For a lot of people, equity release is the answer to insolvency during the later years of life. Once the land registry has been duly notified, the scheme allows you to retain occupancy of your home. In some cases you receive monthly loan payments which help you cover the costs of day to day living.
Home reversion and lifetime mortgage are two potential products on the market. Understanding each product and their differences helps to highlight the disadvantages various schemes have.
How Equity Release Works
Lifetime mortgages do not require the land registry notification. You own the home, but have a loan taken out on it. The scheme extends beyond the lifetime of the borrowers and this makes the issue of repayment fairly unproblematic: the bank or other lending third party simply sells the property as a deceased estate and thus reclaims the debt. Any equity not released in the loan is paid to beneficiaries.
Home reversion requires land registry notification because the house changes ownership, even if it is only a partial change. There is a third party that owns a part of the home, which is sold by the homeowner. The homeowner obtains money to live on that is not paid back even at the end of their life because they sold part of the home instead of gaining a loan. Depending on the amount of property sold and the price, the rest of the home can remain unsold or sold later for more income to live on. If the entire home is sold there is no inheritance left. If only part of the home is sold, any remaining portion at the homeowner’s death or move can be used as inheritance.
However, there are some disadvantages to the conventional equity release scheme. To begin with, you will need to consider the inheritance you leave to your family will be significantly reduced. While it is possible to borrow only part of the value of your property, the accumulation of interest will invariably sap money from the remaining worth.
In addition, home reversion is not a good option for anyone who does not own their home outright. If you are still paying off your mortgage, then you will only be able to release equity from your property to the value of the difference between the amount you still owe and the worth of the home. This situation requires a lifetime mortgage versus home reversion plan.
With lifetime mortgage it is possible to pay off an existing mortgage and take a lump sum to cover living expenses. The mortgage has to be low enough to pay off in full with the funds you take and leave some leftover.
Qualifying your Home and You
Home reversion requires all homeowners named in the agreement to be 65 years of age or older. Lifetime mortgages are attainable at age 55 and over. Specific products from certain companies may have a limit of 60 or 65 years of age to take it out.
Your health and any health issues you might have can be disclosed if you wish. If you do suffer from a health problem it may help you increase the lump sum of money given by the lending company. An enhanced lifetime mortgage offers people with diabetes, obesity, or cancer larger lump sums. There are other illnesses and health disorders that also count. If you do not want your health to factor into a larger payment, your life expectancy is still needed. Lenders calculate average life expectancy to determine the loan amount and fixed interest.
Your home value matters. A home must have a value of at least £70,000 in order to qualify for lifetime mortgages and most home reversion opportunities. The more home value exists, the more you can take out in a loan based on age and life expectancy factors.
Equity Release Advice Paramount
Speaking with an independent financial expert is paramount to gaining a proper plan. These advisers explain products in details including all disadvantages and work for you. This is different from a lender who will go over their products only in an effort to gain your business.
In short, equity release can be a useful strategy to finance your retirement years. However, it is not without its disadvantages. If you are considering signing on to a scheme, you will want to take the decision very carefully and get plenty of advice. You may also want to include your family in the decision to avoid issues later on.