Is Equity Release an Ideal Option for You
  • January 8, 2022
  • admin

Is Equity Release an Ideal Option for You?

The equity release scheme is a commitment for life. It is a lump sum individuals aged up to 55 years get after he/she releases equity from the home.

The homeowner receives the amount after the valuation of the home’s net worth and financial analysis of the debt holdings, like 12-month loan lenders, not brokers.

The money received can be used in the following manner:

  • Assist children to own a home
  • Pay off pending liabilities
  • Live your dreams of travelling the world
  • Consider home renovation
  • Save for retirement

What Is Equity Release?

With an equity release, you can access the money stored in the value of your home without moving out or selling it. Following the death or move out of the house of the last owner, the property is sold, and the equity is repaid based on the balance of the estate.

There are 2 main types of home equity release products:

  1. Lifetime mortgages
  2. Reverse mortgages

Lifetime mortgages:

A lifetime mortgage is a loan backed by your home. It allows you to receive a lump sum of cash for the equity of the property. Mortgages for a lifetime allow the owner to keep ownership and benefit from price increases.

Home Reverse Mortgage

A home reverse mortgage is an option for people aged 65 and above. The homeowner sells part of the house to a Home Reversion plan provider for some cash. The homeowner remains in the house rent-free for the rest of his or her life.

As the value of the property increases, you will benefit from the increase in your share of the value. Home reversion plans are not loans, so there is no interest in paying.

The fundamental difference between the two is that when you take a lifetime mortgage, you are still the owner of the property. But with a home reverse plan, you sell a share in your home with a lump-sum or a regular lifetime income.

How does Equity Release work?

One of the most common types of equity release is a lifetime mortgage. By utilizing the value of the home, you can supplement your retirement income. According to your age and the value of the property, the lifetime equity mortgage lender determines the value of the property.

Your maximum loan amount depends on the plan you choose. A lifetime mortgage has a higher interest rate than a reverse mortgage. However, a monthly payment will reduce the interest costs incurred on a lifetime mortgage.

Should I Go for Equity Release?

As mentioned earlier, equity release programs are a long-term commitment. So, if you change your mind, like need to move out, take loans for single mums without checking finances, or change the house, you could be in serious trouble.

Well, if you take out one, check whether you could fetch a good deal on an early repayment plan after the charge period ends. It is beneficial to apply when interest rates are historically low. Here are some pros and cons of equity release:

Pros of Equity Release:

Here are some pros of equity release:

  • The money released is completely tax-free
  • Protect an inheritance for your family
  • You never owe more than the value of the home after it is sold
  • You don’t require paying off the loan until death, or you move out of the home
  • You can choose to pay off the loan early
  • After taking equity release, you can still move

Cons of Equity release:

Here are some cons that you would like to consider before going for it:

  • Reduced inheritance
  • Releasing equity may affect your entitlement to state benefits
  • If you lend some money to family members, they would have to pay inheritance tax
  • The interest rate on a lifetime mortgage adds up each month, and this reduces the equity you own in your home

Is Equity Release a good idea for me?

Whether equity release is good for you depends on certain circumstances:

  • Your other sources of income or savings do not meet your needs in retirement
  • You are reluctant to downsize
  • You are okay with reducing family inheritance (or you have no beneficiaries)
  • Have been advised by a financial advisor undergoing the circumstances
  • Are you comfortable paying interest on a lifetime mortgage?
  • Analyze does your mortgage lender offers a negative equity guarantee? It means your beneficiaries will not be responsible if the house devalues.
  • Are you looking forward to reducing inheritance tax liabilities?

Equity Release can be expensive and risky if you stand clueless about the reason for going for it. And if you change your mind in the mid, the circumstances won’t favour you. So, take ample time to analyze all the pros and cons and consider an advisor before deciding.

Example of Home Equity Release

Let’s analyze an example for better understanding:

Clark, aged 66, and his house is worth £450,000. He might want to release equity to experience his fantasy about going around the UK. He additionally needs to ensure 30% of his home’s value as a legacy for his family. 

Considering his conditions, Clark might deliver up to £122,850 and secure £52,650 under inheritance protection. Assuming that he didn’t decide to pay any interest, Clark would owe £141,277 following 5 years, £159,705 following 10 years, and £196,560 following 20 years with a 3% loan cost.

Thus, it is critical to take advice from an advisor before going for an equity release. It can help you avoid blunders.

How Much Does Equity Release Cost?

Your financial advisor or mortgage provider can help you decide whether an equity release scheme is appropriate for you or not. Or whether you should consider other options.

Before you sign the dotted line with the equity release provider, consider having a lawyer review the agreement you have with them.

The equity release cost depends on the value of the home and your age. Apart from this, there are many other costs involved with equity release. Make sure you are thorough with them before you finally proceed. These costs include:

a)  Valuation cost

Akin to a mortgage, an equity release lender conducts the home valuation. It can be a quick inspection of the entire house or a detailed assessment. The lender will also consider the prices of nearby properties when determining the equity amount.

b)  Mortgage arrangement fee

Some lenders might impose arrangement fees for the equity release product. It can range anywhere from £500-1000 as per moneyfacts.co.uk. However, some lenders also offer free packages, but they are usually at a high-interest rate.

c)   Early repayment charges

Financial advisor Lifetime mortgages are planned as a drawn-out course of action with repayment made on the offer of the borrower’s home when they pass on or move into long haul care.

Assuming you conclude you presently don’t need the home loan and choose to take care of it prior, you could bring about an early repayment charge.

These can be costly, going from 3% up to 25% of what you have borrowed. A few moneylenders will postpone the early reimbursement charge for people who settle their lifetime contract because of moving home.

No early repayment charges are assuming you die or move into long haul care. A few moneylenders will permit the lifetime home loan to be repaid when the primary borrower passes on, assuming that the remaining borrower wishes to move home and recover the lifetime mortgage.

d)   Advisor fees

To make the right decision from a qualified financial advisor to get an equity release successfully. 

Different advisors charge differently. It can be a percentage of the loan amount or a fixed fee.

However, these costs are variable. You can expect them to touch around £3000.

Is Equity Release Safe?

The Financial Conduct Authority controls equity Release providers (FCA), and progressively, many are individuals from the Equity Release Council. This exchange body has a bunch of guidelines intended to ensure customers are protected when using value-discharge items from their individuals.

A portion of the protections for customers incorporate the no negative equity guarantee and security of tenure.

It implies that when borrowers use a bank that is an individual from the Equity Release Council, they won’t ever owe more than the worth of their property when it is sold after their demise or moving into long haul care.

They can likewise be guaranteed that they can live in their home for however long they wish. Besides, value delivery must be gotten listening to monetary and legitimate guidance. Unlike a customary home loan, it has no danger of repossession (assuming that the terms and conditions are met).

What are some alternatives to Equity Release?

However, the article was all about how you can leverage equity release, but if you don’t want to go for that, you can also consider the below alternative options:

  1. Unsecured loans

If you want to borrow only a small sum, then you can consider contacting unsecured loans for bad credit direct lenders only. Any collateral doesn’t bind that.

  • Retirement mortgages

Increased numbers of lenders offer only retirement-only interest rates, where you can pay the interest but not the capital. It is an interesting alternative to equity release with no age barrier.

  • Grants and Benefits

Those on a low-income borrowing for improvement or fixings or dealing with a disability may qualify for local authority grants.

Deciding whether you need an equity release is an important decision, apart from finding the right product for your needs. It is advisable to seek professional advice before going for one.

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