A great many people are unsure of how they can leverage the equity which is locked in their home. In the past many retired people were forced to sell their property and down size to a smaller and less expensive home in order to gain access to these funds. Many people worry about equity release schemes and whether they would need to sell their home in order to take out a scheme or plan. While there is a great deal of information and advice on selling your property, there is less information about equity release, so here is a basic guide to equity release.
What is an equity release scheme?
Equity release schemes have been around for many years. While many people will provide advice on selling your property to release the equity which is tied up in the home, equity release plans allow you to access these funds without needing to sell the home.
The process is fairly simple, the equity release company collates information including your age, gender and market value of your property to assess the amount of equity available and the estimated duration of the scheme. Equity release schemes have been designed to be lifetime products, so the company will use national statistics to estimate your potential lifespan including your age, gender and state of health. The minimum age for equity release is fifty five and in cases of joint applications, the age of the youngest party is the one used for the calculations.
Generally, you will find equity release schemes will allow you to release thirty to fifty percent of the equity in your home. This equity is determined by taking the balance of any existing mortgage or secured loan from the market value of the home. The amount of equity release is determined by your potential lifespan, with younger people being offered a smaller percentage of equity release.
Why can I not release the full amount of equity?
The main reason for this is that unlike many other financial products, equity release schemes generally require no form of monthly payment. Instead the interest incurred by the loan is compounded on to the balance. The equity release company needs to ensure that there is sufficient equity in the home to cover the initial loan and the amount of interest which will be compounded over the duration of the scheme. This balance can increase dramatically over the years and it will double approximately every eleven years, hence why you cannot generally release more than fifty percent of the equity in the home.
The balance of the loan is only due to be repaid after the home owner has passed away or taken up permanent residence in a care facility. At this stage, the home will be sold and the proceeds used to settle the balance of the loan, with any remaining funds distributed to the beneficiaries of the estate in the normal manner.
So, I don’t need to sell my home?
With equity release, there is no need to sell your home. You would retain the right to live in the property for the remainder of your lifetime. However, it is a serious financial commitment and it is worth exploring your other options fully before committing to a plan. It can be a good idea to seek advice on selling your property to determine whether downsizing would present a better option for you financially. Many equity release schemes have severe early repayment penalties which are applied should you decided to sell the property at a later date. However, if downsizing is a possibility, there are some plans which offer the flexibility to port the plan to another property should you decided to move home.
Taking the next step
It is important to explore all your options and research the possible equity release solutions. There are a number of online tools including calculators which can provide tailored illustrations of schemes which could potentially suit your circumstances. However, these tools cannot replace the expert guidance of professional and experienced equity release advisers. These advisers will be able to help you explore the alternative options and assist you in locating the deal which is best suited to your needs.
If you are interested in equity release and have explored some of your other options including taking advice on selling your property, it is worth taking some time to research the available options open to you. The online tools and equity release adviser guidance can provide invaluable assistance and help you gather all the information needed to make an informed decision as to whether equity release is the best possible solution for your needs. This will then allow you to proceed confident in your decision.
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