With almost £4bn of equity released during 2018, up almost a third year-on-year, and further growth anticipated in 2019, equity release has become an increasingly popular way to free up funds from the value of a home or property and enhance retirement.
Although there are a wide range of later life lending options to choose from, and each should be carefully considered in consultation with your mortgage adviser, equity release has become a valuable and flexible option for many retirees or those approaching retirement age.
Unlike retirement interest-only mortgages, which require an applicant to demonstrate that they can afford repayments, equity release enables a homeowner to access cash based on the value of their property, while remaining resident in their home.
Typically used to release funds to consolidate debt, fund retirement – perhaps to enjoy leisure activities or holidays –, support dependents, or to enable an individual to navigate estate planning and reduce the burden of inheritance tax on loved ones.
Interestingly, although traditionally associated with retirement, a growing number of younger homeowners are considering equity release as a way to release funds at an earlier stage in their mortgage life.
How does equity release work?
There are a number of equity release options but in broad terms equity release products are aimed at homeowners who are 55+ and provide cash in either one lump sum or several smaller sums. Funds can be used freely, and while some borrowers use equity release to enhance their lifestyle, cash can be used to buy a car, make home improvements or even fund healthcare.
What are the disadvantages of equity release?
It is important to consider that equity release will potentially increase how much money you have available to you or your monthly income, and while this is undoubtedly the objective for most people, these figures may be considered and could affect your ability to continue to claim any benefits.
Additionally it is important to understand that equity release will affect the value of your estate and likely reduce the inheritance you are able to leave to your dependents.
As with any type of finance, it is important to seek professional advice – as an independent mortgage broker with access to whole of market, NM Finance can advise on the best possible solution to suit your individual needs.
What are the main types of equity release?
The main types of equity release are:
Lump sum lifetime mortgage
With funds released in a single payment, the homeowner can opt to defer interest and repayments until after their death, or to start to make repayments immediately – this means the estate will pay less in the long-term and by opting to make repayments from the outset, more of the value of the property will be left for beneficiaries.
Drawdown lifetime mortgage
The homeowner can borrow from the total available in stages, as and when they choose, providing a handy ‘nest egg’ that can be accessed when needed. This flexibility has the added advantage that it will reduce the interest charged on the loan by the lender.
Voluntary repayment lifetime mortgage
Although still a form of equity release, this product enables the homeowner to repay up to 15 per cent of the amount borrowed throughout the year with no fixed, regular payment. Leaving more value in the estate, this product is useful for those who have an irregular income, say with dividends or investments making ad hoc payments.
Interest-only lifetime mortgage
As the name suggests, these products mean the homeowner only pays the interest on the equity released and when the property is finally sold, the original amount borrowed is repaid.
Income for a lifetime mortgage
With these products, the homeowner receives a monthly ‘income’ from the equity release, rather than a lump sum, creating a staggered source of funds to help with living costs.
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