Equity release is the process of ‘unlocking’ money that is held in a property. It is only available to older people. The minimum age of someone who can take out an equity release scheme is 55 (with some providers this can 60 years). The steady rate in house prices in certain areas of the country, has meant that a property can be holding a substantial amount of cash and it is becoming a popular part of retirement plans these days.
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.
With employers in the public and private sector cutting back on wage increases and the mounting costs of household bills, equity release has proven to be very popular. Latest figures show that the UK is on course to loan nearly £3 billion through equity release schemes in 2017.
What equity release options are there?
Equity release schemes work like a lifetime mortgage. They are not governed by a set term or payment schedule. The repayment of interest or capital borrowed only happens when the borrower dies or sells the property. However, interest continues to build over this time.
Equity release schemes differ to a ‘traditional mortgage’ as the rate of interest applied is fixed for the lifetime of the loan. This gives the borrower some added security, knowing that they won’t be affected by interest rate rises.
Some schemes allow borrowers to withdraw money in stages. This is helpful as it reduces the interest bill. Whilst, other equity release schemes allow the interest payments to be paid monthly.
You should always consider if it is necessary for you to release equity from your property. If your children have moved out or if you no longer need a property with lots of space, it may be worth considering downsizing to a smaller property.
Why do people use equity release schemes?
Most of equity release schemes are taken out as the borrower wants to use the money to pay off the existing mortgage. They are looking to swap the monthly payments to a deferred payment scheme.
People also release equity from their property as they need the money to undertake some maintenance work or they want to increase the size of the property – such as converting the loft into an extra bedroom. They may also want to give some money to their children or grandchildren to use as a deposit for a house, for instance.
People may also use equity release as a way of reducing inheritance tax that may be due on their estate when they die.
How much you can borrow?
Most of the major lenders abide by the ‘no negative equity’ guarantee, which restricts the amount they can lend This guarantee means that the value of the debt will never be greater than the value of the property.
For example, someone in their late sixties can generally borrow around 35% of the property’s value.
How much it will cost you?
The Equity Release Council, the trade body that governs the industry, states that the average loan rate is approximately 5.35%. Some lenders charge up to 6% whilst others charge 4.5%.
Through an equity release scheme, you borrow a fixed amount of money at a fixed rate. The uncertainty lies in that you do not know how long you are taking the loan out for. This time-period ultimately determines how big the debt will be.
For equity release options, speak to Darren
Dental & Medical Financial Services have been helping doctors and dentists with financial planning for over 25 years. Call to discuss your situation with Darren to ensure you will meet your personal financial goals.
Tel: 01403 780 770