What is equity release and how does it work?
In certain countries like those of the United Kingdom, it is very common to use finacing schemes to purchase properties. Mortgages are special loans which are meant to provide the cash necessary to acquire estate. In some cases, the purpose of these deals is to pay for a fraction of the property itself, while in others people borrow money to afford the deposit. Mortgages work as all loans do: you get a sum of money which you have to repay over time, and you add an interest to the original amount, which is the financial cost of the loan. If you don't repay on time, you get penalized. In the case of mortgages, the loan is borrowed against the property, which means that if you don't repay, you must sell your property - to the lender or a third party - in order to cover your debt.
One of the main negative aspects of a mortgage is the monthly repayments. If you have an income that allows you to pay a fee every month, this shouldn't be a problem; however, it is true that it cuts down the actual amount of cash you have every month. If you don't have a strong income or you already have a debt with another lender, this could be an obstacle for your home economy, and even threaten your capacity to keep paying every month. In some cases, the more money you pay each month, the less interest you accumulate; and the other way around, too.
Equity release is a type of mortgage loan aimed for people over 55 years old. Lenders provide them with a fixed amount of money, in one or more payments, which is a fraction of the property value. Equity release schemes have no monthly payments. Instead, they are cancelled with the sale of the property at the end of the term, either because the homeowner dies or because he/she moves into long term care.
Which schemes are available?
The two schemes of equity release to which people can access are lifetime mortgage and home reversion. Chech this lifetime mortgage vs. home reversion table to see details about each one of them.
|You don't sell your property until you die or move. You can still live in your property.||You sell a portion of your property and become a co-owner. You can still live in your property.|
|It's usually the cheaper option.||It's usually the most expensive option.|
|The ultimate cost is established at the beginning of the deal.||The ultimate cost is established at the end of the deal, according to property's value.|
Using an equity release calculator to estimate the deal's result
The final outcome of the deal depends of how much equity you can release from your property, which is the interest rate and how much your property is worth. The amount of money that you can get depends mostly on your age, but other factors such as health can get you a better deal. The idea behind this is that the closer you are to no longer living in your house - either because you die or move to long term care - the sooner the lender will be paid back, so the less interest you get and the more money you can take.
There are many equity release providers for over 55s, and they all offer different deals. Of course, these are companies, so they will try to maximize their profit, and that might mean that they don't offer you a deal as good as it gets. You should compare different offers in order to choose the one that is best for you. This means that you should know how much you could get before asking lenders for a quotation. You can use online tools for calculating your lump and the interest to which you would have to repay it. These tools are known as equity release calculators and many of them are available online for free, so we suggest that you use them, even if their results are approximate and you could get a better deal from some providers.
This could also give you an idea on whether or not releasing your equity could be convenient for you. However, remember that equitiy release is becoming cheaper and cheaper, so many people are engaging in this sort of mortgage; these are even mortgages which pay other mortgages, because in some cases the difference in interest rates is very wide. Actually, paying old mortgages are the main reason why people over 55 years old engage in these sorts of deals. Other reasons include home improvement, pension boosting and tax planning.