Introduction
When you have a house or any kind of property, you have a nice amount of money there stuck on an illiquid situation. Actually, illiquidity is one of the main downsides when investing in property.
When you are not an investor, but just someone with a fragile economy, the property in which you live may be the only source of cash available. Equity release is a solution for such cases.
In other words, equity release is a financial service that allows you to enjoy the money represented by the value of your property without having to actually sell it.
What Is Equity?
Equity is the value of the property after having deducted the debts associated with the property. Let’s look at a simple example:
If you have a property valued at £100,000 and when you bought it, you asked for a mortgage of £60,000 of which you already have paid £5,000, the current equity would be £100,000 less the remaining debt: £60,000 – £5,000 = £55,000. So £100,000 – £55,000 = £45,000.
This means that since you owe £55,000 to the mortgage lender, you still have your equity available and you should be able to use it as per your convenience.
How Does Equity Release Work?
There are two main financial products to take advantage of an equity release:
Lifetime mortgage:
A lifetime mortgage is a mortgage secured by the property value that is not already committed to doubts. Usually, financial institutions accept mortgages for about 60 percent of the equity. Of course, since you are still the owner of the property, you have the right to continue living there.
The main characteristic of a lifetime mortgage is that you don’t need to refund the money until you die. With the interest, you can choose between rolling it up and adding it to the amount of the mortgage or paying them regularly like with any other loan.
Once you die or if you move to another residence, the mortgage provider sells the property and takes their money back. If after the sale, there is some money that exceeds the amount of the debt, it will go to your heirs.
If the money of the sale would not be enough, the remaining debt should be paid with other sources of money from your wealth. Some lifetime mortgages offer the so-called no-negative-equity guarantee, in which no matter how much, once the property is sold the debt is considered paid.
This is not a perfect solution. Remember that the mortgage provider will be offering about 60 percent of the equity, and then they will keep earning interest. Consider the option to sell your home and pay a rent. You may need to make some calculations. If you do not feel ready, ask for help from your financial advisor.
Home reversion:
Said in plain words, with this option you are selling your home or a share of it at a great discount in exchange for the right to continue living in it until you die or move to another residence.
The business for the providers is that they will pay you about 60 percent of the property value, so they are getting a very cheap price.
Both options require you to be a certain age, typically around 60 years old.
Please view our frequently asked questions to get more answers to questions you may have on naming your property.
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