How does it work?
• The Interest is “rolled up” over the years on the loan and then the whole amount is repaid by your estate when you die OR
• You can pay the interest on your equity release loan “as you go” just like a standard interest-only mortgage, or ad-hoc as finances allow, with many equity release lenders
• On many schemes, the interest rate can be fixed for life.
• When you die or enter long term care, the debt is repaid to the lender and the remaining equity in your home and balance of the estate passes to your chosen beneficiaries.
For some Real-Life Equity Release Case Studies from Touchstone, please click here.
A lifetime mortgage is a form of equity release scheme whereby a loan is secured against your property, providing you with a tax-free cash lump sum or a regular income to spend as you wish.
Please Note: Equity Release will reduce the value of your estate and can affect your eligibility for means tested benefits.
Although there are Lifetime mortgages where you pay the interest (and possible capital) as it accrues, commonly Lifetime mortgages are arranged on a roll-up basis, meaning that borrowers will not be required to make payments during the term of the loan, instead the lender adds the interest that accrues to the original loan mount.
‘Roll-up plans’ can be very useful but borrowers must remember that the amount of the mortgage debt can increase quickly due to ‘compounding’ – i.e. you will be charged interest on the original loan and any interest that is added to the loan account.
Interest is added to the lifetime mortgage loan throughout your lifetime, accruing at a fixed or variable rate. The loan plus interest is eventually paid back when the home is sold which could be when you move into long term care, or when you and your partner die. Subject to your age you can typically release between 18-50% of the value of your home with a lifetime mortgage.
Choose a cash lump sum or regular income, typically with no monthly repayments to meet
You still own your home so all growth in the value (if any, of course) belongs to you
Loans with 'No negative equity' guarantee are available
Some plans enable you to guarantee an inheritance for your family
Plans can be taken out as young as 55
Fixed rates are available, so you can secure the rate payable for the life of the mortgage.
Inheritance amount will be reduced
Interest rates may be higher than for normal mortgages due to the long-term nature of the loan.
The amount owed on the loan can mount up quickly as interest is compounded.
Early repayment charges may apply
Tax position and certain state benefits may be affected
You could raise a larger amount with a reversion plan, especially at a younger age
Please note: You can get interest only lifetime mortgages where you pay interest monthly as an alternative, so the debt does not increase year on year, but lifetime mortgages are mainly offered as 'rolled up' interest. 'Rolled up' interest is paid off all-together in one final payment along with the total amount of your loan when your property is sold, or you move into care, as described above.
Overview of Equity Release
If you're over the age of 55, equity release offers you a way to use the value of your home to raise money.
It is advised that you seek Independent Legal advice before entering into a legally binding equity release contract.
Why do people consider Equity Release?
To provide an additional income
To provide lifetime gifts to relatives
For home improvements
For holiday home purchase
To fund long term care
You probably have other ideas - there is no restriction on how you use the funds.
However, since equity release can be an expensive way to raise money when taking into consideration payment of arrangement fees or interest, you should also consider the following:
Your Savings & Investments
If you have savings or investments you may wish to consider this alternative.
- Benefits entitlement
Have you checked to see that you are getting all of the benefits you are entitled to? It may be that you are entitled to benefits that make equity release unnecessary.
Also equity release could affect your entitlement to means-tested benefits so it's worth speaking to your local authorities to consider these areas first. They may be able to offer you grants or assistance with essential home improvements and alterations that you would otherwise pay for yourself.
- A smaller home
If your family has grown up and they are off on their own financial journey now, your current home may be too big for your needs and you could consider something smaller and more economical to run. In this case, you could consider purchasing a smaller property, leaving you with a lump sum on completion.
- Rent out a room
If your house is sufficiently large you might consider renting out a room to bring in regular extra income.
- Sell your home and live in rented accommodation
This option involves selling your house and investing the proceeds in income producing investments. The income from these investments is then used to rent a property and for your living expenses. You would only really be able to generate sufficient income to liveon if your property was sold for a large sum of money so this option should only really be considered if your house is worth in excess of £400,000.
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