Given the many options available for financing in the United Kingdom, it is understandable that you might feel intimidated by the prospect. However, even with the challenge of understanding the basics of financing, it is still a worthwhile consideration, especially with the flexibility that the right loan or mortgage can offer.
Equity release is one such option among many, and it is especially important for older adults or retirees. If you are interested in this type of financing, read on. We will break down the basic concepts of equity release to give yourself peace of mind through your well-planned finances.
What is it? And how does it work?
Equity release is a type of lending that allows borrowers to withdraw either a lump sum or a monthly sum from the value of their property. These withdrawals are considered part of a loan with your property as collateral. In that regard, it functions similar to a mortgage.
This agreement ends when you sell your home, pass away, or enter a care facility. At that point, the lender will claim the amount they lent you from the property. It also usually includes a certain level of interest added to the amount taken from the property when it is sold. In some cases, it can be paid monthly.
Generally, there are two types of equity release: the lifetime mortgage and the home reversion.
The Lifetime Mortgage
This is the most common type of equity release. It allows you to borrow against your property, and this debt is paid back when you pass on or move into long-term care. The interest rolls up with no repayments, but some providers will allow you to pay the interest monthly to lower the amount owed when the house is sold.
The Home Reversion
The home reversion involves selling your property to a lender in part or whole. From that sale, you are set to receive between 20 to 60 per cent of your home’s value if you sold a portion of it. From there, you will be allowed to live in the property for the remainder of your life. The caveat here is that, depending on your agreement, you may be allowed to live on only the part of your property that remains unsold to the lender.
However, the wonderful thing about a home reversion is that there is no interest to accrue since you have sold your property under the market value. This operates under the assumption that the property will be worth more once they take full possession.
How do I qualify for either of these?
These financing deals are generally available to people aged 55 and older. For home reversions, the age requirement is usually even higher. The property you leverage for an equity release agreement must be your main residence. Most lenders require that your mortgage is completely paid before you qualify for equity release, but in some cases, it could be used to pay off the remainder of your mortgage.
Make sure to use conveyance quoting tools so that you can go into the bank with a fair knowledge of the value of your assets.
Understanding the risks
The younger you sign up for an equity release agreement, the more likely your debt will grow over time. If you withdraw money sooner or in greater amounts, this could also increase the level of your debt. Should a property owner wish to move before their agreement has concluded, they might not have enough left to purchase a new home after being forced to repay their debt.
This presents a problem if you pass on or move into long-term care. If the home’s value is less than the total debt you accumulate through the equity release deal, you could be leaving your family with a large amount of debt. Some equity release plans do not have a negative equity clause, either, meaning there is no cap to the total amount of debt you gather.
Even if you selected a portion of your property for children to inherit (which is possible, depending on the agreement), they might have to sell or take out financing on their inheritance to pay for the debt.
Recognizing the benefits
The wonderful thing about an equity release deal is that it can give you more funds for your retirement, allowing you to live in relative comfort and enjoy life in your advanced age. Real estate properties are sizable assets with inherent value that could be of greater use to you in the form of cash. This cash could be used for more important priorities, such as travelling, enjoying new hobbies, or funding your grandchildren’s education.
If you have no plans to vacate or sell the property, this is definitely an option for you. It is a fair option for those who do not plan to sell their home and downsize their lifestyle to smaller accommodations. This is especially better for those with no children or family members to leave the property to, as they can choose to enjoy the property rather than its value being locked away from liquidity.
What should I watch out for?
One of the most important determinants of the size of your loan is the property’s value, which the bank is likely to determine independently. However, it is best to get conveyancing quotes from a third-party tool to negotiate a better deal.
We have mentioned the negative equity guarantee before. This is one thing you have to watch out for. While it is fully optional for you to use up the total value on your home, it still accrues interest. Without proper management, you might end up with a massive debt suddenly weighing you and your family down.
Having a sound financial plan in place can make this interest and these debts more manageable, especially if you hope to leave something to your relatives when you pass on.
Another thing to watch out for is whether you can take out lump sums or smaller sums or a mixture of the two. This flexibility can help you plan your long-term finances more easily. However, it is important to remember that larger sums usually come with larger interest rates, and the opposite is true for smaller withdrawals.
Make sure to compare offers between financial institutions as well, as some have better interest rates or even fixed interest rates. Some institutions use a cap or limit of some kind in terms of how much the repayment can grow, which is a positive thing to watch out for.
The state of your health might also have something to do with your deal, as people with medical conditions may borrow larger amounts, depending on the severity of their condition.
For home reversions, have a discussion with the lender or financial institution about whether you can select an area of your property for your family to inherit that is exempt from the deal, and therefore, the debt.
While accruing debt might be a frightening thing, especially later in your life, equity release is a good option for those who would like to enjoy the remainder of their lives. If you are confident in your ability to manage your finances, you can maximise your comfort and upgrade your lifestyle. Whether you sign up for a lifetime mortgage or home reversion, both give you the opportunity to live the life you deserve.
If you’re looking for conveyance quotes in London to help you decide on equity release plans, send us a message at Conveyancing Calculator. We can help you get the best out of your deals.