Equity Release Mortgage: Best Step By Step Guide

The words “equity release” is enough to send shivers up some people’s spines. There have been some horror stories about this retirement option, and I dare say some of them are true. Last year, homeowners withdrew over £3bn through equity release products, according to data from the advisers Key Retirement.

Sales of equity release plans increased by over 40 percent in 2017, compared to the previous year. However, few people understand the ins and outs of equity release, and industry trade body SHIP (Safe Home Income Plans) believes the stigma attached to the product is largely the result of misconception.

What is Equity Release Mortgage?

Equity release refers to a range of products letting you access the equity (cash) tied up in your home if you are over the age of 55. You can take the money you release as a lump sum or, in several smaller amounts or as a combination of both.

It enables older property owners – over-55s – to borrow against the equity they have in their home. Many in their late 60s and 70s are equity rich but cash light. An equity release plan provides buyers with ready cash.

Typically, they pay no immediate interest on the money they borrow. Instead, interest is rolled up at a fixed rate, agreed at the outset. The outstanding loan is called in when the homeowner dies – and is typically repaid from the home’s sale.

Hence the name often used for them – a lifetime mortgage. Taking an Equity release is no small decision, and should be thought after, weighing in and possibly enquired from a specialist advice on what type you should get and any major decision concerning it.

Qualifications for an Equity Release?

  • Firstly, you must be over the age of 55 to qualify and you will need to get your home valued.
  • Then money can be taken out of an agreed total amount.
  • This can be done as a lump sum or in several smaller amounts, or both.

Equity release options

Types of Equity Release Mortgage options:

Lifetime mortgage: This is whereby you take out a mortgage, using your home as security. Your home must be your place of residence and you will still be retaining your ownership. You can choose to ring-fence some of the value of your property as an inheritance for your family.

You can choose to make repayments or let the interest roll-up. The loan amount and any accrued interest with its associated cost will be paid once you have passed away, or moved into a retirement home.

Home reversion: You sell part or your entire home to a home reversion provider in return for a lump sum or regular payments. You will still be allowed to live in your house or property, and continue with its day to day activities. This should be the case until either you pass away.

Normal costs and insurance will still be tied to you, and you will be responsible for them. You may be exempted from paying your rent payments any more. Depending on your provider, you can always put up a protection, in terms of percentage for your house, maybe for future interests, such as inheritance.

This percentage should be constant regardless of any change in property value, unless you decide to take further cash back. If everything goes to plan, and the plan is successfully complete, your property is sold and the proceedings/income from the sale are distributed according to the set guidelines as per the agreement

Lifetime Mortgages

This type of equity generally involves loans or credit against your property, in return of a large amount of cash (it’s usually tax free), or maybe some monthly income or you may even prefer both cash streams. The amount will attract some interests, which is usually serviced once the property is sold. In most plans, these repayments are usually made once you are no longer alive. This means that the interests are usually “rolled up” with the loan (over the number of years).

Due to this accumulation of interests, this kind of equity usually attracts large volumes of debt, over a relative short period. It’s highly advised that you enquire from an expert debt advisor before signing up for it.

However, some lifetime mortgages do now offer you the option to pay all or some of the interest, and some let you pay off the interest and capital. Depending on the lender and your specifications, Lifetime mortgages vary from one creditor to the next.

Things to consider

  • Your age should be a priority while considering this kind of equity. Ideally the minimum age required is 55, but because of the pile up of the interests, you should bear in mind that this will have a severe effect on the total amount of debt accumulated.
  • The maximum percentage you can borrow, usually people are allowed to borrow up to 60% of the value of their property. Sad to say, but the percentage usually increases as you are older due to the likelihood of you moving into a retirement home. Your medical past will also play a role in your value of percentage. Large sums are usually offered to individuals with a long medical history.
  • Interest rates must be fixed or, if they are variable, there must be a “cap” (upper limit) which is fixed for the life of the loan (Equity Release Council standard). You have the right to remain in your property for life or until you need to move into long-term care, provided the property remains your main residence and you abide by the terms and conditions of your contract. (Equity Release Council standard).
  • The product has a “no negative equity guarantee”. This means when your property is sold, and 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 (Equity Release Council standard).
  • You should be aware of your rights especially on moving to other properties should also confirm if the new property will be subject to your equity provider terms, or shall it also act as security to your equity, this though is governed by local council rules. Different lifetime mortgage providers might have slightly different thresholds.
  • You should also confirm the interest rate that you’ll be paying i.e. is it going to be paid, all in one chunk, or just monthly or if there are any interests at all? If you do manage to comply with the installments, the equity/mortgage should cost less. If you decide on the lifetime mortgage, with interests being made monthly, then your lender will have to based your monthly payments with high consideration of your income. This is to avoid defaulting on your payments.
  • You should also liase with your lender, with the amount you can withdraw at a go; some may prefer small monthly equity withdrawal, while others may prefer huge one-time large withdrawals. Most debt advisors may refer you the monthly cash back, the reason to this, is with the interest’s payments. Interests are usually charged in reference to the amount withdrawn, the lesser the withdrawal the less interest charged. You should also counter confirm of they are any minimum amount, set for withdrawals.

