Equity Release Mortgage – How does it Work?

An equity release mortgage is a common way of getting money during your retirement. It has numerous benefits, especially for retired couples.

You could get money against your home equity and spend it according to how you like. You are allowed to stay in the same home for as long as you want.

Lastly, there are no monthly payments on the mortgage that you will have to think about.

Types of equity release mortgages

There are three common types of equity release mortgages.

  • The Lifetime Mortgage gives you a tax-free cash lump sum.
  • The Drawdown Lifetime Mortgage gives you a tax-free cash lump sum but you can “withdraw” it in increments or when you need it.
  • Last but not least is the Home Reversion Plans. This plan is when you sell your entire home or just a portion of it to a reversion company.

All three plans have the same benefits. But one must take into consideration the drawbacks of each before making a decision.

An equity release is considered a permanent decision which is why it is commonly offered to elderly or retired couples who do not want to leave their homes.

What are the downsides of equity release?

One major drawback of the lifetime mortgage is that your estate will probably have debt at some stage of the market.

This is because your interests are compounded. And if you wish to end the mortgage early, repayment plans are extremely high.

The major drawback of the Drawdown mortgage will be similar to the lifetime mortgage but interest will be applied to the amount that you have already withdrawn.

This means that each “withdrawal” will have different interest amounts.

One of the drawbacks of the Home Reversion Plans is that if you decide to remain in the house, you will have to pay a nominal rent for the portion of the entire home you have sold to them.

Can you lose your house with equity release?

If you follow the conditions of the contract, you will not lose your home as a result of the equity release plan.

Can I sell my house if I have an equity release?

If you have an equity release mortgage, you can sell your home.
A lifelong mortgage, for example, is a type of equity release instrument that can be repaid at any time and in any manner.

The difference between the market value of your property and the amount owed on your mortgage and other secured loans is your home equity.

If you sell a house in which you have equity, you can keep the difference and use it for other projects.

Can I rent out my house if I have an equity release on it?

Because of an equity release plan, it is illegal for you to begin renting out the home that you own.

Renting out the home would cause you to vacate, which would necessitate paying back the loan and incurring early repayment penalties.
This would be extremely expensive, making it out of reach for the majority of people.

If you leave the property and try to rent it out without the lender’s knowledge, you might find yourself in serious financial problems.

Bottom line

It really is advisable to involve your family in this kind of matter. Since equity release mortgages are considered permanent decisions, having the family around can really help you decide what is best for you.

Do not rush into these kinds of matters. There are still other forms of income such as buy to let mortgages. But that is a different review. Equity release mortgages are very helpful but must be researched and talked about carefully before deciding.

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