritance protection.’
It’s worth noting too that if you’re claiming any benefits, then getting an equity payment may affect the amount you can claim and may reduce them completely since your personal circumstances will have changed.
What is a home reversion plan?
Another, less popular form of equity release, is the home reversion plan. This involves selling some or all of your home to the lender and remaining in it rent-free. Some schemes charge a nominal rent, such as just £12 a year for the rest of your life, for example. You’ll still be expected to maintain and insure your home. You can get a tax-free lump sum or regular payments and a lifetime lease.
How is equity Calculated?
You may not get as much for your equity from your home as you think from a later life lending scheme. And, certainly, the younger you are, the less equity you will receive from your home. That’s because the lender who buys your home will have to wait longer to own your home (i.e. on your death).
What is the Equity Release Council?
Established three decades ago, the Equity Release Council is the industry body for the UK equity release sector. It represents lenders, financial advisers, solicitors and a number of intermediaries. It regards itself as consumer-centric and provides a guarantee that its members are qualified and have signed up to a code of principles.
You can find information on equity release, including the latest news in the sector at its website www.equityreleasecouncil.com
Despite the many benefits of later life lending highlighted above, it’s always worth remembering no financial product is completely guaranteed. Risk and drawbacks exist with any financial product so it’s always best to do your due diligence before signing up to anything that can have a big impact on your financial situation.
We're here to help with your equity release mortgage
Because of this it makes sense to talk to a qualified mortgage broker. He or she can find the equity release product that suits your circumstances best.
If financial discussions make you feel a little uneasy or nervous, then why not bring along a trusted friend or family member to your appointment? Call us at The Mortgage Stop today, tel: 01794 379 379 or click below to get a call back from an expert adviser.
A lifetime mortgage is a long-term commitment which could accumulate interest and is secured against your home. Equity release is not right for everyone and may reduce the value of your estate.