What exactly is Equity Release?
For older homeowners in need of a financial boost, Equity Release could provide the perfect solution to cash flow problems.
Also referred to as Retirement Mortgages, Later Life Mortgages and Lifetime Mortgages, these loans enable borrowers to tap into the cash that is tied up in their home. This can make it possible for homeowners to meet other financial obligations and necessities or enable greater financial freedom during retirement. Like any loan product, Equity Release can feel daunting. However, these types of loans are simply another type of mortgage.
To dispel some of the concerns and confusion around Equity Release loans, we’re here today to talk about the ins and outs of this type of mortgage to create a clearer picture of how equity release could help you.
What exactly is Equity Release?
Equity release loans are just another mortgage product when it comes down to it, which is a loan secured against your property while allowing you to continue to retain 100% ownership of your home and provide you with access to a tax-free cash lump sum from your own wealth tied up in your home which you pay interest to a lender for the use of instead of realising the wealth by selling the property.
There are 4 key differences between a standard mortgage and an equity release lifetime mortgage:
1) How the level of borrowing is assessed.
A standard mortgage is assessed by your income and affordability, as you are contractually obliged to pay the capital and interest back each month. An equity release mortgage is based on your age (life expectancy) and the value of the property. In essence, the loan and any interest is usually repaid from the sale of the property at some point in the future.
2) The freedom to choose to make no monthly payments
With an equity release mortgage, you can choose to make no monthly payments and allow all of the monthly interest to roll up over time. Alternatively, you can service part or all of the monthly interest and/or even make capital repayments in order to preserve your equity and even reduce the outstanding loan
3) Transparent repayments
This is a profound difference between modern day equity release mortgages and historical mortgages that still carry understandable bad memories. In addition, unlike historical plans, these mortgages now offer fixed, transparent, and limited early repayment charges if the client wishes to repay the mortgage at any time.
4) The term of the mortgage
A standard mortgage has an end date (also known as the term) by which the loan must be repaid. An equity release mortgage has no term with the loan usually being repaid upon death, entering long-term care or sale of the property.
Ultimately, equity release loans open the possibility for homeowners to unlock their wealth tied up in their home by releasing a cash lump sum from their home’s value or ‘equity’. The equity of your home is simply the property’s value, minus any outstanding mortgage or other forms of lending that are secured on it.
What benefits can equity release bring?
The key attraction of Equity Release is that borrowers can raise capital whilst retaining one hundred percent home ownership.
For many, the main plus point of this is that it provides money that they can use to enjoy their retirement. After a lifetime of working and saving in order to raise kids, run vehicles and meet mortgage repayments, many retirees are looking to finally release some of their financial burdens during their long-awaited retirement. Dream holidays, new hobbies and home improvements are just a handful of the things that are made possible through this scheme.
Such loans may also greatly relieve the pressures caused by the current cost of living crisis in the United Kingdom, enabling older homeowners to cope with inflation whilst maintaining a comfortable standard of living.
Who is eligible?
Homeowners aged 55 and over and who own their own property are eligible candidates for an Equity Release Mortgage.
To take out this type of mortgage, however, you must be looking to release at least £10,000 in equity from your property.
The value of your home will, of course, also have an impact on the level of loan available to you.
What about interest, how does that work?
The interest rate is fixed for the lifetime of the loan and is based on the amount you borrow in relation to the value of your home.
As there are no contractual monthly repayments,(although you can choose to service the interest and make capital repayments if your wish) the interest accrued is rolled up for repayment when the home is sold.
A mortgage adviser who specialises in equity release products will be best positioned to advise you on the ins and outs of your interest.
Can I still leave an inheritance?
Of course, the main concern for many when it comes to equity release is inheritance. Like the majority of people, you probably wish to leave something behind for loved ones after your departure. If you’ve worked hard to pay off the mortgage on your property, it’s likely that you have always imagined that it would be the value of this property that was passed on as an inheritance to those you leave behind.
Of course, it is essential to recognise that your equity release loan will essentially decrease the amount that you can leave an inheritance to your loved ones. Thankfully, however, many Lifetime Mortgage products enable borrowers to protect a percentage of the value of their home through an Inheritance Protection Guarantee.
If you’re considering an Equity Release loan, it’s essential you seek advice and guidance that you can trust. That’s where North East Equity Release comes in. Simply contact us today to find out how we can help.
