Sunday, October 24, 2021

Should you take out a lifetime mortgage or opt for equity release? This is how the two options work

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Stock release plans can be very useful for those about to retire or about to retire, but experts say you shouldn’t enter into any of these agreements lightly. Paul Thomas reports

Older homeowners released nearly £ 3.9 billion of the equity tied up in their homes last year to help them make it through retirement.

Data from the Equity Release Council (ERC) industry body shows that more than 40,000 55+ year olds released cash from their homes in 2020 to help finance home improvement, settle debts, or give away to loved ones.

But while stock release plans can be very useful for those about to retire or about to retire, experts say you shouldn’t enter into any of these agreements lightly.

Below we outline exactly how these loans work and what the alternatives are so that you can find out if they are the right option for you.

Equity Release is short for two separate products that allow senior homeowners to free tax-free money from their property: lifetime mortgages and home reversion plans.

Life-long mortgages are by far the most popular option. If you are 55 or older, a lifetime mortgage can take out a loan on your home while you retain full ownership of it.

However, unlike a regular loan, you don’t have to make monthly repayments. Instead, the interest is usually rolled up and thus your total debt grows over time.

These debts are paid when you die or receive care, and your home is sold so you can leave the rest, if any, to loved ones.

The bottom line is that with lifetime mortgages you can stay in your home for the rest of your life, which means you don’t have to downsize to get cash.

How much you can borrow ultimately depends on the value of your property and your age, but the absolute maximum is currently 58 percent of the value of your property.

Often times, you have the option of taking the money as a lump sum or withdrawing it in smaller, regular servings, which is convenient when you need the money to supplement your income in retirement.

The other type of equity release loan is known as the home reversion plan, although these are no longer popular.

As with lifelong mortgages, home reversion plans allow you to free up tax-free money – in a lump sum or as a regular payment – from your home.

The main difference, however, is that you have to sell all or part of your home – usually below market value – for the money.

If you die or are taken into care, your house is sold and the provider pays the agreed portion of the proceeds.

For example, if you sell 50 percent of your property to a home improvement vendor, they take that 50 percent when the home is sold in the open market and the rest goes to your beneficiaries.

Although you do not retain full ownership of your home, you can live in it rent-free for the rest of your life as long as you agree to keep it in good condition.

While lifetime mortgage rates have been going down in recent years, due to the way rates compound over time, they can still be a very expensive option.

For example, let’s say you’re a 65-year-old and borrow £ 40,000 at 2.44 percent – the lowest interest rate on the market – on a property valued at £ 250,000.

If you choose to allow interest to top up, your debt will have grown from £ 75 to £ 50,904 by the time you hit £ 75, according to Equity Release Advisor Key. If you were lucky enough to turn 90 your debt rose to £ 73,080.

However, keep in mind that this is the lowest price on the market that not everyone is getting. If your provider charged you 3 percent instead – just 0.56 percentage points more – your debt would have more than doubled by the time you hit £ 90 to £ 83,751.

Given the high cost, you need to wonder if a lifetime mortgage is right for you, especially if you want to leave an inheritance to loved ones.

Actually yes. Share release plans are much more flexible than they used to be, and today, many providers, such as Legal & General and Aviva, have the interest paid off every month. This will stop your debt and can save you thousands in the end.

For example, if you paid the £ 81 monthly interest on your £ 40,000 lifetime mortgage, at the age of £ 90 it would cost a total of £ 64,300 button,

With other providers, for example, you can repay the entire loan without penalty after 10 years, which in turn can save you a fortune. This is something to keep in mind if you need cash now but expect an inheritance sometime in the future.

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