The majority of seniors in the UK have their wealth tied up in the house they bought years ago, while their liquid assets are quite limited.
Despite having a valuable property, the lack of cash may mean struggling to pay for basic living expenses. The best possible solution for such individuals is to turn to Equity Release, which allows them to unlock cash from their home.
How Does Equity Release Work?
When thinking about ‘how does equity release work‘, you need to understand the different types.
With most equity release plans, you take out a loan against your home’s value, and the lender is paid at a later stage. Unlike standard loans, the much you can release depends on your life expectancy and the value of your home, rather than how much you can afford to repay monthly.
There are two types of Equity Release but today we’ll focus on lifetime mortgages. With this type of Equity Release, you take out a loan secured against your home and there are no requirements to make regular monthly repayments. Upon the borrower’s death or moving into long-term care, the home is sold and the proceeds go towards repaying the loan and any interest. Anything left goes to the borrower or their beneficiary.
However, if the debt becomes larger than the property value, your beneficiaries will be required to pay for the deficit. The good news is most Equity Release plans offer a ‘no negative equity guarantee’, which ensures you never have to pay back more than the property’s value.
Types of Lifetime Mortgages
There are several different Equity Release mortgage options to choose from. This includes:
Lump-sum loan
This is where you unlock all your money tax-free at the outset. Most lump-sum deals have a fixed interest rate from the start, which is charged periodically and compounded yearly on the full amount and paid at a later stage.
Drawdown facility
These plans allow you to release cash over time, as and when you need it. Interest is only charged on the amounts you’ve withdrawn, making this much less costly than the lump-sum deal. This option is ideal for those who want to top up their income.
An interest roll-up mortgage
You don’t have to make any repayments with most Equity Release loans. Interest will build-up on the amount of money you choose to release and repaid at a later stage, along with the total amount borrowed.
Interest repayment option
Rather than allowing interest to build up, this option allows you to make some or all of the interest payments over time. This helps to reduce your Equity Release loan that would otherwise burden your estate later on.
Enhanced mortgages
This is a more specialised Equity Release plan, which allows those with a lower-than-average life expectation to release even more cash from their home at reduced interest rates. Many health and lifestyle conditions qualify for this type of plan, including cancer, dementia, high blood pressure, diabetes, a history of smoking, high or low BMI, etc.
Why Would You Need An Equity Release Mortgage?
There are many reasons why people take out an Equity Release loan; the good news is you can use it however you want. Whether it’s to boost income, help out others, upgrade your home, or treat yourself, the choice is yours.
What Costs Are There?
Even though an Equity Release loan may not cost you anything over its lifetime, there may be a few costs associated with the process such as:● Application fees● Legal and/or valuation fees● Advice costs● Buildings insurance● A completion fee● Early repayment charges
With that being said, here’s a list of the benefits and drawbacks of a lifetime mortgage so you can make an informed decision:
Pros● The cash you release is tax-free● You can choose not to make monthly repayments● You can spend the cash as you wish● You continue to own and live in your home● Can be used to pay for your care costs. Live in care costscan exceed £1,000 per week.● There are several different plans to choose from, offering flexibility and choice● The ‘no negative equity guarantee’, which is a requirement of the Equity Release Council, ensures you never owe more than the value of your home
Cons● Your means-tested benefits and tax positions may be affected● Early repayment financial penalties● The size of your mortgage will grow over time● Reduced inheritance● Difficulty remortgaging
Taking out an Equity Release loan is a big decision. As such, it’s important to consider all your options carefully and shop around for the best possible deal. With the help of an independent expert adviser, you can be able to decide what the best option for you is. Be sure to use a reliable equity release calculator to know how much tax-free cash you are eligible to release from your house.