Equity release is a range of products that lets you access the equity from your home once you reach the age of 55. How old you are, how much your home is worth, and whether or not you already have ongoing mortgage payments will all be taken into consideration when determining how much you’ll be able to borrow.
This article does not constitute advice. Professional advice should be taken prior to acting on any part of it. Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.
You can receive the money however you choose: through multiple payments of smaller amounts, in a lump sum, or even as a mix of both. And what you do with the money is your choice – you could put it toward renovations, travelling, or even just everyday expenses.
There are two equity release options to choose from – a lifetime mortgage, which is the more popular choice, and a home reversion.
Lifetime mortgage
A lifetime mortgage is a loan you take out on a home that can be considered your main residence whilst still owning the property. Making payments during the term of the loan (before conclusion at death or admittance to long term care) is not usually required, the interest accrues and unpaid interest is added on top to be repaid at the end of the loan.
Unfortunately, debt can increase rapidly in interest roll-up schemes, which means there may be less money for you to use for inheritance. Fortunately, there are plans that allow you to make regular payments against the interest, so you’re paying down both interest and capital.
If you think downsizing is in your future, just remember that while you can carry your lifetime mortgage over to your new home, there might not be enough equity left which means you might be on the hook for the outstanding balance on your mortgage.
Home reversion
A home reversion requires you to sell a percentage or the entirety of your home in exchange for either a lump sum or periodic payments. Unfortunately, the value assigned to your property is often much less than what it would sell for on the open market. But barring any further need to sell more of your home, the portion that you own will always stay the same even if property values change.
You needn’t move from your home, however, because you’re allowed to live there (rent free) until your death. As long as you insure the property and properly maintain it over the years, there’s no problem. When the plan concludes, your home is sold and the profits are distributed to the remaining owners proportionately.
Five takeaway points about Equity Release:
- These types of loans tend to be more expensive than regular mortgages because lenders carry more risk, and this financial burden is passed along to you.
- You’ll also need to pay arrangement fees, which, depending on the complexities of your plan, can cost anywhere from £1,500 to £3,000.
- If you think you might be able to repay your loan in full early, beware: there might be costly early repayment charges (unless you need to move into long-term care or you pass away.)
- Releasing equity from your home now means you’re depleting the potential financial power of your property later, leaving less money for when you really need it in retirement.
- If you receive state benefits, the funds you get from equity release might affect your claim.
Besides equity release, there are other alternatives if you find yourself needing a loan later on in life.
Standard residential mortgages
These types of mortgages are an option for those planning to have your mortgage fully paid off by the time you turn 75. You can potentially borrow up to £2M as long as your circumstances will allow for that size of loan, because you will need to repay the loan and any interest.
The loan-to-value (LTV) ratio on these types of mortgages differ based on your intended use of funds – for home improvements you may be able to secure up to 85% LTV, and if you have other intentions for the money, you might get 80% LTV.
Borrowing in retirement
If you need extra cash for pretty much anything, are 80 years old or younger, and you’re receiving money from either a state or private pension as income during your retirement, then you are eligible to apply. The maximum borrowing limit is £150,000, and the loan will require you to repay the full amount of the loan plus any interest.
Here at Dental & Financial Medical Services, not only are we veterans in the mortgage sector, helping doctors and dentists navigate the sometimes stressful application process, we are also well-versed in retirement planning, wealth and income protection, and tax and trust planning – so much of our work has a huge impact later on in life.
We favour an integrated approach to financial planning, taking every aspect of your finances into consideration during development. If you’d like to know more about equity release and whether it might be a beneficial part of your financial strategy, speak to a member of our team today.
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