Guide to Equity Release mortgages

Last post: Dec 20, 2011

In these tougher economic times, many people are turning to their home as a source of income, which is something that an equity release mortgage can assist with.


In these tougher economic times, many people are turning to their home as a source of income, which is something that an equity release mortgage can assist with. It's only available to those of a certain age and does have both advantages and drawbacks, so this article aims to go over everything that you need to know about this mortgage type, so that you can decide whether it is the correct choice for you. What is an Equity Release Mortgage?   When a mortgage is finally paid off, the homeowner is obviously sitting on an asset that is worth a lot of money. This value doesn't translate into wealth though, as the money is locked up within the home and can't be used to pay for everyday items or other purchases. An equity release mortgage allows this money to be released and to therefore supplement the finances of those needing a boost. Most mortgage companies will offer this service to those aged over the age of 60, but you should speak to a specialist broker before entering into any agreements of this type. How Does an Equity Release Mortgage Work?   There are a number of different prerequisites that need to be met before an equity release mortgage is something to consider, with the first, as already mentioned, being that you have to satisfy the minimum age requirement. Additionally, the property must also usually be worth a certain amount, although different lenders have different requirements for this proviso. It is worth checking around the different providers if at first it seems that your home does not meet the value requirement. The amount of money that you can unlock through an equity release mortgage also depends on the above factors. The older you are, the more money you can usually release from your home, and this is because the mortgage does not need to be repaid until the death of the homeowner, unlike other loans and mortgages, which are repaid over a set period of time. This means that companies are loath to lend large amounts of money to those who could possibly live for another 30-40 years. You must also bear in mind that the younger you are, the more you are likely to pay in interest when the money needs to be paid back. The amount of equity in the property also controls the size of the equity release mortgage. Equity refers to the amount of the home that the homeowner actually owns, as opposed to the amount that is still being paid off. The amount of money available is usually linked to a percentage of this total equity although, as with all things financial, different lenders have their own different criteria here. It must be noted that it is not always prudent to release the maximum amount of equity in your home though, as this can prove to be expensive in the long run. After all, if needed, you can always release more in the future. When it comes to the interest paid on the equity release mortgage, the figures can be quite large. As an example, someone borrowing £40,000 at a rate of 7% will need to pay back somewhere in the region of £220,000 upon death 25 years later. Before you baulk at this though, you must remember that house prices will also rise considerably during this time, so the amount is much less when adjusted for inflation. Speaking to a broker will give you the best chance of achieving an interest rate that is competitive and leaves the largest portion of your home in equity upon death, which will contribute towards a better inheritance for your next of kin. Things to Think About   As with every financial decision, there are a number of different things to think about when looking at the possibility of taking out an equity release mortgage. Below are some of the main things that you should ensure that you do…

  • Make sure that any mortgage company you approach is registered with SHIP (Safe Homes Income Plan ). This trade body will provide the assurance that the amount you owe never exceeds more than the value of your home.
  • Check your benefits, as a large injection of cash can often affect the amount that you are entitled to. This is particularly evident if you receive any type of pension credit.
  • Investigate other options. There is more than one way to skin a cat, and this means that there are other options available to you. The most cost-effective is to downsize, therefore meaning that you keep full-equity in your home but also unlock a lump sum as well.
  • You should consider the inheritance that you want to leave to your children, grandchildren or anyone else, as this will be affected by the payment that needs to be made upon death. This is obviously not a problem if you have no dependents though.
  • Consider how much you really need to borrow, as often people decide to borrow excessive amounts simply because they can. An extra £5,000 on an equity release mortgage can translate to ten times that when repayments need to be made.
  • Decide whether you can wait for the cash, as the older you are, the less you will have to pay back. If you have only just turned 60, then other options will likely be better for your long-term financial health.
  • Finally, you should always consult an independent professional, as they will be able to provide an unbiased and insightful opinion on whether to go ahead with this type of mortgage and, if so, the best company to use for your own personal circumstances.

NB Choice Loans is not a mortgage adviser and this blog should not be construed as advice. If you have queries, please check with us and we will refer you to one of our panel of FSA registered Equity Release Advisers