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Equity Release Mortgages

An equity release mortgage, also known as a lifetime mortgage, enables a homeowner to extract money from their property without having to move home or sell their property.

If you’re looking for equity release options in Berkshire or surrounding areas, equity release specialists, Simmonds Mortgages Services can help you understand how to get tax free cash from your property.

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What is equity release?

An equity release plan is a special type of mortgage that does not get repaid until the homeowner passes away or moves into a long-term care facility.

The equity release lifetime mortgage is secured against your home and can release monthly income and/or one tax free payment to the homeowner. It’s also possible to extract further equity from the value of your property at a later stage should you require additional funds to meet rising living costs. They are typically for people over 55 and can also be used to purchase a property as well as releasing equity from one already owned.

How does an equity release work?

You can obtain an equity release mortgage from lifetime mortgage providers who review your current financial circumstances including your pensions and any means tested state benefits when deciding if a lifetime mortgage is a suitable product for yourself. Lending is typically based on your age versus the value of your property. The older you are, the more you can borrow.

In later life, it is not uncommon for you to be asset-rich but cash poor. This means you don’t have enough money to live on each month, but you are sitting on a large amount of cash tied up in the value of your home. It’s possible to release equity when you have your own home with no existing mortgage, or if you repay your current mortgage at the same time. Using a trusted equity release service, you can explore each equity release product to see which suits your personal circumstances best.

What types of equity release plans exist?

There are three main types of equity release that allow you to receive tax free cash from your property so you have more money to live on after you’ve stopped working. Some schemes also provide monthly payments which can help you pay your regular bills.

Lifetime Mortgages

A lifetime mortgage is a loan secured against your home while you retain ownership. You can make optional repayments or you can let the interest roll up. The loan amount and any built-up interest are paid back out of the sale proceeds when you die or move into long-term care. You may be able to ring-fence part of the property as an inheritance for your family. Be aware that when interest rates are high, a lifetime mortgage where the interest rolls up can turn into a significant debt.

Advantages of a lifetime mortgage

  • Age is not a barrier – Many standard loan providers won’t lend to people near retirement age or in retirement.
  • No monthly payments – you can choose whether or not to make regular payments to pay back some of the loan. If you can pay the interest each year then no debt will roll up and compound.
  • Not based on income or affordability – lending is based on your age versus the value of the property
  • Can be used to purchase a property – if you do not meet standard affordability rules or do not want to make interest payments, an equity release plan for a purchase may be suitable
  • Can be used to repay an Interest Only Mortgage at the end of its term – if you are coming to the end of your term and do not have means to repay the loan or do not want to downsize, then a lifetime mortgage may be a good option to consider

Considerations of a lifetime mortgage

  • Reduced inheritance – your family won’t get the full value of your property
  • Means tested benefits may be impacted – you might not qualify due to the loan
  • Fees can be significant – there is a cost of setting up the mortgage.
  • Early repayment charges – if you want to exit the agreement, early repayment fees can be high
  • Interest charges – these can increase the debt quickly.

Drawdown scheme

A drawdown lifetime mortgage offers a more flexible option than simply one lump sum. Drawdown equity release products usually offer smaller lump sums initially with a facility to drawdown additional amounts when required. This means you have a pre agreed facility but only pay or incur interest, once you draw from your facility in the future.

Advantages of a drawdown mortgage

  • Reduced interest charges – you’ll only pay interest when you draw down from your reserve. While funds are still in the reserve, no interest is added. This saves a lot of money in the long run
  • More money left to inherit – your family can keep more of their inheritance because interest charges are lower.
  • Means-tested benefits are impacted less – because you have more control over when you take additional funds, you can arrange your finances so there’s less of an impact on your benefits.

Disadvantages of a drawdown mortgage

  • Higher interest rates – other types of lifetime mortgage may have slightly lower interest rates
  • Drawdown limits – you may be limited by the number of withdrawals you can make per year.
  • Early repayment charges – if you want to exit the agreement early, charges can be significant. However these are often fixed and sometimes drop off after 8 to 10 years

Home reversion plan

With this type of equity release scheme, the provider will purchase all or part of your home in return for a lump sum or regular payments. You will be able to continue to in the property until you die. If you wish to retain part of your property value to pass on as an inheritance, you can choose to sell only a percentage of your home.

Advantages of home reversion plans

  • Retained homeownership – you remain the legal owner of your property.
  • No debt building up – there is no interest to pay, so you do not have a big debt at the end of the agreement.
  • Flexibility – you can take an initial amount, monthly income or a combination of both
  • Access more equity – this scheme offers you the option to sell up to 100% of your property in exchange for cash.

Disadvantages of home reversion plans

  • Age limited – usually only available to over 65s.
  • Slower and more difficult to arrange – providers can be more selective about who they will deal with.
  • Reduced estate value – depending on how much of your property you sell, the remaining inheritance could be much smaller.
  • State benefits affected – it is common for this type of scheme to reduce your eligibility for some state benefits.

Get in touch with Simmonds Mortgage Services.

It’s important to get tailored advice when making decisions about your personal circumstances so you can be sure you are making the right choice about your equity release. We offer unbiased equity release advice to help you explore your options. If you are considering using an equity release service, it’s important to choose a reputable provider regulated by the Financial Conduct Authority (FCA) that can provide a clear personalised illustration of your financial options. 

As with most mortgages, you can expect to pay arrangement fees which will need to be factored into the numbers. In addition, you may also need to pay an additional advice fee if your circumstances are complex and you require specialist legal advice.

There is really no difference between an equity release and a lifetime mortgage - these are two terms for the same product which provides homeowners with a tax free initial lump sum and/or a monthly income using a loan secured against your property. The lump sum can usually be used for whatever purpose you choose, such as making home improvements, traveling or helping out family members to get on the property ladder themselves.

Yes, you can remortgage a lifetime mortgage if you want to search for a better deal. You can ask your existing lifetime mortgage provider if you can swap to a more favourable product or you can seek a new personal illustration from your mortgage adviser who can explain the current options for an alternative equity release product.

It is usual to have a fixed interest rate on lifetime mortgages which does not vary over the lifetime of the equity release contract.

While it is usually possible to pay back a lifetime mortgage, be aware that you may incur an early repayment charge, so make sure you get tailored advice before deciding to repay early.

Many lenders will consider you for an equity release plan once you are over 55.

A no negative equity guarantee means if there is not enough left to repay the outstanding loan when your property is sold, after estate agents’ and solicitors’ fees have been paid, your estate will not be liable to pay any more.

It is vital to asses each scenario individually as any changes to your financial situation may affect means tested benefits, therefore please speak to a financial adviser or qualified mortgage adviser to get the right tailored advice.

Fees can be between £1,500-£3,000 so it's vital to factor that into your calculations when you get a personalised illustration from the lender. These would include legal fees, fees to the lender which can often be added to the loan and also a broker fee. You may also need separate independent legal advice.

Recently the Equity Release Council and the FCA have reviewed equity release plans to ensure these types of products are not financially disadvantageous to individuals in later life. Make sure that your provider is regulated by the FCA to get maximum protection for your assets.

Each equity release service provider has their own way of calculating how much you can borrow so it's a good idea to talk to your equity release adviser. Contact us on 0118 469 3037 for a no-obligation chat about your circumstances.

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