Homeowners aged above 55 years old can access cash tied up in their homes using a method known as equity release. It comprises a range of products that allow homeowners to take the money released in small regular amount, a lump sum or a combination of both.
It is a mortgage designed to last throughout the lifetime of the borrower and is secured against a homeowner’s property. The provider uses a lifetime mortgage calculator to determine the mortgage amount based on the age of the younger homeowner and the value of the home.
Lifetime mortgages don’t require repayments thus, the balance is compounded yearly or monthly and increases over time. Your provider will help you determine this amount using a lifetime mortgage cost calculator.
The final payment of the mortgage is obtained after the sale of the house once the last owner passes or relocates to long-term care. Lifetime mortgage providers offer two types of this mortgage; the interest roll-up and the interest-only mortgage.
Here is a short video that explains how the lifetime mortgage works.
You can use the calculator below to find out how much money you could get tax-free.
The mortgage allows the homeowner to get a lump sum amount or a regular amount whose interest is added to the loan. As such, the homeowner does not make monthly payments and the amount borrowed (including the interest) is repaid after the property is sold. The provider determines the actual amount using a lifetime mortgage repayment calculator.
This lifetime mortgage ensures the homeowner obtains a lump sum and pays monthly or ad-hoc payments. Interest-paying mortgages reduce the impact of the accumulating interest and the amount borrowed is repaid once the home is sold.
Interest only mortgage was developed to help homeowners near retirement raise tax-free money. The provider uses interest only lifetime mortgage calculator to determine the interest due on withdrawal.
A lifetime mortgage calculator or home reversion calculator is used in estimating the maximum release available from the property. Lifetime mortgages are calculated based on these criteria:
The home belongs to the homeowner throughout the life of the loan, and he is responsible for maintaining it. However, interest is charged on the amount borrowed and is repaid or added to the total loan amount.
The remaining proceeds after repaying the mortgage are distributed to the beneficiaries. The borrower can ring-fence part of the property as inheritance to the family.
However, if the money is not enough, the homeowner’s beneficiaries repay the additional amount that exceeds the value of the home from the estate. To protect your beneficiaries against this, the homeowner can sign up for lifetime mortgages with a no-negative-equity guarantee.
The calculator applies when the homeowner takes out a home reversion plan. The amount released for this plan is based on:
It occurs when the homeowner sells a percentage of property to a home reversion provider in exchange for a lump sum amount (tax-free). As a result, the homeowner becomes a life tenant of a fixed percentage of land.
Once the homeowner dies or moves to a care centre, the home reversion plan is paid off. The sale proceeds are divided between the home reversion provider and the homeowner in pre-determined ratios.
When applying for the mortgage, the borrower can borrow a lump sum amount at the beginning or a lower initial loan amount that has a drawdown feature. This option is ideal for people who want to take small regular amounts, e.g., to top up the existing income.
Drawdown equity release is the most common form of lifetime mortgage as it allows borrowers to withdraw their tax-free cash in stages instead of a lump sum amount.
The provider uses a drawdown mortgage calculator to determine the initial cash reserve based on the homeowner’s age and the sale value of the property.
The other amount remains in a reserve facility, interest-free until the homeowner withdraws for future use. The drawdown mortgage calculator is also used to calculate the interest, which is usually charged on the money withdrawn.
If you are signing up for an interest roll-up mortgage, the amount owed grows fast and may exceed the value of the home unless the mortgage offers no-negative equity guarantee. The lifetime mortgage repayment calculator should help you estimate the actual amount.
Mortgages that have variable interest rates are also not ideal as the interest rate increases significantly. The homeowner should use the upper limit when estimating the final amount owed when utilising the lifetime mortgage cost calculator.
Also, the lender expects the homeowner to maintain the property in good condition, i.e., within the constraints of reasonable maintenance. Some homeowners usually allocate some money to do this.
Apart from the valuation costs and a subscription fee for signing up for the mortgage, the homeowner should factor in crucial these costs when calculating the final cost using a lifetime mortgage cost calculator:
Yes, equity release can be used to pay for care. Equity release is a viable option for homeowners who have already paid off or nearly paid off the mortgage. However, seniors should not rely on equity release to fund the whole cost as repayment is triggered if the homeowner moves out for long-term care.
If the borrower consists of a couple and one of them moves to a care centre, then he would use the lifetime mortgage as the property will not be sold to repay debt until his partner also moves to the care centre or dies.
Yes. The homeowner can move to a suitable alternative property, which the provider would approve if he were setting up a plan for a new client.
The provider may disapprove the move if the property can’t be sold in an open market. For example, homes constructed on a retirement complex are difficult to sell.
The type of construction also affects the provider’s decision to allow or disapprove the move.
No. Static or mobile homes do not provide adequate security for regular loans or an equity release mortgage.
The provider has to be satisfied that the property can be re-sold in the open market. It explains why the providers ask questions like the age of the property and the type of construction in their application forms.
Specific types of construction have had structural defects in the past compromising their value and attractiveness to buyers. As such, properties not accepted by equity release providers include: