What is equity release?
Equity release schemes allow you to access your property’s value for more cash in retirement – but equity release is an expensive, lifetime, commitment.
If you’re facing a pension shortfall or need to meet an unexpected expense, equity release can seem attractive. It allows you to tap into the wealth you’ve accumulated in your property without the hassle of having to move.
Equity release schemes enable you to take cash from the equity built up in your property. … These enable you to take out a loan on your property in return for a lump sum, an income or a combination of the two. You continue to own the property
How much will equity release cost me?
Equity release doesn’t come cheap. A lifetime mortgage can cost more than three times what you borrow after 20 years, while some home reversion schemes demand more than 70% of your home’s value for just a 20% advance.
Although the Bank of England base rate is at an all-time low and normal mortgages rates have tumbled, rates for lifetime mortgages (the most common form of equity release) remain high.
Average rates have fallen in recent years, but equity release is still very expensive compared with a conventional mortgage.
What are the main types of equity release?
There are two main types of equity release:
Lifetime mortgages, which allow you to borrow money against your house; and Home Reversion, whereby you sell a share in your house.
1.Lifetime mortgages: With a lifetime mortgage, you borrow a proportion of your home’s value. Interest is charged on the amount, but nothing usually has to be paid back until you die or sell your home. The interest is compounded or ‘rolled up’ over the period of the loan, meaning your debt could double in 11 years at current rates.
2.Home reversion schemes: With a home reversion scheme, you usually sell a share of your property to the provider for less than the market value. You have the right to stay in your home for the rest of your life if you wish.
When you die or move into long-term care and the property is sold, the provider gets the same share of whatever your home sells for as repayment.
For example, if you sold 50% of your property to the provider, it would get 50% of the sale price. You can take out some lifetime mortgages from the age of 55, but home reversions are available only to people aged 65 or older.
Some enhanced products offer more favourable terms if you’re a smoker or have health problems that could decrease your life expectancy. Alternative options With increasing numbers of mortgages becoming available to older borrowers, equity release may not be your only option.
If you own your home outright you might find that taking out a mortgage on the property is a more cost-effective strategy. Alternatively, if you have a mortgage in place, you might be able to release extra cash by remortgaging to release equity.
Four equity release tips
If you’ve read the above and you’re sure equity release is right for you, here are a few tips:
1. Don’t borrow the full amount you need in one go. The sooner you borrow, the more expensive it is, as the interest has longer to compound. So borrow as little as you need now, and wait as long as you can to do it again.
For example, if you think you may need £40,000 from your home to cover 20 years, only take what you need now and wait to take more until needed. Drawdown lifetime mortgages are set up to make this easier.
2. Ensure you use a company that’s a member of the Equity Release Council. This trade body’s members must promise a ‘no negative equity’ guarantee, so your estate will never owe more than your home is worth.
3. Get advice before you do it. Speak to an independent mortgage expert such as Mint FS
4. It can affect your benefits. Having cash rather than a property can affect the benefits you’re entitled to, for example pension credit, universal credit and others. So if you’re entitled to those, check the impact first.
Want to know more? Call the experts now at Mint FS on 0330 1355914 or complete our contact form and we will call you back.
Equity release includes Lifetime Mortgages and Home Reversion Schemes. We can advise and arrange Lifetime Mortgages and will refer to an approved specialist for Home Reversion.