Home Revision

This form of equity involves the lender giving you a huge set of amounts, in return of selling parts of your home. In most of the agreements, once the property is sold, the cash generated is shared accordingly to the ownership percentage.

What should you consider?

  • The rate of payments in regards to your equity. Some may prefer one large payment, while other would stress on several monthly payments.
  • Most agreements insist on an age bracket of between 60-65 years. You should confirm with your lender on this.
  • The older you are the higher the percentage of the market value you will receive when you take out the plan but may vary from provider to provider
  • In most plans you should be able to remain in your property for life or you move to a long-term care. This only is allowed if you retain the ownership of your property and you abide by the agreed guidelines.
  • In rare cases some lenders may allow you to move into a new property provided that your new property is acceptable to your product provider and you still continue with your equity release loan.
  • The product has a “no negative equity guarantee”. This means when your property is sold, and 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 (Equity Release Council standard).
  • The rate at which your maintenance on your property is done should be regular. As it will expected to be inspected every few years.

Generally, You Should Look for:

Before you decide whether or not to take out an equity release product, ask the adviser:

  • What their fees are
  • What type of equity release products they can offer
  • What other fees you’ll have to pay (e.g. legal, valuation, set up costs).

Some Usefulness of Using Releasing Equity Mortgage

To Pay off Your Mortgage

Research from Equity release brokerage partnership has recently shown that 32% of those who take Equity Release Mortgage use it to pay for their initial house mortgage. Many people are looking forward to clearing their standard mortgage debt as earlier as possible; this ensures that you don’t have extra payments when you are a senior citizen.

Another advantage is that you are allowed to fully own your home, if you subscribe to the lifetime mortgage, from equity. Before you make any agreements on any kind of equity, it is standard expectations that you have already cleared any existing mortgage or secured loans that use your home as security.

Some Advantages of Taking a Home Equity Mortgage May Include:

To Fund Home Improvements

It might be that you’re longing for a little extension, or you want to have a complete makeover of your kitchen, or you require some changes to your garden. Research recently showed that as high as 20% of British citizens primarily reason of taking a home equity for some major house improvements.

Equity Release might be the best option for you, for these scenarios, but you should also be weary of the type of equity, as with the lifetime mortgage, your house is secured against it. Thus, they may always be that chance of losing your home, after using a lot of cash on it.

Help out Family

Since most equity releases are signed up by senior citizens, there’s always that chance that they may be doing it for that struggling child, who may be in deep financial stress, or they may just want to help with one of the major loans people are usually stuck with; i.e. student debt, the large sum of cash provided by the Equity, may go a long way especially in these situations.

Consolidate Your Debts

According to a Research done by Age partnership, as many as one in ten people stated that they may have signed up for an equity release, to clear existing debts/or loans.

You should be clear with the facts though, such as you can only get £10,000 as the minimum amount, plus interest’s rates in equity are usually higher than normal loans. The pros of it is that you don’t pay during your lifetime.

Fund your lifestyle

Maybe you have always wanted to buy a new car, take that long safari in Africa, or maybe enjoy the sunny beaches of Australia, or even visit the city of love (Paris). All this might just be too expensive for you, and taking an equity against your property will be worth it for some last time fun.

Boost cash flow

Some people may have less retirement cash backs, or you just didn’t prepare well enough for your retirement. Sometimes it’s not worth the suffering. Taking an Equity may provide with that cash injection to push you through, and get you on your feet again.

Dis-advantages associated with Equity Release Mortgage

  • Money released won’t equal the value of your home. While SHIP (Safe home income plan) claims equity release products are far more flexible and better regulated than they used to be, the fact remains you will be paying interest on a new loan after having paid years of interest on your original mortgage.
  • Advisors sometimes overestimate the housing market, which means that customers with lifetime mortgages may become unable to access any further equity in their properties because their debt levels have risen while their house value has fallen.
  • Equity release reduces the value of your estate and the amount that will go to the people named as beneficiaries in your will. Your estate is everything you own, including money, property, possessions and investments.
  • With a home reversion plan, the reversion company owns all or a part-share of your home.
  • Getting a lump sum or taking extra cash to supplement your income may reduce your entitlement to means-tested benefits, now or in the future.
  • If you get care at home funded fully or partially by the local council, they may start charging you or ask you to pay more.

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