Equity Release And Mortgages

1 What Is Equity Release?

Equity release is a solution for managing your finances by using any entity that has capital value. This can include your house, stocks, assets etc. The use of these objects will allow you to create a lump sum according to the value of the assets.

The equity release is most beneficial for elderly clients that intend to use their assets for generating income streams, in case they are unable to provide the prominent amount to their heirs after their death.

Benefits Drawbacks
• The use of equity release will allow an instant income stream. • As the asset is to be inherited by the heirs, the amount will be reduced if the amount of the asset increases at a slower pace.
• The income generated will be tax-free as well as provide a steady income in terms of index linked. • The amount to be bequeathed will be decreased based on the fluctuations in the market.
• The inheritance tax applicable will be reduced. • The means-tested benefits will be affected.
• The owner of the house is protected against the negative equity in case the downturn of the housing scheme takes place. • Releasing an equity is far more expensive than actually selling of the asset.
• In case the interest rates fall, the borrower can refinance in their mortgages at a lower cost. • Interest charges can mount up.
• In some cases, the clients can also stay in their home without worrying about the payments. • You could miss out on house-price rises.

2 Mortgage Arrangements:

You can avail different type of mortgage arrangements based on the type of mortgage interest.

2.1 Lifetime mortgages:

The type of mortgage that is made with the effect of compound interest. The compound interest is the additional interest that is applicable to the imposed interest of the loans. The compounded interest is added on your (borrower) capital throughout the term of the loan.

Either the compounded interest is repaid by selling the property or the borrower dies or moves out. In addition, you (borrower) can retain the legal entitlement of the home as well as responsibilities regarding ownership including costs.

2.2 Interest Only Mortgages:

The type of interest, which is paid only if you, as the borrower remains in the property. The mortgage is made on the capital, which is repaid on the death of the borrower.

2.3 Home Reversion Mortgage:

This type of mortgage includes the selling of the entire or portion of your home to any third-party buyer known as reversion individuals. In case any company owns the part, it is known as Reversion Company. In return, you receive a lump sum or regular income against the part sold.

Moreover, you can continue to stay in the home if you have sold a part of the estate. In terms of selling your entire estate, you can continue to live in if the new owners agree to it.

2.4 Shared Appreciation mortgage:

A type of loan in which your lending party can agree to either lending a lump sum or by lending a sum of the capital assuring share in the future increased value for the estate. This type of loan allows you to benefit from the possible increasing value for the estate, which can result in higher returns.

However, due to market fluctuations, the value of the estate can increase at a slower pace or not increase for the life span. Unfortunately, this type of agreement is no longer available in the UK.

2.5 Home Income Plan:

In such loans, your lending party will offer you annuity options offered by any insurance companies as the form of capital return. This can be beneficial for you in terms of the annuity option you pick.

However, the annuities themselves are also vulnerable to market fluctuations, altering their interest rates that apply to the investments, which can affect your capital return.

2.6 UK Equity Release Schemes:

This scheme is available to homeowners, which are over 55 years of age. In addition, the homeowners must have enough equity in their property that can result in their equity releases with specialist lenders.

5 Key things we must consider

Here are the things you must consider when getting assessed on your capability for a residential mortgage or equity release solution:

  •  Releasing equity might affect entitlement to means-tested benefits and your tax position.
  •  Think about the alternatives i.e.: downsize to a smaller property
  •  Future property prices may either get higher or lower than they are today
  •  Releasing equity from your home will decrease the value of your estate, affecting the amount of inheritance you left behind.
  •  Think very carefully before securing other debts against your home
  •  To understand the risks and features of planning permission for a personalized illustration
  •  Your home may be repossessed if your repayments are not up to date on your residential & retirement mortgages.
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