Before a person considers an equity release plan for their property, it is important that they understand the importance of equity in property dealings.
Equity is the difference between the market value and what is owed on a property, or as some may say, the unencumbered value of a person's property.
When one considers that they may need to move, they should aim to retain as much equity as they can. Equity can be used to help to buy a new property, to rescue a family home that is at risk of foreclosure and it can also be used to help pay for medical bills and funeral expenses.
What is Equity Release?
Equity release is a financial support option that can help people to remain on their property while minimising their monthly outgoings.
This is a service that has been designed to enable seniors to unlock their available equity and use it to provide them with additional income, either to pay bills or to help pay for their care.
For instance, if your property was worth £280,000, and you have a remaining £150,000 from your mortgage, then your equity will be £130,000.
A Closer Look at Equity Release
The equity release market is a fast-paced, growing industry, and there are many companies out there that are in the business of lending people money using the equity in their homes as collateral.
A mortgage is a loan that is provided on the security of an asset. In the case of mortgage-backed bonds, the bond represents a claim on a pool of mortgages from individual properties.
Equity release plans are, in effect, a mortgage. So instead of borrowing against the equity in your house, the equity release provider will take ownership of it.
What are Different Types of Equity Release Schemes?
When a person applies for an equity release plan, their property is valued by the lender to assess the loan amount that they can offer. The following equity release schemes may be available to you:
Life Time Mortgage
The lifetime mortgage is a secured loan that is provided over the term of their lifetime. With this system, you pay a small, fixed monthly repayment that is permanently tied to your property and the lender only receives their interest and capital upon the death of the homeowner.
A lifetime mortgage is perfect for people who have significant equity in their property and who wish to remain in their property for the long term.
Home Reversion Plan
A home reversion plan is an agreement between you and the equity release provider under which your house is transferred to the home reversion provider.
The home reversion plan provider takes care of all the maintenance, repairs and insurance associated with the house while they also take care of any capital improvements as well.
When you move out of the property, the home reversion provider will sell the house and use the money to pay back the home reversion plan. This is also a great option for protecting a portion of the property for your beneficiaries.
What is a Transfer of Equity?
A transfer of equity is a process that is used to move the title of a property from one person's name into another person's name. This is done by creating a second mortgage, at a higher rate of interest, that is then given to the person who owns the property.
How to Do a Transfer of Equity: Requirements to Consider
You will require to prove that you own the property that you want to use for transferring equity. This can be done by providing a copy of your title deeds and/or a copy of the land registry certificate.
However, the most important document you need to focus on is the land registry TR1 form, which is the original form that you will use to provide information about the property. This outlines the current owners, the new owners, or the transferees.
Along with the official copies of your property title, you also need to submit documents detailing the mortgages attached to the property. But without a mortgage, the process of transferring equity becomes relatively simpler.
For one, you'll only need to complete the TR1 form and submit it to the land registry with their AP1 form. Keep in mind that if the transaction exceeds £40,000, you will also have to include a stamp duty land tax certificate.
Should You Equity Release?
Equity release is not the right option for everyone. So it is important to think carefully before deciding to take on an equity release plan.
Before you make a final decision, it is vital that you have all the information that you need to make the right decision. First of all, you need to be 55-years-old and above to be eligible for equity release.
What to Avoid in Equity Release
There are a few pitfalls that you will have to avoid to make the most out of your equity release plan, so here are some of the things you need to watch out for:
Mistake #1: Borrowing Everything in One Go
Borrowing a lump sum may seem like a great idea, particularly if you have a hefty outstanding mortgage. However, you should consider paying off your existing debts as much as you can and then you can use the rest of the money to fund your equity release plan.
Mistake #2: Not Considering How Equity Release Impacts Your Benefits
Once you start taking equity out of your house, you may also want to look into how it will impact your state benefits or other financial schemes such as your pension credit, universal credit, and more.
Mistake #3: Not Getting Approval from the Equity Release Council
You should also check that your equity release provider is licensed by the Equity Release Council. This is a consumer protection and information body that you can use to ensure your protection and to check the service that you are getting.
Mistake #4: Failing to Seek Guidance from a Financial Adviser
If you are above the age of 55-years-old and you are considering equity release, you should always seek the advice of a financial adviser. A financial adviser can help to guide you in the right direction and show you all the other options you can take to help you improve your financial situation.
The Bottom Line: The Low Down on Equity Releasing: is it the Best Decision?
Overall, equity release is a great choice for many people. However, it is important to carry out a thorough assessment of your current financial situation before you decide on a plan.
Equity release is a viable solution if you want to retain ownership of your property while you are still alive and if you need to access equity to pay off debts, support your living, or cover funeral costs.
There are several different types of equity release plans, and each one is designed to provide the person with peace of mind, a guaranteed rate of interest, and ease the burden of mortgage repayments.
However, it is important to understand the implications of what you are doing before you make that final decision. For one, you will need to make sure that you will still be able to afford your living expenses even after you take out the equity release plan.
You may also want to ensure that you don't borrow more than you can afford. With that in mind, don't forget to discuss the matter with a financial adviser as well as they will be able to help you make the right decision.
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