Equity release is a great way of raising finance against the property’s value, but it’s not right for everyone. It has low-interest rates and high borrowing limits.
It all depends on your financial situation, including how much money you can borrow and how much equity you have in the home.
We will discuss the pros and cons associated with equity release mortgages, and how this type of borrowing product works.
What is an Equity Release Mortgage, and how does it work?
Equity is the amount of your home that you own in full, without any secured debt.
If your property is valued at PS200,000 and you have a outstanding mortgage of PS100,000., then you would own equity of PS100,000.
The equity of a home is 100% owned by the owner, regardless of whether they have any mortgage debt. This equity changes with property value.
Many equity release mortgages are available, with some being designed to finance home improvement and other expenses. Some are designed for retirees who want to take out a mortgage or home reversion plan in order to fund their retirement.
Each product works differently so it is a good idea to consult a team of independent advisors before choosing the right product.
Below are the topics covered:
How does equity release work?
Different equity release products work depending on the nature and purpose of the mortgage agreement.
This could be:
Borrow against your equity, sometimes as part of a refinance. Then repay the debt plus interest as usual.
A lifetime mortgage can be taken out without repayments. If you pass away or become incapacitated, the property is sold and the proceeds used to repay the debt and accrued interest.
A lender can sell a portion of your home for a lump sum agreed in cash. They’ll also sell the property if the borrower dies or goes into long-term care.
There are many benefits and drawbacks to this option, including the fact that you can borrow large amounts of money, keep ownership, and be able to live in your home until your death.
The lender will usually sell your home. Any excess proceeds of the debt are usually passed to you and then distributed to your beneficiaries as per your will.
What are the pros and cons of equity release?
You are not the only one who is unsure whether equity release is right for you borrowing needs.
We will be discussing the main pros and cons of each to help you make an informed choice.
Equity Release Advantages
Borrowing via an equity release mortgage is exempt from tax – there are no Capital Gains and Income Taxes.
Equity release is simple and easy to get than other secured home loans.
You have the option to receive your payment in a lump sum or as a regular deposit.
Flexible equity mortgages typically have a maximum limit and you can draw down funds when you need them. You only pay interest on the amount you borrow and not on the entire facility.
Responsible lenders sign agreements and codes that ensure you don’t end up in a negative equity position. They will never recoup the property’s value.
Borrowers don’t need to repay any interest, but you can still find products that have either interest-only or voluntary payments if this is what you want to do.
If you don’t have enough savings to retire and are in need of funds for medical, living or other expenses, the main selling point is that this product can be used. You can borrow a substantial amount of money with an equity release product, regardless your credit score.
Both the borrowers and the partners can live in the home as long as they need to without having to move or reduce their size.
The Pitfalls and Pros of Equity Release:
Equity release has the obvious drawback that you can’t know what your loan will cost over the long-term because no one knows how long they will be alive!
Although interest costs can be significant, they don’t have to exceed the assessed property value.
Remortgaging a property with an equity release product can be difficult as most lenders won’t lend to you if the property has a pre-existing charge.
Also, be sure to make a decision carefully as you could face steep early repayment fees if your mind changes.
The main problem is that even if you don’t make any repayments, the lender will still sell your house, which could lead to a reduction in the value of any inheritances you might want.
What is Equity Release? How does it work if I receive benefits?
Remember that an equity release product can increase your cash savings, especially if it is a lump sum upfront payment.
Borrowers who receive means-tested benefits (including credits against council tax and pension income) may have their benefits cut or stopped because they don’t qualify for the same support.
It is a smart idea to evaluate your income and outgoings to determine if an equity release loan would be suitable.
What is the cost of equity release?
Equity release is not an exception. Every mortgage product comes with costs. These charges include:
Valuation and property survey fees
Legal costs.
Lender application charges.
These costs will vary depending on what type of property you have, how big your home is, and the degree of assessment required by your lender.
The interest rates can vary greatly, starting at a fixed rate 3.45% product that is locked in for life to 7.1% per year. This allows you to choose an equity release loan with no fluctuating interest costs, similar to a fixed mortgage for a longer term.
The average interest rate on equity release mortgages is 3.95%. Even if you don’t have to make repayments, it will impact which lenders you choose and how much money you can borrow.
A lender will require you to evaluate your life expectancy, property value and income to determine if they can cover the original capital debt as well as the anticipated interest charges for the sale of the home.
Is it worth the cost of equity release?
If borrowers have poor credit, severe financial problems or no other options for borrowing, equity release mortgages may be a lifeline.
We’ve discussed several potential disadvantages. It is important to explore all options and understand the implications, as well as communicate your plans with your loved ones.
The Equity Release Advisers offer expert advice
Contact us for more information on the pros and cons, as well as the different product options, and help in choosing the right mortgage to suit your financing needs.
A mortgage broker can help you compare various mortgage options and determine the total cost to make informed financial decisions.
