Equity Release? – Which type of scheme is right for you?
The number and design of equity release mortgages has evolved to suit the needs of those who most need this type of product. There are now two types of Equity Release Mortgage available .
They have become safer, more efficient products with the loans tailored to help resolve the financial concerns of those who need to access this type of facility.
A recent meeting with a client, a single retired woman with no family brought to my mind the true value of equity release.
The financial circumstances were that she had a small occupational pension, the full state pension and a small investment fund.
She found herself stressing on how to get by on the income which never seemed to cover the increasing cost of surviving (not living); furthermore she worried as her investment eroded every time she had to en-cash part of it to keep herself going.
She lives in a house in Surrey worth £400,000.
The two types of mortgages are as follows:-
- A Lifetime Mortgage where the borrower doesn’t have to make any monthly interest payments. The interest is added to the loan on a monthly basis so the amount of the loan will rise over time.
- The Home Reversion Plan is another type of equity release arrangement that isn’t really a mortgage. The providers of this type of scheme effectively purchase a percentage of the value of the property, at a discount. The home owner retains the legal right to remain in the property until they die, sell it or go into care. On selling the property, the provider takes its agreed percentage, with any balance being paid to the client or their next of kin, so the intended beneficiaries always know exactly what percentage of the value of the home they will inherit.
Which of these two types is the right choice ?
It is only an experienced specialist Independent Financial Adviser who, having assessed your individual requirements, will be able to research the whole of the market for a suitable lender and mortgage product.
There are various options available:-
- A lump sum, to spend as you wish, such as a deposit for grandchildren to purchase their first home, or fund their university fees.
- A small remaining mortgage can be repaid before the funds can be utilised for other purposes
- Use the loan to serve as a regular income plus “ad hoc” lump sums as required.
- Use the loan as a reserve account (like an overdraft facility).
- You can protect a percentage of the equity (value) in your home to safeguard any legacy.
- Make monthly interest payments in order to limit the size of the loan (depending on the type of scheme used)
- Borrow against a holiday home, let property or main residence.
- Proof of income is not required.
- Interest rates can be fixed for the life of the loan.
The lifetime mortgage option will not lend as great a percentage of the value of the house as a home reversion arrangement because this type of mortgage adds the monthly interest which increases the size of debt, unless you choose the make the monthly interest payments.
A home reversion plan works by buying a percentage of the value of the home and then passes a percentage of this amount to you as cash or income; the difference between the percentage that they buy and the percentage that they pass to you represents the provider’s gross profit before costs and expenses.
My client found that an equity release mortgage solution has transformed her financial position and lets her sleep well. Which is best for you?
For an initial consultation about Equity Release at our expense please contact Gordon Tate Associates on Tel: 023 92 571183