Equity release is often advertised as a product for over 55s, but the truth is anyone who owns a home can release equity. They can do so through remortgage, secured loan, a 25 year fixed mortgage, or lifetime mortgage. Lifetime mortgages are the only product that is on the market for the over 55s. It is important to define what equity release schemes are so you can fully understand how they may be of help to you.
Defining Equity Release
An equity release takes the current property value of your home minus any outstanding mortgage you have on it. If you have a 25 year fixed mortgage with £30k left on it and a home value of £250,000 it means you have £220k left in home equity. Someone who does not have a loan on their property would therefore own it in full and would have £250k in equity.
With equity in the home, you can release some of it into cash. By taking out a loan like a remortgage, secured loan, or lifetime mortgage you can receive a cash lump sum in return for a loan with compounding interest.
Calculating the Available Funds
With the different products on the market, meant for different consumers, there are different ways to calculate the funds. Secured loans and remortgage are similar in that you pay a monthly instalment. This monthly payment combines the annual percentage rate broken into a monthly rate, plus a percentage of the capital sum lent. In this way you pay back the loan and pay off the interest as it accrues. At a certain point in time such as 10 to 30 years the loan is repaid and you again own your home free and clear. During that time you accessed cash that you needed.
An equity calculator in this case would need to look at the current value, the current interest rates, and the length of term you want the loan to be outstanding. The result would give you a monthly repayment amount. This is what you would need to send to the mortgage company each month to keep the loan in good standing. If you cannot make the payment amount because it is too high you cannot get the loan.
The 0ver 55s Equity Release
A person who is over 55 would be better off with a lifetime mortgage. This is due to repayment issues. Someone nearing or in retirement will not have an income to make monthly payments. A lifetime mortgage does not require you to make payments with equity release schemes.
Instead, the capital sum plus compounding interest is paid in full at your death. It can also be repaid before death if you decide to move from the home or need to move for long term care. Whenever the home is no longer your main residence the lifetime mortgage needs to be repaid. Often this means a home sale to pay it back.
For the equity release calculation your age and the property value are necessary. Your age determines the life expectancy you have left. A younger person would live longer, thus they receive a lower lump sum of tax free cash that was once equity in the home. An older person, living for a shorter amount of time would unlock more equity in a tax free lump sum.
There are other products such as enhanced which takes into account an illness you might have. Another is a drawdown lifetime mortgage where you can take only what you need and draw on an account as you need the funds.
The calculation creates a loan to value percentage. For example, the Aviva Max Plan offers 30% in loan to value percentage as a maximum if you are 65 years old. This means you obtain 30% of the home value as a tax free lump sum. If the home is worth £200,000 then you would receive £60,000 as the maximum amount.
Summing up the Values
Now that you understand equity release products for homeowners, it is time to consider what the equity release calculator has provided. The value is based on the information you input and the time of equity release schemes you are interested in. It is an estimate of the funds you may be able to access. It is not a ‘set in concrete’ value. You need to speak with an independent adviser who can assess current market products and find the best equity release product for you. They will double check the calculation to let you know if it is a possibility or not.