Equity release can help you raise funds against the value your property. There are low-interest rate and large borrowing limits. But it’s not for everyone.
Your financial situation will play a major role in how much you borrow, the equity in your house, and your overall financial position.
This article will explain the benefits and drawbacks of equity releases mortgages.
What is an Equity Release Loan Mortgage?
Your equity refers to the percentage of your home that is owned outright without any debt attached.
Consider this: If you own property valued at PS200,000, and have a PS100,000.00 outstanding mortgage, your equity is PS100,000.
Without any mortgage debt, homeowners own 100% equity in their property. This changes as the value of your home increases.
There are many equity-release mortgages that can help you finance your home and other spending. Others are intended for retirees, who can take out a lifetime mortgage to pay off their home or use a home reversion plan as a way to save money for retirement.
Each product is different, so it’s worth speaking with independent advisers to ensure you get the best product.
These are just a few of the topics that we have covered:
How does Equity Release Work?
The nature of the mortgage agreement can affect the way equity release products work.
It could refer to:
You can borrow against your equity (sometimes part of a Remortgage), and then repay the debt plus the interest as normal.
A lifetime mortgage is possible without making any repayments. If you become disabled or die, the property can be sold. Proceeds are used to repay debt and interest.
You can sell a percentage of your home to lenders for a lump sum. They will also sell the property to the lender upon death of the borrower or when the borrower is in long-term residential care.
There are many benefits to the arrangement, but also drawbacks. For example, it is relatively easy to borrow large sums and retain ownership.
The lender will typically sell your house. Any proceeds beyond the debt will usually go to your estate. These funds are then divided among your beneficiaries in accordance with your will.
What are the benefits and drawbacks of Equity Release?
There are many people who don’t know if equity release is the right option for them.
To help you make an educated decision, we have listed the most important pros and con’s.
Equity Release Advantages
Borrowing from an equity mortgage is not subject to income tax.
Equity release can be very simple and convenient.
You can choose to receive payment as a deposit or a lump sum.
Flexible equity mortgages are usually limited in amount and allow you to access funds only when you require them. Interest is charged on what you borrow and not the total facility.
Responsible lenders will sign codes of conduct that prevent you from ending up in a negative equity scenario. They will always recoup the full value of the property.
Borrowers don’t have to make any repayments. But, you may be able to find products with interest-only and voluntary payments if that is your preference.
It is ideal for those who don’t have sufficient savings for retirement, but still need to pay for living expenses, medical care, and other costs. A equity release product will let you borrow a large amount, regardless of your credit rating.
Both the borrower as well as their partner can remain in the home for as long and as they wish without having to move.
The pros and cons of equity release – the trapfalls
The obvious downside to equity release is that it is impossible to predict what your loan will end up costing you in the long term. No one knows how many years they will live.
However, interest costs may be substantial but they won’t exceed the property’s total assessed value.
Remortgaging can be complicated if you have an Equity Release Product. Lenders are reluctant to lend if there’s a preexisting charge.
You should also make sure you are clear on your decision. If you change your mind, there may be steep early repayment penalties if you cancel the equity release program and repay the loan.
However, this has the main drawback that the lender will not make you repay, and your home will be sold by the lender, reducing the value any inheritance you may wish to leave.
How does Equity Release work if I have benefits?
A second thing to remember is that, if your equity release product is chosen, especially if you select a lump-sum upfront payment you will often increase your cash savings by a large amount.
Borrowers receiving means-tested benefit, such as credit against council tax or pension income credits, could see their benefits cut or stopped. They won’t be eligible for the same support.
In order to make sure an equity release loan is right for you, it’s important to examine your income and outgoings.
What is the Cost of Equity Reduction?
Every mortgage product is subject to costs. Equity release is no different. There are:
Property valuation and survey fees
Legal costs.
Lender application charges.
The type of property that you own, the size and level of assessment required of your chosen lender will all affect the cost of those costs.
Interest rates can vary widely. A fixed-rate 3.45% product locked in for life is one example. 7.1% per annum is another. Therefore, an equity release loan for longer-term purposes with no fluctuating costs is possible.
Average interest rates on equity-release mortgages are around 3.95%. Although you won’t have to repay any, this will influence which lenders are best for you and how much borrowing you can do.
The lender will need your life expectancy as well as property value in order to provide a negative equity guarantee. This ensures that the lender covers the original capital and the expected interest costs when the time comes to sell the home.
Is Equity Release worth the price?
Borrowers with poor credit ratings or financial difficulties may need an equity release mortgage. They can provide a lifeline if they have no other options or are unable to obtain low-interest secured loans.
We have already talked about some potential disadvantages. So it’s important that you look at all your options, understand its implications, and share your plans with family members.
Expert Advice from the Equity release Advisers
Please get in touch for more information about equity release, the product types, and assistance in selecting the best mortgage for you financing needs.
Mortgage brokers can give you all the information that you need to compare mortgage options and to understand the total costs so that you can make sound financial decisions.