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If you are aged 55 and over, and own a home with little or no mortgage remaining, you could be eligible for equity release. This is an effective way to release funds from your property if there is considerable equity, which can be used for a number of purposes. Many people intend to use the funds for home improvements, travelling, repaying unsecured debt, purchasing additional properties or simply to supplement their income into retirement. Equity release is a vastly misunderstood area, so we hope to break this down and answer your questions below.
How much equity can I release?
The most common form of equity release is what is called a Lifetime Mortgage, which is essentially a loan secured on your property against the equity within your home, whereby you can typically release up to 60% of the property’s value. Generally, the amount you can release depends on your age, as lenders will be more comfortable lending a larger amount if you are older, to avoid accruing too much interest over the term of the lifetime mortgage.
There are different ways to release the funds, either as a cash lump sum or by keeping some cash in reserve to draw down at a later date. This will avoid any interest being accrued on the funds which have not yet been drawn down, which can be a more cost-effective method and worth considering if you are intending on using the funds as an income and do not require a lump sum.
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Do I need to repay the equity release loan?
Unlike a standard mortgage there is no requirement to make monthly repayments towards the loan. Instead, the lifetime mortgage only needs to be paid off upon the death of the last borrower or when they enter long term care by selling (or refinancing) the property to clear the balance of the loan. This explains the name ‘lifetime mortgage’ as there is no set term to the loan. However, similarly to a standard mortgage, lifetime mortgages also accrue interest over the course of the loan, which can be serviced to avoid the final balance growing too vastly, or if you wish to keep the original loan the same. There are different ways of making payments, either to reduce the balance of the loan, or purely to service the interest by paying a monthly amount (similar to an interest-only mortgage). Any interest which is not serviced will be rolled up and added to the loan which will need to be paid at the end of the lifetime mortgage.
Are there any implications of equity release?
As with any mortgage or financial commitment, it’s crucial to assess whether equity release meets your needs and is right for you. Our expert equity release brokers will speak with you in depth to explain how the lifetime mortgage will work, and to answer any questions you may have as well as offering guidance on suitable alternatives if equity release is not suitable.
A key thing to note about lifetime mortgages is that, whilst it may seem as though you are simply liquidising your own asset into cash, you are still essentially borrowing against the value of your property. This means that when your property is sold either once you pass away or move into long term care, you will only receive the difference between the amount owed (including interest) and the value at that time. With the interest compounding year on year, you must be aware of updated balances. If the property value falls or does not increase overtime, there becomes the possibility of very little, if any, equity remaining in the property. The good news, however, is that lifetime mortgage providers carry a ‘no negative equity guarantee’, meaning your family will not be responsible for any shortfall if the amount owed is more than the sale value once the loan is cleared.
For any equity release related questions and to speak with our brokers to discuss the possibility of releasing equity from your home, contact us today.