Equity Release Calculator
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Equity Tree’s Equity Release calculator is an estimate based on the information you have provided. A full Equity Release quote can be provided by speaking to one of our Equity Release specialists.
Equity release Calculator
Equity Tree Equity Release Calculator Explained
If you are looking to release equity in your property, then you will find our equity release calculator very easy-to-use. You simply enter your age, the value of your property, any outstanding mortgage, and we will calculate an indicative level of equity release for your situation.
Despite the fact that life expectancy in the UK has improved and our working lives have been extended there is often limited access to traditional remortgages/equity release mortgages for the over 50s. This created a vacuum for older homeowners looking to release equity which has been filled by companies offering lifetime mortgages and home reversion schemes. So, what do you need to consider when looking towards equity release as an older homeowner?
Before we take an in-depth look at equity release and the various aspects to consider, it is worth reminding ourselves of the indicative equity release percentages for different age groups. All things being equal, the equity release figures for those over 55 are as follows.
Equity release percentage
Between 55 and 60
Between 60 and 65
Between 65 and 70
Between 70 and 75
Between 75 and 80
We will use the following example to give you an idea of the calculation:-
- Property value: £500,000
- Outstanding mortgage: £100,000
- Homeowner age: 55
Looking at the above table, you will see that a homeowner aged 55 looking to release equity would, in theory, be able to release 24% of the net value of their property.
The calculation is as follows:-
£500,000 – £100,000 = £400,000 x 24% (age) = £96,000
This is an estimated result because the actual figure may vary slightly depending on the homeowner’s individual circumstances/criteria of the lender. However, these figures will give you an idea of what to expect.
Different Types of Equity Release
There are numerous ways in which you can release equity from your property, some of which are open to the over 50s and some of which aren’t. We will focus on opportunities for the over 50s which are predominantly lifetime mortgages and home reversion schemes. Our equity release calculator is only applicable for lifetime mortgages as the structure of home reversion schemes is very different.
Before we delve into the details surrounding lifetime mortgages, it is probably useful to look at the process undertaken by those looking to release equity.
Get Your Property Valued
You may have a rough idea how much your property is worth, in your mind you may have already spent the equity release before it is even approved, but the first thing to do is get your property valued. This will give you an idea of the gross value of your property and depending upon whether you have an outstanding mortgage, the net equity value.
Speak With a Lifetime Mortgage Provider
Once you have an idea of the net equity in your property and the level of equity you want to release, it is now time to speak with a lifetime mortgage provider. Many people prefer to use mortgage brokers to do their negotiating as brokers tend to have a wide range of contacts and access to attractive deals which may not even be in the public domain.
Also, the mortgage industry can be very complicated unless you know exactly what you are looking for!
Arrange a Lifetime Mortgage
Assuming that you are eligible for a lifetime mortgage, and the figures stack up, there is every chance that your application will be approved. It is worth noting that with a lifetime mortgage, there are no monthly repayments and interest/capital is repaid in full at the end of the term.
As with any traditional mortgage, the lender will have a charge over the property, but it is still owned by the borrower. When the mortgage is eventually repaid this charge will be released, and the homeowner/their estate will be free to do whatever they please. While there is an outstanding mortgage, the charge will prevent an outright sale unless approved by the lender.
Sell a Property and Repay the Mortgage
The structure of a lifetime mortgage means that there are no regular interest payments, these are rolled up and paid off at the end of the term, together with the original capital. The homeowner will have rent-free accommodation until they die or move into full-time care. Each of these scenarios would result in the property being sold, the mortgage repaid, and any surplus funds returned to the homeowner/executors.
While this is a very basic timeline for a traditional lifetime mortgage, it does give you an idea of what to expect.
