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What is Equity Release?

For those looking to remain in their own home as they continue to enjoy their retirement, an equity release may be an attractive option. This can be a great opportunity for those in need of additional income or as a supplement to their existing retirement savings.

Individuals looking to maintain their quality of life within their own home can now access the value of their property to cover bills, have more money for groceries and utilities, or simply enjoy their retirement more. Those who may not intend to leave a large inheritance after they leave can reap the benefits of the value their property has immediately.

An equity release works similar to an additional line of credit that is opened once the loan begins, and paid off when the property is sold. The idea is that the individual has the freedom they need to continue enjoying their life within their own home without having to drastically shift their living habits or environment.

Many feel as though an equity release provides the financial breathing room they need to afford to live the way they always have without the need to sell their own home. Each person’s situation is unique, and someone’s circumstances may make an equity release seem favourable while someone else’s may not.

An equity release may come in many different forms and could include one lump sum, several smaller amounts, or a combination of both. The person will need to find a structure that works for them and make sure they have a full and detailed understanding of their equity release so that it doesn’t return to haunt them later on. It may be wise to consult with an advisor who is specially trained to deal with such matters and always consider all options fully prior to making any decisions.

There are two main types of equity releases and these are recognised as the lifetime mortgage and the home reversion plan. Each of these forms of an equity release carry their own set of payment structures and advantages or shortcomings depending on the situation of the individual.

Knowing which one is best for a given situation will depend on many factors including for how long the individual wishes to remain in their home, how they prefer to access or use their money, and more.

The Lifetime Mortgage

The most common form of equity release is called a lifetime mortgage that insures the amount of any loan given to the recipient with the value of the property the person is currently residing in. These plans can come in many different options that could allow the individual to make voluntary payments to better control their balance among other possible features.

The name “lifetime” is derived from the fact that the lifetime mortgage is intended to span the rest of the duration of the individual’s remaining years. The high availability and broad offering of this form of equity release make it a highly versatile option and one that has several potential variables involved.

Due to the fact that lifetime mortgages are very easy to customise with unique add-ons and special features, they are available in a wider selection of options than other forms of equity releases. Knowing this, let’s examine in more detail some of the most common variations of lifetime mortgages to gain a better awareness of their independent factors and unique features.

Enhanced Lifetime Mortgage

If you’re in good health and looking to get a qualified lifetime mortgage, an enhanced lifetime mortgage could be a good fit for you. These kinds of lifetime mortgages take your state of health and fitness into account to offer possible lower interest rates and other potential benefits.

Drawdown Lifetime Mortgage

These types of mortgages are highly preferred by many thanks to their ease of access and fast availability to funds that can be commonly used just like a cash bank account. Interest is only charged on the money taken out of the account, therefore letting you keep your money in the value of your property unless otherwise needed.

Income Lifetime Mortgage

The type of income is incorporated into an overall retirement strategy and treats your equity payments as fixed income payments to give you the money you need to maintain your way of life. This could be a good strategy for those on a fixed income looking to add a bit more to their monthly spendable amount.

Interest-only Lifetime Mortgage

This plan can be managed in a way that’s much similar to a responsible line of credit, in which interest is paid off regularly each month.  If this requirement is met during the lifetime of the plan, there will be no balance to repay the lender once the loan is finished.

This can be a good option for those looking to get a loan from their property but still willing to leave behind an inheritance or not have interest overwhelm their available equity.

Home Reversion Plans

If a homeowner is particularly committed to selling the value of their home in exchange for livable income, they may decide that a home reversion plan is the right choice for them.

This is another highly popular plan where the homeowner receives either partial payments or a lump sum payment for the value in their home, either as a percentage determined between the homeowner and the lender or simply as a complete purchase of the property by the lender.

These agreements include the understanding that the homeowner continues to live in their own home as a life-long tenant. One good aspect of home reversion plans is that the cash from the equity in your home is purely interest and tax-free, meaning it’s fully yours to do with as you see fit.

This of course comes at the expense that your home will no longer fully belong to you and you will not receive full market value if it were to sell. These details need to be closely considered by someone interested in getting a home reversion plan and how this will impact any future inheritance plans they may have in mind.

