How does an Equity Release mortgage work?

Last post: Mar 14, 2013

Equity release is like selling your house or other object of value and getting a lump sum for this or steady monthly payments, but still maintaining use of the property or object in mention.

Equity release is like selling your house or other object of value and getting a lump sum for this or steady monthly payments, but still maintaining use of the property or object in mention.  This form of financing is most applicable for seniors, retirees, or people in their golden years that have no plan or are unable to leave a large estate to their heirs.  Since eventually the mortgage will be paid off by selling the property either upon death or transfer to an elderly care facility of the borrower. So how does an equity release mortgage work?  There are two types.  You can either avail of a 'Lifetime Mortgage' wherein you get a loan based on your property's value and interest is applied to the amount but payment would only start upon sale of the property after death or moving out.  One common option under this type of mortgage is to drawdown from the agreed upon amount of loan and pay interest only on the amount drawn to date. The other type of equity release mortgage is called a 'Home Reversion Scheme' where you may "sell" only part of the property and still retain use of it.  Division of the proceeds upon actual sale of the property will then be based on the remaining shares of the borrower. One major advantage of getting your mortgage in lump sum is it is tax free.  However income generated from investing any of this proceeds is NOT tax exempt.  Some other advantages of equity release mortgages are, both types of equity release do not require any payments of either capital or interests incurred, since all payments will be done only upon sale of the property.  Legal ownership of the property is also retained by the borrower in both types of equity release mortgages.  So any increase in the value of property would still benefit the owner.  One particular advantage of the home reversion scheme though is you can easily manage or budget the amount you draw based on your needs.  Also, larger amounts can be borrowed under this type compared with a lifetime mortgage. When talking about disadvantages of a lifetime mortgage it is good to point out that since payment only starts when the property is sold; the longer you decide to keep the house or the longer you live, the bigger the amount that needs to be paid back.  The home reversion scheme, on the other hand, also has its downsides.  Since you are basically already selling part of the property to the lender, your share upon sale would also depend on the remaining part you own.  While most lifetime mortgages can be availed upon reaching 55, some home reversions are only available to those who are 65 and above.  Another disadvantage of home reversion is if you die shortly after availing of the scheme, since you will not be getting the full value of the property.  Though there are certain policies which provide an 'early vacancy guarantee', meaning a percentage of the value of the property will be given back if the property is vacated earlier due to unforeseen circumstances. When applying for an equity release mortgage, there are certain costs that are incurred during the process.  Such as an arrangement fee, which typically costs anywhere between £300 to £600.  Upon valuation, you would also be paying an assessor between £200 to £400.  A solicitor would then handle all legal aspects for £300 to £600.  Additionally, a financial adviser may also be needed to help and assist you in your application. Also bear in mind that equity release mortgages are a lifelong commitment and options in getting out of this scheme or wanting to move house is quite limited.  Also having a big amount of capital sum may disqualify you from availing of certain means-tested benefits.  Lastly, always inquire about any early repayment scheme that can be offered to you. An equity release scheme can be very helpful in slowly unloading investments and making sure that you are able to enjoy the fruits of your labour.  This can also benefit those who are in a low income pension.  One alternative to equity release is to just sell the property altogether and downsizing to a smaller one.  With this you can still get the full value of your property while being able to enjoy the income incurred in the downsizing.  As long as you are getting sound financial advice and are fully understand how an equity release mortgage works, this type of mortgage can be very helpful for you in this stage of life. To speak with a qualified Equity Release specialist about your case please either call us on 01494 410125 or complete our short Mortgage Enquiry form here and we'll call you.