Important Considerations About Equity Release
Often, equity release appears to be a good choice if you need extra money without moving house or living costs in retirement. You could Downsizing With A Bridging Loan. However, it isn’t always the right option for everyone. It’s important to bear in mind that in some cases equity release is more expensive when compared with ordinary mortgages. Higher interest rates are typically charged on lifetime mortgages than on standard mortgages and debt can mount up rapidly if you opt to roll up the interest.
Usually, a lifetime mortgage will have no fixed date or term by which the loan is expected to be repaid. A lifetime mortgage’s interest rate doesn’t change during the contract’s lifetime unless you choose a variable rate product but the rate of interest paid on drawdowns is determined when the drawdown is made rather than when you enter into the contract. That means different drawdowns may have different interest rates.
A home reversion plan won’t give you the property’s full market value which you would receive if you sold your home on the property market. That is because you’re permitted to continue living in your home for the remainder of your life – something which would be impossible if the property was sold outright. Furthermore, if you decide to release the equity in your home, you may have financial problems later on should you need money in the future, for example, to cover the cost of long-term care. That is a consideration to keep in mind before you make a final decision.
While it’s possible to move home taking a lifetime mortgage along with you, should you decide that you wish to downsize at a later date you may lack sufficient equity in the property to achieve this. In turn, this means that you may have to repay a portion of the mortgage.
Another financial consideration to bear in mind is that money received due to equity release could affect whether you can claim state benefits. You’ll also have arrangement fees to pay in the region of £1500 – £3000. You’ll have less to pass on as an inheritance to your family if you opt for a lifetime mortgage with rolled-up interest too, so it’s imperative to discuss any plan to take out an equity release plan with family members in order to avoid later complications and conflicts.
Unravelling these schemes is often complicated should you have a change of heart, and you’ll also need to remember that a charge for early repayment is often levied in such cases which may be expensive
An In-Depth Guide To Lifetime Mortgages
The majority of people taking out equity release will use lifetime mortgages. Typically, there are no repayments to make during the lifetime of the borrower. The interest rolls up instead, meaning that the unpaid interest will be added onto the loan. As a result, the debt often increases fairly rapidly over time. Some lifetime mortgages are now offering borrowers the opportunity to pay some or all of their interest, while others allow borrowers to pay the capital and interest off. But, just like standard mortgages vary between lenders, lifetime mortgages do too.
Typically, the minimum age for taking a lifetime mortgage out is 55 years. It’s important to remember, though, that the earlier you take one out, the more it’ll cost in the long term, especially if you’re opting to pay no interest during its term.
The percentage of the property’s value that can be borrowed will vary depending on several factors. These include the property’s overall value and your age when you take the lifetime mortgage out. Typically, the percentage will increase in accordance with your age at the time the lifetime mortgage is taken out, and some providers may offer a larger sum to people with certain present or past medical issues.
While it’s possible to fix the interest rate of a lifetime mortgage, if you opt for a variable interest rate product it has to be capped, and this will not change during the loan’s lifespan. It is, however, crucial to ensure the lifetime mortgage comes with a guarantee of no negative equity. That means when the property is eventually sold and the fees of the solicitors and agents are paid off, neither your estate nor you yourself will have liability for making further payments, even if the leftover amount is insufficient to cover the loan still outstanding to the provider. You should also make sure that you will be able to move into a different property as long as it is acceptable to the lifetime mortgage provider as an ongoing security for the loan. Each provider may have a slightly different policy regarding this.
A key factor to consider when choosing a lifetime mortgage is whether you will be able to pay all, some, or none of the interest. When you’re able to make repayments, the total interest payable on the sale of the property will be lower. However, when taking out a lifetime mortgage with monthly payments, you may find that the amount you’re able to repay is based on income. Your provider will therefore need to check whether you’re able to afford to make the regular payments.
Finally, you need to consider whether your chosen lifetime mortgage product will permit you to withdraw the released equity in small sums over time, or whether it must be taken as a single lump sum. Taking small amounts offers the benefit of only paying interest on the withdrawn amount, but you’ll need to check whether a minimum amount is specified if you opt for this type of product.
An In-Depth Guide To Home Reversion
A home reversion will enable you to sell all or some of your property to the home reversion provider. Unless the entire property has been sold, they will then effectively co-own your property, but you’ll be entitled to continue living there, possibly rent-free, for the remainder of your life and receive regular payments or a lump sum in return. Normally, you’ll receive between 20-60% of your home’s market value (or the market value of the portion of it that you sell).
If you’re considering taking out a home reversion, it’s important to check several things. First, you need to determine whether you’ll be able to release your equity only in a single lump sum or over several smaller payments. You’ll also need to check how old you have to be before taking out a plan since some providers require you to be a minimum of 60-65 years before making your application. A further consideration is the market value percentage you’ll receive. This increases if you’re older when taking out your plan, however the exact percentage will vary between providers. Finally, you’ll need to find out how much maintenance you’ll need to carry out as well as how frequently inspections will take place.
When Do People Choose London Equity Release?
Equity release can help many people in London improve their finances during retirement. If you take out an equity release product in London, you’re under no obligation to spend your money on any specific thing. Therefore, some of the reasons for opting for an equity release plan include for paying off the remaining amount on a mortgage, to cover the cost of home improvements so your home can be more suitable and accessible for you later in your life, or to cover the cost of long-term care. Some people may gift the money to a loved one, help a family member get onto the property ladder, or cover a child or grandchild’s tuition fees. They may even spend it on a dream holiday or on purchasing a holiday home overseas.
