In this article
How does Equity Release Work?
How is the Amount You Can Borrow Calculated?
Equity Release – Important Facts
Pros and Cons of Equity Release
Reasons Why you may Consider Equity Release
Equity Release Calculator
Fluent Money Application Process
Equity Release – Key Differences
How Does Equity Release Work?
Equity release works by providing you with a cash value that is based on the equity you own within your home. An equity release lifetime mortgage is a loan that is secured against your home equity; it is important to note that you still retain ownership of your home with this type of product. For the purposes of this guide when we refer to equity release, we are specifically referring to a lifetime mortgage.
How Does an Equity Release Company Calculate the Potential Loan Amount They Will Lend You?
An equity release company (also known as an equity release product provider) will take into account 2 major considerations:
Home equity. When you purchased your home, presumably you took out a mortgage and each time you paid a monthly instalment to your lender (typically a bank or a building society) you paid a portion of the money you borrowed and the interest they applied to your mortgage.
Market value. An equity release company (provider) will also take into consideration the market value of your property. Using the above factors, an equity release company will then decide on the sum of cash available for you to release.
Important Facts to Remember About How Equity Release Works
The equity within your home is a means of security for your equity release product provider. This means that the provider has accepted the equity as a form of security against the money they have lent to you.
You have 3 main options of how to repay your loan. The money borrowed can be paid back when you die, when you go into long term care or you can potentially make early regular repayments if your chosen provider permits.
A variety of plans now have built in flexibility with regards to early repayment options such as voluntary repayments or fixed early repayment charges.
Are equity release companies and the products they sell safe?
There are a number of misunderstandings regarding equity release and lifetime mortgages . All equity release companies that Fluent Money deal with are regulated by the Financial Conduct Authority (FCA) and governed by the Equity Release Council (ERC).
Things to Consider When Taking Out an Equity Release Lifetime Mortgage
Benefits of taking out an equity release lifetime mortgage
- You still own 100% of your home
- The money you receive through the product is completely tax free
- You can still leave inheritance to your family
- By choosing an equity release plan you can receive a cash sum without the hassle of having to downsize or move to a different location
- All plans have a no negative equity guarantee. This means you can never owe more than the value of your home
- You can still move house after you have taken it out
Important considerations to carefully think through before taking out an equity release plan
- You must be aged 55 or over to apply for an equity release plan
- The amount of inheritance you leave to your family will be reduced if decide to take out the plan
- If you gift a portion of money to a family member, they may be subject to Inheritance Tax in the future
- The interest you pay is compounded. This means that the amount owed will increase over time if you do not repay anything until you die or go into long term care
- Some plans may be subject to early repayment charges if you want to pay back more than the plan’s maximum voluntary repayment amount
- The cash released from your plan could impact any means tested state benefits you may be entitled to
Reasons Why You May Consider Taking Out an Equity Release Lifetime Mortgage?
Pension income is not enough to support retirement plans. Taking out an equity release plan can ease the burden of having to juggle paying for essential living costs and doing the things you love. Many people look forward to their retirement years as it is their chance to use the time to relax, go on that holiday and spend quality time with family and friends.
Taking out a plan can mean that there is more cash to enjoy these moments in life without having to sacrifice them to pay for ongoing and/or unexpected bills and not having a lot of money left over.
Unforeseen costs. Once retired it can be harder to gain access to some forms of credit that would be typically available prior to retirement such as a second mortgage. This type of plan could be a solution to pay for unforeseen costs in retirement such as home renovations, medical costs or the death of a spouse.
Giving family members a helping hand. Being there to financially help children and grandchildren through key life events can be a rewarding experience. Whether it’s to help children with home improvements, help a grandchild to get on the property ladder, pay for a wedding or help with getting a university education, taking out a plan can give you more flexibility in the way you can help family members.
Earlier retirement. Taking out an equity release plan could be a viable solution to pay off a debt that is still within its repayment term and cannot be paid for with pension income alone. Examples could be an interest only mortgage, credit card debts or a car loan. The cash from the plan could be used to pay off a debt meaning that monthly expenditure has been reduced to a point that means that pension funds are sufficiently projected to support retirement.
Equity Release Calculator
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How the Fluent Money Equity Release Lifetime Application Works
The Fluent application process is quick and efficient and you can relax knowing that you are in safe hands with Fluent.
Initially our qualified advisers will discuss with you how equity release works and will answer any questions you may have about the different equity release companies available and the different types of products they offer.
Your Fluent adviser will also need to fully understand your individual circumstances and requirements as they will use these important details to match you with a selection of the best equity release companies and products in relation to your specific circumstances. Your adviser has access to market-leading technology and will compare a wide selection of plans, current rates with lifetime mortgage lenders.
If you decide to go ahead and apply for a lifetime mortgage your Fluent adviser will submit your application and arrange an independent surveyor to value your property, and an independent solicitor to cover the legal aspects. You will then receive a personalised report that details a breakdown of your options.
At the next stage, if the provider issues you with an offer it will include the full terms and conditions for your approval.
If all is approved, then next stage will be completion, and this is when the cash will be released.
The whole process takes approximately 8-10 weeks from application to completion.
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How is an Equity Release Plan Different to Other Types of Loans?
Equity release plans and secured loan differences
A secured loan (also called a second charge mortgage, home owner loan or home loan) is often used to borrow sums of money in the region of £10k to £1,000,000. The main difference is that a secured loan normally requires you to start to pay the money back after the first month of taking the loan out. Repayment terms are normally monthly and normally range between 3 to 30 years.
With an equity release plan you would normally intend to pay all or a significant amount in the far future; perhaps when you go into long term care or upon death. Another major difference between the two plans is that there is a minimum application age for an equity release plan which is 55 years old.
Equity release and bridging loan differences
A bridging loan can also be used to borrow money to make home improvements, they are also often used to buy other properties. In a retirement scenario a bridging loan may be more suited for if you wanted to downsize or move to a different area. An example would be that you wanted to move to say Spain and you saw an ideal property, however, you hadn’t sold your current home yet. You could potentially take a bridging loan to buy the property in Spain whilst you were waiting for your property back home to sell.
It’s important to note that a bridging loan offers a short term solution to any cash that you may have tied up in an asset. They are only designed to be taken out over 12 to 24 months.
Equity release and buy to let mortgage differences
Buy to let mortgages are taken out if you become an accidental landlord or you intend to purchase a property for investment purposes. In both scenarios you would not live in the property. In a retirement scenario you may become an ‘accidental landlord’ if perhaps you decided to move into your partners house. Or perhaps you wanted to downsize but you didn’t want to sell your current home, you wanted to rent it out instead. In retirement you may also want to invest in an additional property as a means of gaining an additional retirement income. A key difference is that you would not be living in the property that you would take the buy to let mortgage out on. Whereas with an equity release plan you would take that out on your home and you would still live in your home.
Equity release and traditional mortgage differences
Traditional mortgages are usually taken out over long repayment terms of 10 years plus. A lender will also look at the income you are generating each month and will typically want to see a salary coming in. With a mortgage you would be expected to start to pay the money you have borrowed back after the first month of taking the mortgage out. Mortgages is quite different in terms of eligibility and criteria.
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