An equity release mortgage releases the money you have invested in your home. It’s an excellent alternative for homeowners ages 55 and older when their application for a mortgage can not be approved.
Check out how it works.
The Definition of the Equity Release Mortgage
As the name suggests, this mortgage releases the equity in your home, giving you cash in your pocket. You have two options with the equity release mortgage – a lifetime mortgage or home reversion mortgage.
A lifetime mortgage allows you to stay in the property and enable you to take out a percentage of the equity. The remaining amount remains untouched. The lender decides how much you can borrow based on your age and health. The younger and healthier you are, the less you can borrow.
The amount you borrow accrues interest which you can pay or not pay right now. If you don’t pay it, the interest rolls up or compounds on itself. In other words, you pay interest not only on the principal but on the interest accrued too. You do have the option to make interest or interest plus principal payments if you can afford it. This eliminates the risk of your mortgage balance compounding, leaving you with a much larger balance.
A home reversion mortgage means that you sell some or all of your home to a home reversion company. You sell the equity for less than market value and the company then pays you the funds either as one lump sum or you can receive it in monthly instalments. When you or your heirs sell the home, there are fewer funds to distribute.
What you Should Know
The most common equity release mortgage is the lifetime mortgage. To get it you must be:
- At least 55 years old
- You may borrow up to 60% of the home’s value, but your loan amount depends on your age and the lender’s requirements
- If you get a variable rate, it must have a maximum or cap
- As long as the home is your primary residence, you can remain there for the rest of your life
- You won’t owe more than the home sells for when you do sell it
- You may move into another home with lender approval as the new home will become the collateral for the loan
- You may have to prove that you can afford repayments if you decide to make them
Talk with a trusted mortgage advisor about your options for an equity release mortgage. Some borrowers must take their funds all in one lump sum, while others can spread it out over monthly payments. Think about why you need the funds and what the best use of them would be. Make sure you take into account the accruing interest, and the overall cost of the loan at the end of the term (when you move out) or your heirs have to disburse your estate.
You will need to take legal advice before releasing equity from your home as Lifetime Mortgages, and Home Reversion plans are not right for everyone. This is a referral service.