We will now take a look at the criteria for lifetime mortgages:-
- Minimum age between 50 and 60 dependent upon lender’s criteria
- Minimum property value circa £80,000
- Minimum equity release circa £15,000
- The property must have a relatively low mortgage/mortgage-free
If you fulfil the above criteria, there is every chance that you will be eligible for a lifetime mortgage although there are some other issues to consider:-
- The property must be well maintained
- No outstanding major building works
- Pre-construction properties are not eligible
The idea is simple, in order to maintain the value of the property going forward (to repay the rolled-up interest and initial capital) it must be in good repair. However, as we saw in the initial age group drop-down table, lifetime mortgage companies will hedge their bets to a certain extent by offering relatively low levels of equity release for younger homeowners.
This is because over time, the rolled-up interest element could grow significantly. Therefore lifetime mortgage companies need to maintain a safe buffer between the total cost of equity released and the value of the property (adjusted for outstanding mortgages).
We will now take a more in-depth look at how lifetime mortgages work as well as some alternatives.
Lifetime Mortgages and Affordability Calculations
When you see the term “mortgage”, you will probably assume that monthly interest/capital repayments will be part of the agreement. However, if you take a step back and look at this from a distance, for many, the concept of withdrawing equity is to improve their cash flow not to take on another debt with regular repayments.
The whole idea of a lifetime mortgage is to improve cash flow which is achieved by rolling up interest until the mortgage comes to an end. As a consequence, as there are no regular repayments, there is no need to carry out an affordability calculation.
This is a very important point because many older homeowners, who have perhaps experienced a drop in their income, would likely fail the affordability test for traditional remortgages/equity release mortgages. However, there is a degree of flexibility when it comes to lifetime mortgages.
If you so choose you could either decide to make regular interest payments against your lifetime mortgage, thereby reducing the impact of rolled-up interest, or make regular capital repayments. The capital repayments would reduce the level of your original mortgage, leading to a drop in interest charges and ultimately a lower repayment total when your lifetime mortgage comes to an end.
While these options are not necessarily relevant to the majority of equity release applicants, there may be situations where an improvement in finances means that they have additional surplus capital.
One factor which is often ignored is the hoped-for level of capital appreciation on your home in the longer term. So, what you lose in terms of rolled-up interest at the end of your mortgage may be at least partially (or even fully) offset by an increase in the capital value of your home.
Can You Stagger Equity Release?
In a sign of the times, competition in the equity release market for older homeowners has seen the introduction of a staggered equity release option. This basically means that you can arrange a lifetime mortgage but the only drawdown the money as and when you need it. As a consequence, you will only pay interest on each drawdown from the date that you actually receive the funds.
If you arrange a continuous drawdown facility, then you will pay less interest on the withdrawals closer to the end of your mortgage. It will obviously depend upon the level of funds you have taken as a whole, and the frequency of drawdowns, but this can lead to very helpful interest savings.
It has to be said that the majority of lifetime mortgages involve lump-sum payments, but for those looking to supplement their income in the longer-term a staggered equity release may be the best option.
Interest Charged on Lifetime Mortgages
As we touched on above, you should expect to pay a premium over and above traditional mortgage interest rates although the situation has improved of late. At the end of 2019, the average lifetime mortgage interest rate stood at 4.91%, which is still higher than the traditional mortgage rate, but the gap is definitely reducing.
Looking longer-term there are two specific issues to take into consideration:-
Increase in Demand
There is no doubt as the demographic of the UK continues to change; we are all living longer and working longer, there will be more demand for equity release from older homeowners. In 2019 the equity release market for older homeowners was worth a staggering £4 billion, and this is expected to show more growth in the short, medium and long-term yet.
It is also worth noting that UK base rates have been at or around their historic low for over a decade. Many experts believe there is limited upside potential in short to medium-term. Therefore, this will influence the interest rate on lifetime mortgages in the short term.
Might low interest rates tempt even more people to consider releasing equity from their property?
Increase in Competition
The fact that the average lifetime mortgage interest rate has fallen to 4.91%, a historic low, also reflects the growing level of competition in this area of the market. Many people forget that the average UK property is now valued well in excess of £200,000. If these properties were bought back in the 1980s/90s, there is every chance they are mortgage-free and made up wholly of equity.
As a consequence, we will likely see new entrants to the market in the short, medium and long-term. At this point, it is also worth noting that the interest on lifetime mortgage (indeed any mortgage) should be considered in relative terms.
