How Does Equity Release Work?
Many older home owners feel they are ‘cash poor, asset rich’ meaning that although they have little in the way of readily available funds their home may be worth a huge amount and vastly increased in value since they purchased it. Equity release is a method that allows homeowners, typically over the age of 55, to unlock some of the capital tied up in their home without having to downsize or relocate.
There are two different kinds of equity release; Lifetime Mortgages and Home Reversion Schemes.
How does a Lifetime Mortgage work?
Lifetime mortgages work by taking out a loan for a percentage of the market value of your home. You continue to own your home but make an agreement with a lender that the sum you borrowed plus and accumulated interest will be repaid through the sale of your home when you and your partner either die or permanently move to a residential care home.
Types of lifetime mortgage:
- Roll-up Mortgage –With a roll up mortgage you do not need to make any monthly or annual interest repayments instead this amount is repaid along with the original amount you borrowed through the sale of your house. It is important to consider however that as this type of plan involves compound interest the amount you eventually repay may be considerably more than you initially borrowed. All Equity Release Council registered plans however carry a ‘No Negative Equity’ guarantee which ensures you or your estate will never be required to pay more than the amount your home is sold for even if it’s less than you originally borrowed.
- Fixed-repayment Lifetime Mortgage – This plan does not incur any interest rates. During your application you agree how much more than the amount you are borrowing will be repaid to the lender through the eventual sale of your property.
- Interest-only Mortgage – With this option you can pay monthly or annual interest repayments but the original sum you borrowed is still repaid through the revenue produced through the sale of your home.
How does Home Reversion work?
Home reversion works by selling your home to a reversion company or individual. They will pay you less than its current market value but in return will guarantee your right to continue living there until you and your partner both die or permanently move into care. Some plans will charge you a monthly rent but at a reduced rate to what you would normally expect to pay for your house, others will let you stay there for free.Some home reversion schemes give you the option of being paid in a one off lump sum or to receive regular ‘income’ payments.
Most equity release plans will require an initial arrangement fee as well as a fee for the valuation of your property; these costs vary from lender to lender so it is important to shop around to find the best deal for you. You will also have to pay legal costs to your solicitor and if you want to repay your lifetime mortgage before the end of the contract you will most likely have to pay an early repayment charge.
Is equity release right for you?
Equity release is a long-term commitment, so it is a good idea to consider all of your options before committing to a plan. To find out more about the different types of equity release and if one is right for you, simply click on the link and fill in the quick form and an equity release specialist will get back to you with free, no obligation quotes and advice.