Equity release for that once-in-a-lifetime holiday to the Maldives is now within reach for many people. Remortgaging, equity mortgages, lifetime mortgages and home reversion schemes are just some of the options now available.
It is safe to say that the equity release sector has grown significantly in recent times. As life expectancy improves, our working lives are extended, and the cost of living continues to rise, the need for equity release will likely be greater going forward. So what are the options?
What Is Equity Release?
Before we look at the options for equity release in detail, to pay for that dream holiday to the Maldives, let’s remind ourselves what equity release is. In its purest form, it is simply a means of exchanging equity in your property for cash.
This is possible by a variety of means as detailed above, but there are various pros and cons to each option.
Does Age Make a Difference for Equity Release?
The simple answer is yes. Remortgaging and equity mortgages tend to be available for those under the age of 50/55. Lifetime mortgages and home reversion schemes tend to be more focused on older homeowners, often with a minimum age of 55.
If you delve deeper into the traditional mortgage/remortgage market, you will find there is a limited supply of mortgage funding for those over 50. This is almost certain to improve as demographics across the UK continue to change.
Would I Need to Pass an Affordability Test?
With remortgages and equity mortgages, as both require regular payments, you would need to pass a mortgage affordability test.
As we will cover in a moment, with lifetime mortgages and home reversion plans there are no regular repayments and therefore no need for a mortgage affordability test.
How Does Remortgaging Work?
Remortgaging is probably the simplest form of equity release with the following example showing the calculations. If you have a property which is worth £250,000 and a £50,000 mortgage, then you have £200,000 of equity in your property.
When looking to remortgage, you would simply look at the LTV ratio in the market, traditionally a maximum of 80%, and work out your maximum remortgage which on this value is £200,000.
If you are looking to raise the maximum funds available, then you would apply for an 80% LTV mortgage, raising £200,000 and use £50,000 to pay off your initial mortgage. In effect, you have released equity of £150,000 in this instance.
What Are Equity Mortgages?
The equity mortgage option is fairly popular, although there are various conditions in which it is a more favourable option. If we take the same example above of property worth £250,000 with a £50,000 mortgage, there is the option to release an additional £150,000 of equity.
Rather than remortgaging the original £50,000 mortgage, this would remain in isolation. You then take out an additional equity mortgage for £150,000.
There are numerous reasons why you would look to take out another mortgage as opposed to remortgaging the whole property such as:-
- Significant repayment penalties on the original mortgage
- You weren’t able to replicate the attractive headline interest rate
Obviously, as you are taking out a second mortgage upon which there will be repayments, you would need to pass on affordability test.
However, in this instance, the affordability test would take into account repayments for both mortgages to see whether they were affordable.
What Is a Lifetime Mortgage?
Lifetime mortgages tend to be available for those of minimum age 55 although some lenders will vary slightly. There also tend to focus on mortgage-free properties. The initial process is similar to a traditional mortgage, but there are no interest payments.
Interest payments are rolled up on a monthly basis and repaid at the end of the term together with the initial mortgage capital. As there are no regular repayments, with interest rolled up, there is no need to undertake an affordability test.
Traditionally the interest rate on lifetime mortgages tends to be higher than the average traditional mortgage. However, an increase in demand and competition within the sector has brought average interest rates down to around 4.91% with further savings likely in the future.
This is all good for those looking at equity release.
What Is a Home Reversion Scheme?
One of the more controversial tools available to those looking to release equity, a home reversion scheme would see a buyer (as opposed to a lender) acquiring a percentage of your property. Unfortunately, there will only pay between 20% and 50% of the actual market rate.
So, if you have a property worth £100,000 and you are looking to sell a 50% share, this would have a market value of £50,000. A home reversion company would only pay between 20% and 50% of the market value which equates to between £10,000 and £25,000 – dependent on age, etc.
The home reversion company would sell their share when the property is sold, on the death of the homeowner or move into full-time care, and receive a share of proceeds (in the above example 50% of net sale proceeds). The balance will be returned to the homeowner or their estate.
Do I Pay Rent With a Lifetime Mortgage/Home Reversion Scheme?
One of the carrying costs associated with lifetime mortgages and home reversion schemes is the fact that the homeowner will live in the property rent-free until death or they move into full-time care. This is a cost which is often overlooked when calculating the “real” cost of such equity release options.
Are There Restrictions Spending Equity Release Proceeds?
As long as you pass the affordability test for your remortgage/equity mortgage, then it is up to you how you spend your funds, in this case, a once-in-a-lifetime holiday to the Maldives!
The situation is much simpler with lifetime mortgages and home reversion schemes in that there are no affordability tests and no restrictions on how you might spend your money.
When you consider that for the majority of people, their home is their largest asset and largest investment, property equity can build up over the years.
So, what better way than to use this equity to live the life, live the dream, book your dream holiday to the Maldives and do those things you have always wanted to do?
How Can Equity Tree Help?
Here at Equity Tree, we have partnered with some of the UK’s leading Equity Release broker companies.
They have already helped thousands of people release equity already, and they can do the same for you.
Choosing an independent adviser means they won’t recommend a scheme unless they are sure it is in your best interests. Their advice is also regulated by the FCA, which gives you an additional layer of protection.
If you would like to speak to one of these equity release companies, click on the below and answer the questions.