What is equity release?

Your house is probably the largest investment you have ever made, and over the years its value has increased – proving the shrewdness of your decision to buy in the first place. Realising that investment and turning it into real cash for you to use through your retirement years is often mistakenly thought of as a single option: sell it and move elsewhere.

Equity release provides the better alternative, understanding the memories that make your property a home and not just a house. It provides you with a cash sum for you to spend however you like, secured against your property and to be paid back upon your death. You and your partner remain in your home until you both pass away, and only then is the debt called upon, allowing you to live happy and without fear of repayments.

Of the two options for equity release, lifetime mortgages are by far the most common. This article answers all the questions you may have about the finances of lifetime mortgages so that you can make an informed decision if equity release is something you are considering.
What is equity release?

What is a lifetime mortgage?

A lifetime mortgage is like any other mortgage – a large loan that is secured on your house.

When you bought your house with a standard mortgage, you made monthly repayments over years to pay off the loan, but always knew that if you were unable to make those payments, there was always the option to sell the house to cover the debt.

A lifetime mortgage is similar but jumps straight to the second option. You are not asked for any repayments but agree that upon your death the house will be sold, and the debt repaid in full. It is, as the name suggests, a mortgage that lasts your lifetime.

How is a lifetime mortgage calculated?

A lifetime mortgage is a loan taken out based on the value of your home. This value is called the equity of the property and is calculated by assessing the market value of the house and deducting any outstanding borrowing secured against it.

  • Some lenders will agree to a lifetime mortgage even if other borrowing is secured against the home, while others will only consider an application for a home if it is free of secured debt. At The Mortgage Hut we can help you find the right lifetime mortgage provider for you if you already have secured debt – call for advice.
A typical lifetime mortgage might be for 40% of your total equity. On a property with a market value of £315,000 this would release £126,000 in funds immediately to your bank account.

Accruing interest

Like any loan, a lifetime mortgage has an interest rate. Typically, this would be a fixed rate for the entire term of the mortgage, but it is possible to get some lifetime mortgages with a variable rate. The Equity Release Council standards protect you in the case of a variable rate mortgage, specifying that a cap must be set above which the interest rate cannot rise.

Interest rates on a lifetime mortgage depend greatly on the current market.

  • Low interest rates in the UK make now an excellent time to get a fixed rate lifetime mortgage. Take advantage of a decade of austerity by releasing funds from your largest asset! Call The Mortgage Hut today or use our lifetime mortgage calculator to find out more.
Interest on a lifetime mortgage is typically rolled-up or compound interest, meaning that the next interest calculation is made on the total outstanding debt including previously accrued interest, not set to the initial loan capital.

Interest rates on your lifetime mortgage can vary depending on many factors, including your age, the value of your property and even the construction of the house! Some deals can be as low as 2.9% while some rise to 8% or more. For a detailed no-obligation quote, call The Mortgage Hut today!

Examples of lifetime mortgage borrowing

The following examples are simplified for ease of understanding and do not represent actual quotes; in them, compound interest is calculated monthly.

Example #1: Simon and Sarah James get a lifetime mortgage at 4.3% for an equity release of 40% of their £410,000 home. They release £164,000.

Example #2: Jane releases £30,000 on her £180,000 flat with a lifetime mortgage rate of 3.75%. This represents an equity release of 16.67%

Offsetting the cost – rising house prices and the no negative equity guarantee

Looking at those figures out of context can be worrying. In the first example, after 25 years it would seem that Simon and Sarah owe more on the lifetime mortgage than the value of the house – can that possibly be true and what happens if that’s the case?

Those basic figures fail to take one important real-world calculation into consideration: the rise of house prices.

It is true that your house could lose value as well as gain it, but trends over recent decades have shown an astonishing level of growth on house prices. Inner city houses have shown to increase in price an average of 7% per year, which is the equivalent of doubling in value every ten years. With this in mind, Simon and Sarah’s house could be worth £1,000,000 or more when the lifetime mortgage (plus all the interest) represents a little under £480,000!

The offset of rising house prices mean that lifetime mortgages rarely come close to exceeding the equity in the house at the time of sale, but what if they do?

The no negative equity guarantee

As part of the Equity Release Council standards, all reliable lifetime mortgage providers write a no negative equity guarantee into the contract. This states that the estate of the deceased does not have to pay any additional money to the equity release provider, including any agent or solicitor’s fees.

In real terms, this means that even if your house were to lose value significantly, your heirs wouldn’t be stuck paying of a debt they didn’t want and any remaining funds in the estate are completely protected and would be inherited as intended.

  • All lifetime mortgages recommended by The Mortgage Hut come with the no negative equity guarantee. If you fear your equity release is missing this clause and you need advice, call today to see how we can help.

Ring-fencing – protecting your children’s inheritance

One worry that can arise is that the lifetime mortgage is going to wipe out any inheritance you had planned for your loved ones from the house. Thankfully, equity release comes with the ability to ring-fence part of the equity, making sure that there’s plenty left for their inheritance even if you live a very long life (and accrue a greater-than-expected level of additional interest).

With ring-fencing, you specify the level of equity that must not be touched by the lifetime mortgage upon repayment and that money is then safe and forms part of your estate upon death. Note that the level of ring-fencing you require may affect the terms of your equity release.

Paying off the lifetime mortgage early – saving interest and early repayment charges

Like most other debt, you are entitled to pay off some or all of the lifetime mortgage early. Different lenders will have their own rules as to exactly what you can you pay and the associated charges, so it is sensible to choose the provider who properly suits your future planning and not just accept the best-looking deal by interest rate alone.

Paying off interest - Most providers have a clause that allows you to make payments to pay back some of the interest as the mortgage term goes on. Paying off the interest will make the mortgage a lot cheaper in the long run and is usually sufficient when combined with the ever-increasing value of the home to satisfy most customers.

Paying off the capital - Paying enough to clear all the interest lower the initial debt may be outside the terms of your contract (unless you wish to sell the house and pay off in full). Check the terms of your deal to see if it allows for lowering the balance of the mortgage.

Paying in full - If you choose to settle the entire mortgage before you die, either because you wish to sell the house and downsize, or because your finances have changed then you will be able to do so but will incur early repayment fees. These will depend on the timing of your repayment and the terms of your deal. Selling the house and moving on due to a change in circumstances to long-term care never incurs early repayment charges.

Equity release advice from The Mortgage Hut

At The Mortgage Hut we have a team of specialists who work diligently to get you the best equity release packages available. For the answers to any questions on the subject, why not read our library of resource articles on equity release or give us a call today to speak directly to one of the team?

For the best lifetime mortgage deals, fill in our contact form and let us find the perfect quote for you!

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