The average rate for a lifetime mortgage is currently 4.91% with UK base rates at 0.1% but when base rates eventually increase, lifetime mortgage rates (and lending rates in general) will also move higher.
Are Lifetime Mortgages Regulated?
As we touched on above, there are two main types of equity release schemes for older homeowners. These are the lifetime mortgage (which we have covered in detail) and what are known as home reversion schemes (we will come to those in a moment). Historically there appeared to be a lack of regulation in this particular area of the market and a disappointing level of transparency.
It would appear that some older homeowners who signed up to various lifetime mortgages/home reversion schemes were not totally aware of the structure and as a consequence, the long-term impact on their finances. However, thankfully things have changed!
Equity Release Council
The Equity Release Council is the official industry body which represents lifetime mortgage and home reversion scheme providers. While it is there to represent the industry, it is also a very useful information portal for those looking to release equity from their property.
In many ways, the council acts as a buffer between those active in the sector and regulators. If you check their website, you will see an array of information regarding recent regulations, new recommendations and the code of practice for members. This much improved regulatory structure together with greater transparency, will no doubt help the sector going forward – rebuilding trust with the general public.
Ultimately the equity release sector comes under the control of the FCA, which is the main regulator for the UK financial sector. As the sector expands and demand for services grows, we are likely to see a number of hybrid equity release funding tools emerge. As a consequence, the regulatory structure for the sector as a whole will become even more important.
Alternative Equity Release Plans
We have already touched on home reversion plans in passing, which are for many older homeowners the only real alternative to lifetime mortgages. So, what do they entail?
What Is a Home Reversion Plan?
A home reversion plan is a means by which a homeowner can sell an element of their property to a third-party in exchange for a cash payment. The basics are relatively straightforward, but as with any financial transaction, the devil is in the detail.
The first action is to value your property and decide what share of your home you would like to sell to a home reversion plan provider. This can be a tricky decision for many homeowners who may prefer to leave a significant element of their property as an inheritance for their children. This decision will also depend upon the level of funding required.
One of the more controversial elements of home reversion plans is the discount which is applied to the market value of your property. Depending upon your age, a home reversion company would pay between 20% and 50% of the market value for a share of your property.
So for example, if you have a property worth £200,000 and were looking to sell a 50% share, you would reasonably expect to receive give-or-take carrying costs, circa £100,000. In reality, you would receive between £20,000 and £50,000.
It is worth noting that while the discount may be disappointing for many people, the homeowner will be allowed to live rent-free in the property until they die or move into full-time care. In either of these scenarios the property would be sold, the home reversion company receive their share of net proceeds with the balance going to the homeowner/their executor.
When a home reversion company acquires a stake in your home, they cannot call in their investment early as the conditions are set in stone. So, while they may well benefit from capital appreciation in the longer term, the investment would be tied up until the homeowner dies or moves into full-time care. This could be anything between 10 and 40 years or even longer.
Buyback a Share in Your Property
On occasion, the finances of a homeowner may change dramatically, and they may be in a position to buy back the home reversion company’s share of their home. However, there is one factor which needs to be considered before proceeding. The option to buy back part or all of the home reversion company’s investment will be valued at market value.
Therefore, in the above example, assuming the value of the property remained the same, it would cost you £100,000 to buyback a 50% share for which you would have received between £20,000 and £50,000.
It is very easy to dismiss home reversion plans as uncompetitive when, in reality, they have various carrying costs as well as a degree of lost rental income by offering long-term rent-free accommodation to the homeowner. As we mentioned above, demand for equity release services for older homeowners is certain to increase going forward, and this will inevitably lead to more competition.
Might it be possible that the traditional 20% to 50% discount rate used by home reversion companies will improve as competition grows?
Reasons for Releasing Equity
There are many reasons why older homeowners may look to release equity in their property. When you bear in mind that some of these properties may have been bought in the 1980s/90s or even before there is a good chance they could have built up a significant level of equity.
