Equity release is a form of money management available to older home-owners that involves borrowing a sum of money against the value of the home. It is usually only available to people over the age of fifty-five and sometimes considerably older. There are, broadly speaking, two main forms of equity release loan.
With a lifetime mortgage, you borrow a set percentage of the value of your home, usually receiving the money in a large lump sum. Another option is to put a ‘drawdown’ system into play. Upon the issuing of the loan, a small sum is handed over to the home-owners with the option for them to request more pay-outs as and when they are needed. The homeowner is only ever responsible for the money they have actively borrowed and this can keep interest repayments low and more manageable. Unlike regular mortgages, there are no payments to make, but interest is added on from the moment of the loan being issued. Usually you are not able to borrow more than sixty per cent of the value of the home, although this rate can rise for older borrowers. The mortgage ends when the homeowner passes away or the house is sold, at which point the money lent, plus interest, is claimed back. It is important to remember that interest will continue to accumulate until the loan is repaid and, if the homeowner lives a very long time after the mortgage is put in place, then this can amount to a considerable sum indeed. However, regulations put into place to prevent such occurrences ensure that the loan will never be permitted to exceed the value of the home.
With a home reversion equity release, essentially the home-owner sells off all or part of the home. It helps to think of this form of equity release as being similar to floating company shares on the stock exchange. The homeowner sells a certain percentage of the home, anything from twenty per cent to one hundred per cent, receiving anywhere from twenty to sixty per cent of the market value. The payments can be made in one large lump sum, or the home-owner can opt to receive several payments, staggered over time, depending on their needs. Despite their having sold off the home, or a percentage of the home, the home-owner continues to live in the house and must maintain the building and grounds.
What to Consider
– Equity release is that most unusual of financial packages, being slanted in favour of older customers. Crudely speaking, this is because the loan usually ends with the decease of the customer, so it is in the best interests of the lender if this happens sooner, rather than later. Therefore, it is more likely that older customers will be able to get a better deal on their equity release than younger, fitter people.
– Always ask about the possibility of making repayments. These can reduce the interest and keep the ownership of the home in your hands, while still allowing you the freedom of access to cash.
– Make sure you understand all the ins and outs before you sign any agreement. Some equity release loans do not hand over very much cash and can take up ownership of your home, without leaving much over for your heirs.