Retirement Mortgages

These are loans that are designed to operate in concordance with a person’s retirement, and therefore typically begin just prior to or during the individual’s retirement. The person will then have access to money that they will be required to repay as well as interest levied against the value of the property.

At the end of the plan, the house is often sold at auction with whatever remains other than what is owed to the lender passed on to the individual’s estate. Choosing if you need a retirement mortgage will likely depend on several various factors such as the person’s age, their income, and the value that their property is worth.

It may be a smart strategy to consult with a qualified advisor who will help you to determine whether getting a retirement mortgage could be a good strategy for you. Given the individual circumstances you are in, you may wish to seek a retirement mortgage because you have an outstanding final mortgage repayment, you are moving somewhere else, or you can simply use the extra income.

Retirement Interest-only (RIO) Mortgages

Borrowing can be more difficult for older homeowners due to the requirements and regulations often associated with them finding a plan that’s affordable and meets their needs. These are loans where the interest is paid monthly by the homeowner and if met, the balance remains unchanged.

The main difference between a retirement mortgage and an RIO is that the RIO mortgage has no fixed term and is only paid upon death or moving by the homeowner into long term care.

Purchasing a Second Home or Holiday Home Using an Equity Release

Many seniors have dreamed their entire lives of owning a second home, and an equity release can help make this dream a reality. With proper planning and choosing the right loan, an equity release can deliver the necessary supplemental funding for a down payment or purchase of a vacation home or second home.

This will come down to the individual’s priorities and strategies for their future and retirement.

How an Equity Release Works

It’s important to understand the factors involved that matter most when considering an equity release with regard to how much you will be allowed to borrow. The three main factors include the value of your home, how old you are, and where you live. That is because the value of your home will determine how much equity it has, in turn leading to the amount the homeowner can borrow. An equity release gives the homeowner the opportunity to access some of the value in their home as tax-free cash.

Things to Watch Out For

As with any loan that can last a significant length of time, equity releases can also carry their share of issues to be mindful of when looking to acquire one. Each equity release plan is unique, and it’s good to be prepared for any possible conflicts that could arise when shopping around.

For example, “roll-up” interest is the money that accumulates over time as most equity release recipients opt not to pay any money on interest during the span of their loan. Once the loan ends and the house is sold, the remaining owed interest is then “rolled up” to be added to the total amount due.

Early repayment charges can also present a possible problem for many who would prefer easier or early access to their funds. The fees come into the picture when someone decides they would like to pay off their loan early, as most equity release plans are not intended to be paid during the lifetime of the homeowner. This is a point that may need to be strongly considered, as those looking for more flexibility or access to their money may need to choose the equity release that works best for them.

Remortgaging to Release Equity

There are many different reasons why a homeowner may want to remortgage their homes to release equity, but these are usually financial in nature and could involve large improvement costs associated with the property, a need for additional income to pay off bills, or more.

Deciding to remortgage a property to release equity is a personal decision that comes down to each individual homeowner and their situation as to whether releasing equity is a good course of action.

Choosing How You Will Be Paid

Don’t forget that today’s wide selection of equity release plans bring with them many different ways of receiving your payments, including lump sum, income, or drawdown. Those looking for an equity release as a means of affording a large or significant expense such as home renovations or something else may find that the lump sum option suits their needs.

An income-based payment system may be more beneficial to those who would like additional money to handle living expenses, On the other hand, those simply looking for smaller portions of their money at specific moments in time could find the approach of the drawdown loan to be more to their liking.

Finding How Much Equity You Own

To know how much your equity release may be able to provide, you must first have a clear understanding of the value of your home. You may decide to work with an estate agent to give you an estimate. To calculate the amount of equity available in your home, you will need to subtract what remains of your mortgage from the overall value of your property.

It may also be wise to research how much other properties within your area are selling for to gain a better sense of what your home’s most genuine value may be. While equity releases may not be the best option for some, others may find that it allows them the space they need to keep enjoying life without being stifled by additional living expenses or other potential problems and set-backs.

Today’s wide availability of options means that it’s a better time than ever before to find an equity release plan engineered to fit your individual needs and goals. Speak with a consultant or lender to learn more about all options that exist when it comes to finding the perfect equity release arrangement for your needs.

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