What is Equity Release?
Equity release schemes are usually available to those over 55 and allow for some of the equity existing in their property to be liquidated in some way, while allowing them to continue living in the property. Usually, property owners remortgage to release equity using bespoke mortgage products designed for this purpose.
What is gained from an Equity Release scheme?
Equity release schemes vary and can offer a cash lump sum, a flexible facility (where money can be withdrawn at will or on a regular basis), or a combination of these options, such as a cash lump sum and smaller regular payments.
What are the different ways of releasing equity?
Lifetime mortgage
This is money borrowed against the value of a home that is already owned by the property owner, provided it’s their main residence. Interest is charged on the borrowed amount and can be either serviced and paid each month, or you have the option to make no payments and simply ‘roll-up’ the interest being charged. When the property owner dies or moves into long term care, the house is sold to pay off the loan itself. Depending on how long the loan lasts, the ultimate sum to be repaid may significantly exceed the sum borrowed because of the impact of interest rolling up.
You need not worry if the debt outstanding exceeds the value of the home to be sold as all lifetime mortgages that we arrange come with a ‘no-negative-equity guarantee’. But you must be aware that taking out a lifetime mortgage will reduce the legacy that you can leave to others from your property.
Home reversion plans
This is when an equity release company buys part of your home, usually at 30-60% of the market value. The property owner then remains living at the property on either a ‘rent free’ basis, or they pay a fixed rent amount, or a rent amount that increases by a fixed annual percentage. The property cannot be sold until the property owner dies, moves into care or the property is otherwise permanently vacated. The older a property owner is when they start the scheme, the higher the percentage of the home bought would be. This type of arrangement is rarely ever used and is purely as a last resort for unusual situations related typically to an unusual property set-up. Again, you must understand that taking out a home reversion plan will dramatically reduce the legacy that you can leave to others from your property.
Retirement Interest Only (RIO) mortgages
This is a loan secured against a home on which only interest is paid each month, so the amount owed doesn’t increase over time. Again, the property cannot be sold until the property is vacated via the death of the owner, when the owner moves into care or some other reason. The main difference between this and a lifetime mortgage is that an ROI mortgage requires the monthly interest payments to be repaid, so homes can still be repossessed if they are not kept up with, while a lifetime mortgage’s interest compounds over time and is paid at the end. ROI mortgages do, however, end up with less to pay at the end.
Is Equity Release a good idea for me?
Money from equity release is often used by property owners in order to provide them with an additional income or funds in their retirement. This can be taken as a monthly income or a lump sum to purchase things like holidays or to support family members. The money can also be used to settle outstanding debts from other creditors, creating a much cleaner financial situation in retirement. Property owners can use an equity release calculator to get an estimate of how much money they could receive from an equity release. We would strongly encourage you involve your family in any conversations around equity release as it is likely to reduce the amount that they can inherit from you. Your adviser will discuss other options such as selling your home and moving to a cheaper property which can also release value.
David Williams IFA Mortgage & Insurance Services Ltd provides equity release advisory services to assist property owners with choosing the best option for their financial situation. To find out more contact us online or give us a call on 01604 250280.
A mortgage is a loan secured against your home. Your home may be repossessed if you do not keep up repayments on your mortgage. Check that this mortgage will meet your needs if you want to move or sell your home, or you want your family to inherit it.
To understand the features and risks of any Equity Release plan, ask for a personalised illustration.