Equity Release Information from the Equity Release Expert

Equity Release Explained:

There are several schemes but they mainly fall into:

•          Lifetime Mortgage

•          Home Reversion

Under a lifetime mortgage you take out a loan which is secured on your home. The plan will usually end and your home will be sold when you die or move out of the property (maybe, to a care home or a family relative, for instance. ). The proceeds of the sale will be used to repay the outstanding mortgage.

You remain the owner of your home if you use a lifetime mortgage scheme, but the property is subject to a mortgage and you can  live in your home for as long as you want to.

A home reversion scheme means selling all or part of your home to a somoen else. This will generally be to an individual or a home reversion company. Your home, or part of it, will belong to someone else.

You can receive either a cash sum or a regular income in return for selling your property. You retain the right to live in it for as long as you want to, even though you have sold your home.

Lifetime Mortgages

Lifetime mortgages can be arranged in a number of ways such as:

•          A Home Income Plan

•          A Roll-Up mortgage

•          A Drawdown mortgage

Home Income Plans

The mortgage loan you get produces a cash lump sum. This lump sum is used to buy an annuity that provides you with a regular income for life. From this income you pay the interest on your loan, usually at a fixed rate, and the rest is for you to use as you wish.

The amount you originally borrowed is repaid when your home is sold. The extra income you will get is fairly low if you take the annuity soon after retirement, so this type of scheme is usually only suitable if you are older, usually 80 +. The older you are when you buy an annuity, the higher the income you’ll get, as there are fewer years over which the income will need to be paid.

Roll Up Mortgage

A mortgage is arranged which is secured against your property. There is no repayment of interest or any of the outstanding mortgage until the property is sold. The proceeds are used to repay the mortgage plus the all of the accumulated interest when the property is eventually sold.  You will receive anything left over after the mortgae is repaid.

The effect of the interest is compounds on a such a mortgage and the debt can increase quickly over time. The percentage of the total property value that can be borrowed at outset is relatively low.

The table below shows the effects of a £100,000 roll-up mortgage at a rate of 7% per year, based on a property initially valued at £300,000.

Number of years since you took out the loan    Amount you owe if you take a lump sum of £45,000 at the start and if the mortgage interest rate is:
5%                   7%                   9%
5    £57,433    £63,115    £69,239
10    £73,301    £88,522    £106,532
15    £93,552    £124,157    £163,912
20    £119,399    £174,136    £252,199
25     £152,387    £244,235    £388,039

It is possible that you owe more than the value of your property with a roll-up mortgage. Some providers offer a “no negative equity guarantee” which means that you will never have to repay more than the value of your home

Drawdown Mortgage

A drawdown mortgage is similar to a roll-up mortgage. The major difference is that a smaller amount is taken with the option to draw down more cash (up to an agreed limit) when needed. The mortgage amount and the interest are repaid when the house is sold off.

Click to find more Equity Release Information or you can contact John Higgins if you want to speak with an Equity Release Specialist

Tags: Equity Release Explained

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