Equity Release is an option available to home owners over the age of 55, who are property-rich but are low on cash.
Equity release plans are designed to enable homeowners who do not have a mortgage on their property (or a small one that has to be paid off as part of the arrangement ) to release some of the equity in order to provide capital or supplement their retirement income.
Some of these schemes involve mortgages (lifetime mortgages) and some involve the sale of the property to a provider in exchange for a benefit (home reversion plans).
Gift to family
If you or anyone you know are considering releasing money tied down in a property, please contact sMighty Mortgage Deals by submitting an Enquiry Form and I’ll search our comprehensive panel of lenders to find Equity Release deals that meet your needs, without leaving footprint on your credit report.
Lifetime Mortgage Explained
Lifetime mortgages are regulated mortgage contracts that are available only to older homeowner over a certain age and where the lender cannot seek full repayment until one of the following events occurs:
– the homeowner’s death
– the homeowner moves to live elsewhere without the reasonable expectation of returning (into residential care or sheltered accommodation)
– the homeowner moves to another ‘main residence’ or sells the property
– the lender exercises its legal right to take possession under the mortgage contract.
Lifetime mortgage options
A– No regular payments of capital or interest required. Interest accrued can be ‘rolled up’ to be paid at end of mortgage
B– Payment of interest required but capital not repaid until end of mortgage
C– Payment of interest and partial repayment of capital may be required, but full repayment of capital not required until end of mortgage
D– Payment of interest required, but borrower has option to convert to ‘rollup’ basis in future (hybrid scheme)
How a lifetime mortgage works
(1) Homeowner raises lifetime mortgage on property
• Mortgage usually on fixed-rate basis
• Lender restricts lending depending on borrower’s age. You can normally borrow up to 60% of property value
• Capital released provides annuity, invested to provide income, or used to meet borrower’s needs
(2) No regular or monthly payment of capital or interest
(3) Property is sold when borrower dies, moves or goes into permanent residential care
(4) Original loan plus rolled up interest over the mortgage term repaid to lender
Drawndown lifetime mortgage
A lifetime mortgage can be arranged on a drawdown basis. The lender agrees a maximum lending limit and the borrower can draw down lump sums as they wish, subject to a minimum withdrawal.
Interest is charged on the amount outstanding, but is rolled up rather than paid each month.
The benefit of this type of loan over a standard lifetime mortgage is that interest is calculated only on the loan amount that has been drawn down. For example, a borrower can choose to take annual income by drawing down capital, thus maintaining control over the speed at which the debt builds up.
According to the Key Retirement Market Monitor (Key Retirement, 2016) 67 per cent of equity release sales in 2015 were on a drawn down basis.
Home reversion scheme
Home reversion scheme is an alternative to a lifetime mortgage. The homeowner sells all or part of their property to the lender in return for a capital sum, an income or both.
The original owner(now the reversion occupier) then enters into a lifetime lease agreement with the provider/lender usually at a nominal annual rent which guarantees him lifetime occupation. Under the arrangement, the reversion occupier is entitled to occupy at least 40 per cent of the land as or in connection with a dwelling.
The arrangement specifies that the right to occupy the property will end:
- when the occupier dies or moves into residential care on a permanent basis
- after a specified period of at least 20 years from the date of the arrangement.
The capital raised can be used as the homeowner wishes and because it comes from the sale of a main residence, is not subject to tax
So if you are 55 or over and you have a property from which you want to release some equity to improve your retirement standard of living, get in touch to find out the best equity release deal available for you.