Important Factors and Drawbacks of UK Equity Release Mortgages
Do you plan on buying a building? Do you have intentions of buying a jet? For most of us, a house is the largest purchase that we will ever make. It is bigger than our vehicle (in most cases). And it is bigger than any appliance, furniture, clothing, or electronic gadget that we will ever buy. One of the greatest days of our lives is the one on which we make our last mortgage payment.
So why would someone consider taking out equity on their home? While equity release or an "equity release mortgage" is quite a complex topic, the equity release definition remains fairly basic. If you have paid off a fairly large chunk of your mortgage, (and/or) the price of properties have gone up, you can avail of some of the "profit" that is built into your house. And the best part is that you are not required to sell your home!
Why choose an equity release mortgage?
What makes the equity release mortgage so attractive? First, the properties of some UK homeowners have doubled since the middle of the 1990s. Also, many retirees are interested in this type of mortgage, in order to supplement their weekly income. However, while this scheme is useful for some homeowners, others will find it less beneficial.
The nuts and bolts of equity release
What exactly is equity? This typically refers to the difference between the house’s actual market value, and the figure that is owed on the mortgage. For instance, if your home is worth £250,000 and you still owe £200,000, then your property’s equity is worth £50,000.
How does an equity release mortgage work? Generally, you are permitted to take out up to 95% of your home’s equity, in a lump sum or up to a particular level that you can draw on. In other cases, you receive a particular amount of money every month.
You pay back the lender as you would a standard mortgage. What can you use the lump sum for? You can spend the money on anything, such as home improvements, home repairs, or that motorized ice cream cone you have been eyeing for a while.
When do you have to start making repayments? You do not have to do that until one of three events has happened: 1) You have repaid the amount that you borrowed, plus any interest that is owed, 2) You have sold your home, or 3) You have died. Because interest has been allowed to accrue, the figure can become somewhat high. In all sincerity, while an equity release mortgage can free up cash that you want or need for a particular purpose, taking out one is a major event and will significantly restrict the inheritance of your heirs.
For your consideration
In sifting through equity release info, you should consider the main advantage of an equity release mortgage. Specifically, it allows you to secure extra capital to use during your retirement, without the need to sell your property and move into a less expensive one.
However, the equity release mortgage is not for everyone. In the majority of schemes, you must be between the age of 55-70 and the value of your property should be a minimum of £30,000-£40,000. Also, it is better if you are a freeholder (own the property for life, without any conditions).
Nevertheless, even if you qualify for an equity release mortgage, it is important to consider some questions when gathering information on equity release, to determine if it is truly a wise option for you:
1. If a home equity release scheme is providing you with cash, you may be ineligible for means-tested benefits.
2. Factor in your life expectancy. The equity release mortgage is ideal for those who are in their 60s or 70s. If you are older than that, the amount of cash payments you get before your death may not be significant enough, considering your home’s value.
3. If your are living with a younger relative, friend, or partner, he or she may be required to find alternative housing in the case that you die.
4. Consider whether or not the scheme permits you to relocate to another house if you need to. In the future you may need to relocate to be closer to your family, to receive residential care, etc.
5. Review what your family will inherit upon your death. Using your home for a home equity release means that it cannot be included in their inheritance
The bottom line is that home equity release schemes can be somewhat complex. It is advisable that you receive independent financial and legal advice, before making a decision. Also, to avoid a family feud, it is highly recommended that you talk to your family and anyone you currently live with, about taking out an equity release mortgage.
Look before you leap into a pitfall
While an equity release mortgage certainly has its benefits, you must be wary of equity release pitfalls:
1. The UK government does not regulate equity release mortgages. While this has not resulted yet in a major personal finance scandal, many financial gurus fear that this could eventually materialize. Thus, it is important to constantly be wary when taking out this type of mortgage.
2. Keep an eye out for charges (i.e. property survey, setup fees, legal fees, etc.)
3. Verify that you are permitted to move home after you have taken out an equity release plan.
4. Make sure that following the sale of your property, no outstanding debt is transferred to your relatives.
5. When considering an equity release plan, always verify that it contains a negative equity guarantee. In other words, if your property’s value drops, then the debt will also decrease correspondingly.
6. If you have a live-in boyfriend or girlfriend, always take out a joint plan that allows the debt to be reclaimable only after your last surviving partner has died.
7. Make sure to maintain full ownership of your home until the time of your death.
It is advisable to speak to a mortgage specialist before you take out an equity release mortgage. They have the knowledge and experience to help you to avoid various pitfalls.
Also, consider seeking official advice from the uk regulator.
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