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Equity release mortgages give older people the opportunity to borrow money against the property they have paid into over many years. This gives people over the age of 55 the chance to boost their retirement income.
This guide will explain how the different aspects of equity release work and what you should consider before applying.
Equity release is where existing homeowners can release the money they have already paid into their mortgage to use for whatever they wish, whilst still retaining the right to live in their home.
There are two main methods for releasing equity from your home, these include Lifetime Mortgages and Home Reversion Plans. These products allow people to release money in two ways, as a cash lump-sum or as regular, smaller payments.
There are two main types of equity release schemes;
Home Reversion Plans– These plans allow you to release all, or partial funds, from the mortgage you have already paid into over many years, whilst still preserving you and your partner’s right to live in the property, rent free. If you opt for a partial home reversion plan, the remaining equity in the property can be accessed at a later date, should you need to release additional funds in the future. The remaining equity in the home can also be reserved for your family’s inheritance. Home reversion plans end when you and your partner die, or go into long-term care. The property is then sold and the reaming funds are split between the lender and benefactors of your will. Money released in a home reversion plan is also tax-free.
Lifetime Mortgages – A lifetime mortgage is where you can choose to release money from your home as a lump sum, or in smaller amounts over time. Under this agreement, the homeowner also reserves the right to live in their property until death or entry into long-term care.
In both types of equity release, there are very few/no restrictions in what you choose to do with the property after you have taken out an equity release product. Further, the funds are provided tax-free and reputable companies offering Home Reversion Plans and Lifetime Mortgages will be compliant with the Financial Conduct Authority (FCA) and Equity Release Council, to safeguard their customers.
As equity release is a complicated financial product, the Equity Release Council has established a ‘code of conduct’ called the Safe Home Income Plans (SHIP) scheme. Financial companies wishing to sell equity release products must maintain standards such as the homeowner reserving the right to live in their property for life, as well as having the freedom to move to other properties in the future, without incurring a penalty.
Under this code of conduct, the borrower is also permitted to go a solicitor of their choice, to review the Key Facts Illustration documents, before securing an offer. Further, negative equity cannot be factored into this kind of agreement. This means that your family are not required to pay any additional debt upon your death.
If you would like to find out more about negative equity, take a look at this guide.
There are a few options with equity release in how the interest is paid;
Lifetime Mortgage – With a lifetime mortgage, you can choose to pay the interest off every month or you can opt for a ‘rolled up’ interest product. This is where the interest owed is added to the total amount of the mortgage, which is repaid, in full, upon the borrower’s death or entry into long-term care. If you are a couple, then the interest and transfer of property ownership is due when the last living person dies or moves into long-term care. With some plans, you can also retain a percentage of the property value as an inheritance for your family, in your will. Further, you can also switch from paying off interest monthly to rolling it up, provided you get permission from the lender to do this.
Home Reversion Plan – Under these schemes, you are agreeing to sell all or part of your home to the lender, in exchange for a lump sum or regular income. When the house is sold, the company retains their share and the rest of the home’s value can be included in your will.
Please Note: Taking the decision to go forward with an equity release plan requires careful consideration. You must be sure that this is a viable option for you, as the results can be irreversible. Take a look at this guide to the Benefits of Good Financial Advice.
Peter and Julie are 65 years old and own their £200,000 home. They wish to boost their retirement income and are looking into releasing £30,000, as a lump sum payment. They have found a lifetime mortgage deal charging 5% interest per annum, which can be rolled up and paid at the end of the mortgage term. The cost of setting up the mortgage and paying their solicitor comes to around £2,000. After six years both Peter and Julie have died and the total interest payable on the £30,000 loan came to £10,470.53
Equity Release is a complicated financial product and one where it is highly recommended that you seek financial advice for, before making any applications.
Get in touch with and advisor accredited by the Equity Release Council today, they can discuss your circumstances, state benefit and tax implications and offer you a free, no-obligation equity release quote.
I need a little help to understand the process. The adviser guided me through everything and was happy to have my family present during the meetings.
Bill Westwood, London
THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY OTHER DEBT SECURED ON IT.
If you are thinking of consolidating existing borrowing you should be aware that you may be extending the terms of the debt and increasing the total amount you repay.
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