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how much can you borrow from equity release

How much can you borrow from equity release

Equity release is borrowing cash from a provider against your home. Home reversion plans and the lifetime mortgages are the main types of equity release products in the UK.

However, you need to be careful always before taking any equity release. Look at the alternatives to equity release before consulting an equity release council get to know what is equity release and the pitfalls of equity release.

1. What is equity release?

Equity release is getting money from a provider against the actual value of your home.

This means that you get a percentage of cash while still living at the house to sustain your expenses. Equity release ensures that you don’t have to downsize and move to a new neighbourhood. You can still enjoy the lifestyle you are used to since equity release ensures that you have enough cash for all your income.

You cab read more about what equity release is and how it works here.

2. How much can you borrow from equity release?

Getting an equity release mortgage is measured by the value of your home and how old you are.

The amount of money you can release from your house depends on two things how old you are and the value of your home. The providers need to calculate and make an estimate of how you will pay them and after how long.

Ideally the older you are, the more money you can get.

In calculating the amount, you will receive from the equity release the provider makes a combination of your age and the value of your property.

The lenders typically charge 5% interest on the amount of money you release. However, this varies from provider to provider which is why we always recommend that you take financial advice.

The amounts that you can get from a Lifetime mortgage or Home Reversion scheme differ.

Also, most of the lenders allow you to get up to 50% of the value of your home. Before taking an equity release, you should consider all the other options because equity release is a financial decision that can affect your whole family.

Home reversion plans – How much can you borrow?

In this plan, you sell a part of your home to the provider. This does not mean you have to stop living in your house.

Most home reversion plans tend to have a higher minimum age for you to apply for the equity release. They allow you to apply for equity release when you are between 60-65 years of age.

If you sell 40% of your house to a provider the money you get is 40% of your house value at the current time. A disadvantage to using this plan is that you end up missing out on the price of your home if it increases. For younger customers they have less discount of around 20% and the value can go up depending on age.

It can go up to around 60% if you are an older customer. For example, if the value of your home is around £40000 and you sell 40% of your home. The money you can get can range between £32000 and £96000 depending on your age.

Lifetime mortgage – How much can you borrow

A lifetime mortgage is the most used applied type of equity release plan. This is because you can borrow a certain amount of money from your home depending on the value of your home. The equity release discount depends on your age.

If you are older, you can get a higher discount of around 60%, as compared to applying for release when you are younger, you can get a lower discount of around 30% and below.

This means that if your house is £400,000 you can get an amount of between £120,000 and £240,000 depending on your discount and age. You can always opt for a drawdown lifetime mortgage instead of taking the whole amount. This will ensure that you release the money only when you need it.

3. Equity release Calculator

The best way to see how much you could borrow will be to use an equity release calculator.

By inputting your age and house value the calculator can give you a good indication, straight away, about how much you could borrow.   You would then need to speak to an equity release specialist to see what the current interest rates would be on the type of equity release mortgage that you want.

Try the calculator below and see how much you could receive.

4. Can you apply for equity release if you have a mortgage?

People tend to ask if they can apply for any equity release if they have a mortgage. Moreover, yes they can, all they have to do is to pay off the outstanding mortgage loan after the release of equity.

This will ensure that you own the house and you don’t have any outstanding debts.

5. Alternatives to equity release

Before choosing whether this is the right route for you, there are alternatives to equity release that you can consider. Examples of this include:

a. Downsizing

You can always opt to downsize and move to a smaller less expensive place. You can start looking for a neighbourhood that suits your needs and is to your liking. However, first, talk to your family about it and be sure that you will be comfortable in the new neighbourhood.

b. Look for benefits

Apply for benefits in your area as this will help you gain some income. You will be amazed at how many discounts you can get if you took advantage of the age benefits. The discounts you get can help you save up and be able to cover your expenses.

c. Use your savings and investments

Before applying for an equity release, you can always consider using your savings and your investments. You can take a vacation using your savings and not have to worry about blowing up your mortgage. This will allow you to live something for your kids and beneficiaries.

6. Pros and cons of equity release

There are a number of advantages and pitfalls to equity release.  We have noted some of these below.   In addition, here is a useful video that explains what some of the advantages and disadvantages are.

Pros

a. You still live in your home

An advantage of equity release is that you still live in your home even after taking the money from the provider. This reduces the stress of having to move to a less expensive house and downsizing. Since you still want to remain in the same neighbourhood and around your friends.

This is always a great option since you get enough cash to sustain you and take care of all your expenses. You still live a comfortable life you are used to without any stress of moving and downsizing.

b. Nobody monitors how you use the money

The equity release money is yours to keep and do whatever you want. Nobody monitors what you are doing with the money you get from the equity release.

You can opt to help out a family member stuck financially. You can choose to go out on vacation and enjoy the places you’ve always dreamed of visiting. If you don’t like how your home looks, you can opt to upgrade your home and have your dream house.

c. You can use the money when you want

You don’t have to ask for the whole amount at a go since you can use the drawdown lifetime mortgage. Drawdown lifetime mortgage allows you to get money from your provider when you need it and want to use.

This limits you from overspending, and you only use the money when you are in need. Additionally, interest is charged on the money that you have released; this is a great way to ensure that your interest bills don’t build up.

Cons

a. It reduces the inheritance

Getting an equity release to support you will always mean that the value of your home will depreciate and your family will have a smaller inheritance. Since a part of your home belongs to the provider, this means that your home will be sold to pay off the debt.

This always ends up costing your beneficiaries, and you live them without any assets. Be careful on the contracts you sign when asking for equity to ensure that you have secured a percentage of your home to your family.

b. You miss out on price rises

The real estate market appreciates with time, and you could miss out on the price rise.

The home reversion equity plan requires you to sell a part of your home to your provider. When your house is sold in the future, you end up losing and missing out on the price changes in the real estate market. If your family was expecting that money to help them out in a predicament, they might end up feeling frustrated.

c. Interest charges can build up

If you get a long time loan, the interest charges end up building up to a large sum. Sometimes you might end up finding that you owe the providers more than the value of your home.

However, a reputable provider has the no negative equity release guarantee which means that you can never owe them more than the value of your home. This ensures that your family don’t have to pay unnecessary debts when you move to a nursing home or when you die. This makes sure that your family will have an easy time transitioning from everything.