There are now numerous options to release property equity for that once-in-a-lifetime holiday Safari. Remortgage, equity mortgage, lifetime mortgage or a home reversion scheme, there are numerous options depending on your status and age. That dream holiday could be just around the corner!
While some areas of the UK equity release market are still in their relative infancy, there is no doubt that the sector will show huge growth in the short, medium and longer-term.
Life expectancy continues to improve, our working lives have been extended, but the cost of living continues to rise – releasing equity from your property could help plug financial gaps.
If going on a once in a lifetime Safari holiday for you and your family excites you, continue reading to get all the nitty-gritty details about how you can do this.
What Are the Options for Equity Release?
There are numerous options when looking to release equity in your home, which include traditional remortgage, equity mortgage, home reversion scheme and a lifetime mortgage.
In theory, these four options can be split into those applicable to the under the 50s, the remortgage and equity mortgage option, and over 50s, home reversion schemes and lifetime mortgages.
Despite the fact that the UK demographic is changing, we are working longer and living longer; there are still limited options, especially for equity release when it comes to the over 50s. However, things are changing!
Do I Need to Pass On Affordability Test to Release Equity?
If we look at the four options available, the remortgage option and the equity mortgage option both involve regular payments. As a consequence, they will still require an affordability calculation to see whether you are eligible.
When it comes to the over 50s market, the lifetime mortgage and the home reversion scheme do not involve regular payments, and therefore no affordability calculation is required.
This is useful because many older homeowners will experience a drop in their income as they retire and live off pensions and investment income.
How Does a Remortgage Work?
A remortgage is a very simple concept whereby, for example, let’s say you have a £50,000 mortgage remaining on your £250,000 property. All things being equal, the maximum LTV ratio for a remortgage could be as high as 80%.
However, if we work on a 60% LTV to be cautious, this equates to a remortgage of £150,000. You would then use £50,000 of this to repay the existing mortgage allowing you to withdraw £100,000 while also leaving £100,000 in equity in your home.
Regular repayments would be required which would traditionally involve an element of interest and an element of capital repayment. At some point, the mortgage will be paid off, and the property would be debt-free.
How Do Equity Mortgages Work?
Equity mortgages are structured to lay behind an existing mortgage on a property with what is known as a second charge. When you acquire a property with mortgage funding, the lender will take charge over the property in the event that you default on repayments.
The second charge placed with an equity mortgage is effectively against the equity you have in your property but is second in line behind the first charge.
In the event that you defaulted on your equity mortgage, the lender would use their second charge, and the property would be sold.
The proceeds used to repay the first mortgage and then remaining proceeds used to repay the equity mortgage, with any surplus returned to the homeowner.
In effect, you would have two mortgages running at the same time and therefore, two monthly payments. When carrying out a full affordability check, this would take into account the cost of the first mortgage and the cost of an equity mortgage.
Why Not Just Remortgage Rather Than Take Out an Equity Mortgage?
There will be occasions where an existing mortgage has significant early repayment penalties which make it uneconomical to remortgage and pay this off.
There may also be scenarios where it is impossible to match the interest rate and the terms on the first mortgage. Rather than remortgaging the whole property on less favourable terms, it makes sense to retain the low interest earlier mortgage and take out an additional one to release the equity.
What Is a Lifetime Mortgage?
A lifetime mortgage is a kind of hybrid between a traditional mortgage and an equity release scheme on a debt-free property. There are no regular repayments with a lifetime mortgage; therefore, no affordability test is required.
The majority of lifetime mortgages have a minimum age of 55, and the LTV ratio will depend upon the age of the homeowner(s). So let’s say for example you have a property worth £200,000 and a lifetime mortgage LTV offer of 60%.
This means that you can withdraw £120,000 in equity from your property. Rather than regular repayments the interest is rolled up and paid off at the end of the term together with the initial mortgage capital.
Under the terms of a lifetime mortgage, the homeowner will have rent-free accommodation until they either move into full-time care or die.
At this point, the property will be sold, the lifetime mortgage, together with rolled-up interest, would be repaid, and any surplus returned to the homeowner or their estate.
What Is a Home Reversion Plan?
The home reversion plan is one of the more controversial elements of the equity release market, but we have seen an improvement in terms and greater competition in recent times. With a home reversion plan, the third-party (perhaps we should call them an investor) would acquire a percentage of your property in return for a cash payment. The problem is that they would only pay between 20% and 50% of the market value of the share in your property.
For example, if you had a property worth £200,000 and you were looking to sell a 50% share, then you would expect to receive £100,000. Unfortunately, due to the discount to the market price, the home reversion company would only give you between £20,000 and £50,000 for a 50% share in your property.
There lies the problem, overnight their share in your property is worth £100,000, and they have an immediate paper profit. However, this arrangement also allows rent-free accommodation for the homeowner for the rest of their life or until they move into full-time care.
When the property has been vacated, it would be sold with the home reversion company receiving a share of sale proceeds equal to their share in the property.
In this instance, if the property was worth £200,000 at the point of sale, they would receive £100,000. There is a carrying cost to the investment as well as the cost of free accommodation for the homeowner, which should be taken into account.
There is no doubt that recent years have seen an improvement in competition amongst equity release companies. Whether looking at a remortgage, equity mortgage, home reversion scheme or a lifetime mortgage, more lenders are now joining the sector.
As a consequence, these options will become more competitive, going forward to the benefit of all homeowners.
So, if booking a once in a lifetime Safari holiday is on your bucket list, Equity Release should certainly form part of your plans.
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.