Some of the more common reasons for releasing equity include:-
Repay Existing Mortgage
As we touched on above, unfortunately, the mortgage industry has, to a certain extent, failed to keep up with the changing demographic of the UK. Life expectancy is now greater, our working life has been extended, but the cost of living continues to go up.
So, many older homeowners might look towards equity release as a means of paying off their existing mortgage. As we have covered above, the more popular equity release options available to over 50s do not require monthly repayments.
Funding Home Improvements
In many ways releasing equity from your property to fund home improvements can if managed correctly, become a self-fulfilling prophecy and enhance the value. For example, let’s assume that you withdrew £30,000 in equity to fund an extension of your property which increased the value by £60,000 that would be an impressive return.
These returns may seem extravagant, but if you do your research, you will see that they are actually achievable.
Boosting Regular Income
Equity release can be a very useful way to raise capital for those in retirement and perhaps experiencing reduced income. While many people prefer a lump sum payment when releasing equity, it is possible to schedule regular payments going forward.
This is helpful in two ways, it is a useful way to budget, and you only pay interest from the day you withdraw funds from the equity release programme.
Many people begin to think about inheritance and tax planning in their later years when perhaps we should all consider this subject when we are still relatively young. There is still a lot you can do about inheritance tax planning in your later years, although it is sensible to take professional financial advice.
While releasing equity may seem the best idea at the time, it may be storing up potential tax liabilities for the future or diminishing your financial strength. Take advice!
A Holiday of a Lifetime
In a perfect scenario, upon retirement, there would be nothing better than to enjoy a dream holiday, that location you both wanted to visit or perhaps revisiting a resort which holds fond memories. Let’s face it, many of those looking to release equity have led a full working life and given their all. Perhaps it is time they enjoyed the fruits of their labour?
When you think about it, equity in your property is not earning an income and is purely based on capital appreciation. Yes, the trend in UK property prices has been upwards in the long-term for many years now. However, we have also seen recent short-term volatility which is a subtle reminder that nothing is guaranteed.
So, while you may have £50,000 equity in your property today will it increase, reduce or remain steady in the future? The truth is nobody knows, and the only definite value is the one before you today.
Therefore, it is not uncommon to see older homeowners looking to release equity from their property as a means of funding investment opportunities. These could range from stocks and shares to various assets, a business opportunity or an additional property which brings us on to buy to let.
Buy to Let
Let us assume that you have a property in which you have built up £200,000 of equity. While this may look far-fetched for many people, let’s not forget the jump in house prices since the 1980s. There is also the fact that with a repayment mortgage, you are paying off interest and capital on a monthly basis. After 20 or 30 years, there is every chance that your home is debt-free and the total value of your property is, in fact, your equity content.
Now let us assume that you were able to release £100,000 in equity and pay cash for a buy to let investment. It is not impossible to negotiate a gross yield of up to 10% on some buy to let properties as well as the potential for long-term capital appreciation.
When you bear in mind that the equity in your property is non-income producing, this may be worth considering. You would obviously need to compare and contrast the interest rate on for example a lifetime mortgage (currently averaging 4.91%) against rental income.
However, rental income could at least cover all lifetime mortgage interest payments and even leave a surplus. That is before we even consider the potential for long term capital growth!
In this article, we have focused on equity release for older homeowners with particular attention to lifetime mortgages and home reversion schemes. This is a market now worth approaching £4 billion a year has shown significant growth in recent times. It is worth noting the changing demographics in the UK with improved life expectancy and longer working life.
Currently, the market for over 50s is limited, to say the least with remortgages/equity mortgages likely to have an upper age limit of circa 50. This means that for the majority of older homeowners, the only real current options are lifetime mortgages and home reversion schemes.
Thankfully, much tighter regulations and greater levels of transparency have improved the reputation of the equity release sector for older homeowners. While the Internet is proving to be a very useful medium for those researching equity release options, this can be a very complicated subject.
It will, therefore, be no surprise to learn that those employing the services of mortgage brokers, both independent and tied brokers, continue to grow in number. Whether looking at a lifetime mortgage or a home reversion scheme, there are many different factors to take into consideration with no one size fits all solution.
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.