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18 October 2017

Equity Release – Using your home to generate income

Equity release is a way of releasing some of the money, or equity, in your home without the need to sell the property. There are two types of equity release, which are the lifetime mortgage and the home reversion. This article will concentrate on lifetime mortgages, which are the more common type of equity release.

Lifetime mortgages are mortgages which are secured on your property and only repaid on your death, or when you move out of the property. There is usually no monthly mortgage payment during the mortgage term but interest does continue to accrue on top of the loan amount. As the interest is not paid, the amount owed to the lender can increase very quickly.

One difference between a standard mortgage and a lifetime mortgage is that you are only able to take out a lifetime mortgage if you are over the age of 55 or 60, depending on the lender’s criteria. In contrast to this, a lender will usually only consider a standard mortgage if the borrower will be working and earning sufficient income over the full term of the mortgage and is therefore frequently below the age of 65.

The amount which can be borrowed against the property will depend on a number of factors, including your age at the time of taking out the lifetime mortgage. The younger you are when taking on the lifetime mortgage, the smaller the percentage of the value of the property that you can borrow. This is due to the fact that the interest will be accruing for a longer period of time and therefore the equity in the property will be reducing down for longer. The lender will want to ensure that when the mortgage is repaid, there will be enough equity in the property to repay the mortgage.

Different lenders will provide lifetime mortgages with different terms and some will allow people to pay interest during the mortgage, which can help to reduce down the amount outstanding at the end. You may also be able to borrow a smaller amount at first, with the option to borrow more later on, which could also help reduce down any interest payable at the end of the mortgage term.

There are some disadvantages to a lifetime mortgage, which should be carefully considered before going ahead. The first downside is that the cost of repaying the lifetime mortgage can be very high. This is due to the fact that the interest rates are often high and interest is charged on the total figure of the initial lump sum, plus any previous interest, as shown in the example below:

If borrowing £50,000, with an interest rate of 8%, the total owing over the next five years will be as follows:

Year 1             £50,000

Year 2             £54,000

Year 3             £58,320

Year 4             £62,985.60

Year 5             £68,024.45

There are also often large early repayment charges, should you wish to pay off the lifetime mortgage prior to the end of the term.

Another downside is that it is often difficult to obtain permission from the lender to port the lifetime mortgage to a different property should you decide to move house, perhaps deciding to downsize in later life. The lender will only agree to port the lifetime mortgage if there is sufficient equity in the new property, which may not be the case should the new property be smaller and therefore perhaps of less value.

Most lenders will have a condition within the mortgage, which states that if the property is vacant for a certain period of time, they will require repayment of the mortgage. This can cause difficulties for people who have been taken into hospital for a long period of time, or have moved into a care home. As the amount to repay is frequently a large sum of money, this will often mean that the property will have to be sold.

It is also important to be aware that receiving a lump sum payment from a lifetime mortgage can have an effect on any means tested benefits which you receive from the local authority or Government.

Before going ahead with a lifetime mortgage, it is important to take advice from an independent financial adviser, who will be able to advise you on whether a lifetime mortgage is the best option for you.

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