What is Equity Release?
What remains from the total value of your property after you subtract the sum
of your mortgage and other loans secured against it is what we refer to as
equity. Therefore, equity release is a contract that enables you to access money from your equity without
having to move out of your home. You may get the money as a lump sum or
regular smaller payments, or both.
Usually, this plan is available to people at least 55 years old.
Be sure to access professional advice before getting an equity release scheme
because you need to understand the terms and conditions.
Some Important Facts About Equity Release
Equity release may look like the best option if you need some extra money and
don’t want to move house, but there are essential facts to consider:
First, the cost of equity release may be higher than an ordinary mortgage. Especially
when you take out a lifetime mortgage, you will typically pay a higher rate of
interest than if it were a regular mortgage.
Your provider must factor in all precautions they are providing you with (like a
fixed interest rate for the life of the plan) when making their calculations.
Therefore, they can lend you at different rates than a regular mortgage.
The
interest rates
on a lifetime mortgage will not change throughout your contract unless you
take any additional borrowing, and it will only apply to that extra cycle of
borrowing.
Home reversion barely gives you anything close to the actual market value of
your property when compared to openly selling your home on the market.
Releasing equity from your home might make it impossible for you to rely on
your property for any money you may need later during your retirement, perhaps
if you need funds for long-term care.
Even though you can move out and carry your lifetime mortgage with you, if you decide you want to downsize later on you may not have
enough equity in your property allow it. Hence you might have to repay part of
your mortgage.
The money you will receive from equity release can easily affect your
entitlement to state benefits.
Taking out an interest roll-up plan will mean less inheritance for you to
leave for your family.
Suppose you change your mind about your equity release plan, you can incur early repayment charges, which can be expensive, although
they remain inapplicable if you die or move into long-term care.
Key Facts Regarding The Main Equity Release Schemes
There are mainly two forms of equity release schemes:
Lifetime Mortgage
A lifetime mortgage will give you money as a lump sum or in sizeable amounts.
You and your broker will agree on the maximum amount of money that you can
borrow.
When you take out a lifetime mortgage, you remain the owner of your home. A
lifetime mortgage carries interest. Thus, you can repay it in instalments or
let interest rates build up and pay back the loan and interest when you die or
move into long-term care.
It is essential to know:
The minimum age requirement for you to take out a lifetime mortgage is usually
55. People now live longer, so it’s likely to get costly in the long run if
you start early.
Typically, you can borrow up to 60% of the value of your property. But the
total amount that you can release depends on your age and the value of your
property. Typically, the percentage naturally increases regarding the age at
which you take out the lifetime mortgage, and some providers may also offer
more massive amounts to people with particular medical conditions.
The rate of interest must remain fixed. If it is variable, there must be an
upper limit which remains set throughout the loan according to The Equity
Release Council standards.
According to the Equity Release Council, you reserve the right to remain on your property for life, provided that it
remains your principal residence and you adhere to the terms and conditions of
your contract.
A lifetime mortgage has a “no negative equity guarantee”. Meaning agents and
solicitors take out all fees, neither you nor your estate will be liable to
repay anything more, even
if the remaining amount is not enough to repay the outstanding loan to your
provider.
You reserve the right to move to another home, expected that the new property
is acceptable in value to your equity release provider as security for your
equity release loan because different lifetime mortgage providers may have
other limits.
If you can make repayments, it will reduce the lifetime mortgage in costs.
However, the amount you can repay will regard your income.
A Home Reversion Plan
With a home reversion plan, you may sell all or part of your home and get
whether a lump sum of money or sizeable regular payments.
You can live on the property until you die and not pay any rent.
Some providers insist that the minimum age at which you become eligible for a
home reversion plan 60 or 65, then you can apply for one.
The percentage of the market value you can receive usually increases the older
you are as you take out the plan. However, there are variations between
providers.
You may remain on your property for life, provided the parcel remains your
principal residence, and you adhere to the terms and conditions of your
contract, according to the standards of the Equity Release Council.
You can move to another property provided that the new stuff is acceptable to
the terms of your initial contract as security for your equity release.
A home reversion plan also has a “no negative equity guarantee.” Thus after
your property gets sold, and the solicitors deduct their fees, neither you nor
your estate will be liable to pay any more than initially required, even if
the remaining amount is not enough to repay the outstanding loan.
You will also agree on the expected level of maintenance you will conduct and
how often your property will undergo inspection (which can be every few
years).
Rules Regarding Equity Release
Both home reversion plans and lifetime mortgages get regulated by the
Financial Conduct Authority (FCA). Thus, any firm that offers either type of
equity release plan should follow the FCA’s rules about equity release.
How are FCA Rules Good for You?
The FCA’s rules align all equity release firms to take significant steps in
ensuring all equity release products recommended to you are suitable for you.
And, a firm regards whether equity release is ideal for you, they should weigh
the effects that it may have on any benefits you receive.
Who are the Equity Release Council?
The Equity Release Council (ERC) is a non-profit organisation representing the
different firms involved in providing equity release (including lenders,
financial advisers, solicitors and professionals).
The primary goal is to give you access to information and protection as you
are considering signing an equity release plan by guiding their members
on how an equity release scheme should work.
Is Releasing Equity the Right Option for You?
When getting an equity release, it’s quite tempting to focus on the immediate boost you will get from the money you access. However, you will need to
consider how it will affect your future choices and financial situation in
later life.
Whether equity release is the right route for you will depend solely on your circumstances such as your age, income, the amount you would like to release, and your plans for the future.
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