The equity in your Essex house is how much of it you own, and an equity release mortgage is a way to get access to that value and turn your house into cash.
Once your mortgage is paid off, you have 100% equity in your home, which means you own it completely. But if the value of your home goes up, you don’t get any extra cash because that extra value won’t be turned into cash until you sell the house. If you never sell, the only people who will be better off are your estate and your beneficiaries.
So, getting one of these mortgages is becoming a more common way for people over 55 to use the equity they’ve built up in their homes.
What is equity release?
With an equity release mortgage, a lender gives you cash in exchange for a cut of the money from the sale of your home in the future. But unlike a traditional mortgage, where you pay back the loan over a set period of time, you don’t pay off an equity release loan until you move out of your home.
Some of these mortgages are portable, so you can move, and the lender usually doesn’t get their money back until you move into long-term care or die.
Equity release mortgages and remortgaging to get cash out of your home’s equity are not the same thing. If you get a remortgage, you will have to pay back the money you borrowed plus interest every month.
You should talk to a professional to see if equity release is right for you and make sure you know how these products will affect what you can leave to your family. Many people think it’s best to let their beneficiaries know what they’re doing so they don’t get any nasty surprises when it’s time to settle their estate.
There are two main kinds of mortgages that use equity:
- Lifetime mortgages
- Mortgages that let people take back their own homes
What is a lifetime mortgage?
With a lifetime mortgage, you use your Essex home as collateral for a loan. Most of the time, you don’t have to pay back these loans during your lifetime, and the interest is just added to the loan balance.
When you take out a lifetime mortgage, interest is added to the loan. Some lenders let you pay off the interest every month, but most people just let it build up.
For more information about equity release mortgages in Essex please call us on 01277 620083.
Some lifetime mortgages give you a lump sum all at once, while others let you “draw down,” which means you can get money as you need it. The good thing about a drawdown loan is that you only pay interest on the money you have already taken out of your equity.
You can stay in your Essex home, and the lender doesn’t get any money back until you relocate into a care home or die. At this moment, your home is sold to pay off the debt and interest.
If you want a lifetime mortgage, you have to meet a lot of strict requirements. You must be at least 55 years old, own your home outright, and live there full-time. You can usually borrow up to 60% of its value.
Some lenders will let you pay the interest off so that it doesn’t keep adding up. This is not the same as a mortgage where you only pay the interest.
The trade group for the industry, the Equity Release Council, says that all lifetime mortgages must include a “no negative equity guarantee.” This means that if the value of your property goes down and you can’t pay off the loan in full when you sell it, neither you, your heirs, nor your estate will have to pay the difference.
What is a home reversion mortgage?
With a home reversion mortgage, you sell a home reversion provider all or part of your home. The provider gives you less money than the current market rate, but you can stay in your Essex home as long as you want.
A few home reversion mortgages give you a lump – sum payment, while others give you regular payments.
When you pass away or move into a care home, your property is sold, and the lender gets its share of the sale price. If the property’s value has gone up a lot, the lender’s share will also be worth more.
You can move, but the home reversion provider will have to agree that the new home is good enough. This is because the lender will be a co-owner of the new home, and it will be the new security for the loan it gave you.
Some companies only give home reversion mortgages to people who are 60 or 65 years old or older.
Equity release interest rates and charges
When you get a lifetime mortgage, you need to think about how interest will affect how much you owe. In a traditional mortgage, you pay off the loan over the term of the loan. With a lifetime mortgage, however, the interest period is open-ended and ends only when you die or go into long-term care.
The average interest rate on a lifetime mortgage is higher than the average interest rate on a mortgage that you pay off over time. This means that the debt grows faster, especially if the interest is added to the debt instead of being paid off.
With a home reversion mortgage, you need to remember that if your Essex home’s value doubles, so does the mortgage provider’s share.
There are different fees that come with setting up an equity release mortgage.
You will have to pay an adviser first. The good news is that consultants who specialise in equity release must have a special qualification. This means that the advice you get should be complete and up to date. Your adviser must also tell you if there are better options for you or if equity release is not a good choice for you.
A separate fee, called a “set-up fee,” is usually charged by lenders for an equity release product, but it can be quite low.
There will also be costs for the lawyers. The lender needs to be sure that no one else has a charge on the property. It doesn’t want to find out after you’re gone that you weren’t the only owner or that there are other lenders with an interest in the property.
And depending on when you bought the house, you might need to list it with the Land Registry. Before the 1980s, it wasn’t always necessary to register a property’s deeds, so it could be a piece of paperwork you forgot to do and need to do now.
What are the alternatives to equity release?
A retirement interest-only (RIO) deal is another type of mortgage that you could think about.
You could also take money out of your pension instead of using your Essex home as a source of income. Because of changes made to pensions a few years ago, you might be able to use your savings when you turn 55.
This will affect your future pension income, and decisions like this are usually irreversible, so make sure you get good financial advice before going down this route.
For more information on Equity Release Mortgages please give us a call on 01277 620083.