When Is Equity Release A Poor Choice?
While there are benefits to an equity release, there are a few drawbacks to keep in mind too. These include:
- If you’re deciding on a home reversion, a percentage of your property will be sold to your lender at an amount under market value. You would get more money for your home if you sold it on the open market.
- If you’re eager to leave family members a large inheritance, equity release could be a poor choice for you. Your property is sold when you pass away, with the proceeds being used to pay the loan off. Therefore, your family will receive a significantly smaller inheritance. There is IHT to consider also. This could be a benefit.
- You’ll increase your debt in the long term as equity release plan interest rapidly compounds.
- Should you ever wish to opt out of the loan you’d have a charge to pay for early repayment which could be quite high.
- Opting for equity release will affect your eligibility to receive means-tested benefits as equity release will be deemed to be “savings”. You’ll be legally required to let the DWP know about your equity release if its amount is over a specific figure and you’re claiming benefits.
- If you pass away shortly after you take out an equity release product, your estate may lose a substantial amount of money that otherwise it would have been able to access.
When Is Equity Release A Poor Choice?
Every equity release scheme will have its own criteria. In some cases, you must earn a minimum income, live in a specific area, or have a high credit score. There are also some common criteria between all providers. For example, if you’re opting for a lifetime mortgage, you’ll need to be at least 55 and own a UK property worth at least £70,000. Therefore, working with a professional adviser is key so that they can let you know about each plan’s requirements before making your selection.
What Are The Options For Equity Release In London?
Anyone considering London equity release has two options open to them. The first is a lifetime mortgage while the second is home reversion. It depends on the purpose as many clients many just want to downsize and release the equity that way.
What Is A Lifetime Mortgage?
You can take out a lifetime mortgage on your primary residence while still retaining ownership. In some cases, it’s possible to ring-fence a portion of the property’s value for your family to inherit. You may opt to allow the interest to roll-up or make repayments as you prefer. The built-up interest and loan amount will then be paid back when the property is sold following the death of the final borrower or following their move to a long-term care facility.
What Is Home Reversion?
Home reversion involves the sale of all or part of your property to the home reversion provider with regular payments or a lump sum provided in return. You will be able to carry on living in your property until you enter long-term care or pass away, however you must agree to insure and maintain it. A percentage of the property can be ring-fenced for use at a later date, potentially as an inheritance for your family. This can be done by selling only part of the property. The retained percentage stays the same no matter how much the property’s value changes, unless you opt to take a further cash release. Once the final borrower has moved to a long-term care facility or has passed away, the property is then sold with the sale proceeds being shared out in accordance with the remaining ownership proportions.
How Much Will Equity Release Cost?
You’ll need to remember there are some costs involved if you’re making an equity release application. These include your solicitor’s fee (typically around £1000-£2000), the arrangement/advisory fee (typically between £600 and £2000) or 3-5% of the loan, and the interest that you’ll pay as well as fees. Subject to quotes. It’s important to get a regulated advisor and have a family member present when gain the advice.
How Much Can Be Released From A London Property?
The amount that you’re able to release from your London property will depend on the kind of property you own, your age, and your home’s value. It will also depend on which product you decide on. If you opt for a lifetime mortgage, you’ll usually be able to release somewhere between 20% and 60% of your property’s value. If you opt for a home reversion, the amount you’ll receive will depend on what percentage of your home you’re selling to your lender and its overall value. It will also depend on the age of the youngest borrower.
Could I Lose My Home If I Opt For Equity Release?
Many people worry that if they opt for equity release, they could end up losing their home. An equity release loan will be secured against your property’s value and it will only be repaid once you’ve gone into long-term care or passed away. The FCA (Financial Conduct Authority) regulates equity release lenders and they put strict rules in place for your protection. The no negative equity guarantee is one such regulation which means you’ll never owe more on your loan that your home’s overall value. As a result, you’ll never have to worry about losing your home if you opt for equity release.
Should I Opt For Equity Release?
Whether or not you should opt for equity release will depend on your own specific circumstances. You’ll need to consider your income and age as well as your future plans and the amount of money you wish to release before making a final decision. It can be tempting to only focus on unlocking an immediate cash injection through equity release, but you must think hard about how your financial situation and future choices could be affected later on. You should also check an equity release calculator to determine how much you can expect to receive before making any application.
How Do I Get Advice About Equity Release?
If you’re considering taking out an equity release product, whether a lifetime mortgage or home reversion plan, you need to take professional advice to ensure you’re making the right decision for you. Seeking out an independent specialist who is FCA regulated and who has membership of the ERC (Equity Release Council) is the best course of action as you can then be confident that you’re receiving the best quality advice and will also receive the no-negative equity guarantee on any product you take out.
You’ll also need to use the services of a conveyancing solicitor to carry out the legal elements of equity release, and choosing the right firm is vital. This is especially the case if your property is currently held in trust of if there is a power of attorney involved. There are legal questions that may need to be answered too, particularly if you’re applying for an equity release product when you’re divorced, if you live in a leasehold property, or if you purchased your home under a shared ownership scheme.