If you are over the age of 55 and looking to raise cash, you might be considering equity release. Equity release is a loan available to home owners over the age of 55, secured against the value of your property. Equity release, like all loans, is a risk. Size up the pitfalls with a thorough equity release comparison. Calculate your options accurately and take expert, independent financial advice specific to your circumstances. In the meantime, here are the essential facts.
Equity release is a mechanism for homeowners over the age of 55 to access a lump sum of cash, based upon the value of their property. There are two ways equity release works:
– Lifetime mortgage
– Home reversion
A lifetime mortgage is the most popular method of releasing equity. You borrow a percentage of your property’s value at a fixed rate of interest. Interest is added to the loan amount and consolidated. You can borrow a lump sum or draw smaller amounts. Unlike standard mortgages there are no compulsory repayments until after you pass away or move into long term care. The house is sold, the loan is repaid and your estate captures the balance.
Repayments and interest
A standard repayment mortgage consists of repayments on a decreasing balance. A lifetime mortgage is different. Instead of the balance decreasing, the amount owing increases. The interest on a lifetime mortgage is compounded. Compound interest is calculated by charging interest on the loan, plus charging interest on the accumulated interest you owe. Current lifetime mortgage interest rates are between 3-5%.
You should always seek expert, independent financial advice to confirm interest calculations for your lifetime mortgage. Make sure that you are crystal clear as to how compound interest will eat into your property’s remaining capital. A great place to start is with an equity release comparison.
There are two types of lifetime mortgage for you to compare equity release calculations.
– Lifetime mortgage with repayments
– Lifetime mortgage with no repayments
Repaying your lifetime mortgage
To help minimise the total amount owing, you can opt to make repayments on your equity release loan. This option is sometimes referred to as a “serviced lifetime mortgage”. You commit to monthly interest repayments, or repayments made when you can (ad hoc).
Compound interest lifetime mortgage
Often referred to as a “roll-up” lifetime mortgage, you do not need to make any repayments for the duration of the equity release loan. The interest is compounded and added to the total amount owing. When you pass away or move into long term care, your property is sold and the loan repaid.
Seek financial advice. Expert independent financial advisers can clarify what equity release will actually cost. They can help you compare equity release options before you look for a product that suits your circumstances. It may be wise not to borrow the full amount you are entitled to straightaway. Take only what you need, and leave a buffer to borrow again if necessary later. This helps protect available capital and reduces overall debt.
Your equity release loan contract must carry the Equity Release Council standard “no negative equity guarantee”. This ensures the amount you owe will never exceed the value of your property.
Considerations to help you compare equity release products
It may be wise to avoid variable interest rates. Their unstable nature leaves you extremely vulnerable if interest rates spike. If a variable rate is your only option, ask about Equity Release Council standards. Specifically, the ‘upper-limit cap’ for variable interest rates.
A lifetime mortgage carries additional charges. You will almost certainly need a valuation of your property. Your financial advisor, lender and administrative fees will need paying. Ask your financial advisor about early repayment penalties (some lenders charge 25% of the loan).
Other factors to watch out for
– If you are receiving or know you may need to apply for state benefits, your equity release may affect your claim.
– Releasing equity from the value of your property now will reduce your options later on. These include paying for extended medical care and inheritance.
Home reversion refers to selling a percentage of your home to a lender, for a lump sum. The lender pays less than the current market price, usually between 30-60% of market value. The cash is usually paid to you in monthly instalments. You’re allowed to remain at the property until you pass away, or need to enter long term medical care. The home reversion scheme permits you to remain at your abode rent-free until you pass away or need long term care. When the house is sold, the lender reclaims their share.
Home reversions are available for home owners over 65 years old, although some are available to those aged 60 years and over. You will receive a greater market share for your property the older you are. Experts tend to suggest home reversions for home owners over 70 but you should always seek professional advice.
Home reversion is considered high risk. It is essential to seek independent financial advice due to the far-reaching implications.
Examples of essential questions to ask your financial advisor include confirming whether you can move house under the home reversion scheme, Income tax implications and whether the income you receive is guaranteed.
A fundamental requirement of the home reversion scheme is ensuring that your property remains in tip top condition. In addition to standard home insurance requirements, you may also be liable for ground rent fees, regardless as to the percentage of the property you sell. You will also be liable for legal and administrative costs, advice and lender fees.
We understand the unrelenting pressure of stretched finances. Yet taking the time to compare equity release options may prove to be invaluable in the longer term. Our outline is intended to provide you with essential facts and you should always seek independent expert financial advice in order to make your equity release work for you, now and into your future.