How an equity release plan works
There are two types of equity release; a lifetime mortgage or a home reversion.
A lifetime mortgage is a long-term loan secured against your home, which doesn’t need to be repaid until you die or go into full-time care. You will still retain ownership of your home and should continue to use the property as your main residence. When you die or go into long-term care, the house will be sold and your loan will be paid off.
Home reversion is where you sell all or part of your property to a home reversion provider at an amount less than the total market value in return for tax-free cash. You then continue to live in your home as a tenant without paying rent, providing you keep the property well maintained and take out building insurance.
Equity release considerations
There are a few things you should consider before deciding to take out an equity release:
- Your property will not immediately go to your beneficiaries when you pass away, however, you can choose to safeguard some of the property’s cash value to use as an inheritance for your family.
- It may be that your circumstances change after releasing equity from your home, in which case you may not be able to rely on your property if you need money later on in your retirement for unforeseen medical emergencies or events.
- Releasing equity from your home can change any benefits you are entitled to, as any money released in equity from your property can affect your income and capital.
Equity release vs other loan options
Equity release is only suitable if you haven’t got any other savings you could use instead. Depending on your circumstances there may also be other loan options that are more appropriate and less expensive for you, such as a secured loan. If you need to release a substantial amount of equity from you home, downsizing your property might also be an option for you. Before making a decision on what type of loan is right for you, it’s always a good idea to look at the other options available and seek professional advice.
Clever Mortgages work closely with Age Partnership, who specialise in offering finance solutions to people. If you’re considering an equity release, your queries will be referred directly to them to give you the most appropriate support and guidance.
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Why Clever Mortgages?
At Clever Mortgages we can offer you the support and advice required to ensure you get the right mortgage for your first home. We provide access to a comprehensive range of mortgages from across the market. We are also authorised and regulated by the Financial Conduct Authority (FCA) and adhere to the Treating Customers Fairly (TCF) guidelines, so you can be confident that we will treat you with integrity and only recommend products that meet your needs.
A fixed rate mortgage is where your interest rate stays the same for a set time period (usually between 2-10 years). As a result your repayments are exactly the same each month, regardless of what happens to other mortgage rates. These types of mortgages are popular with first time buyers and people looking to budget each month, especially those who have suffered from a poor credit history.
The main downside to a fixed rate mortgage is that if mortgage rates go down you can be paying a higher amount than you would on a variable rate mortgage. However, this can also go in your favour and if interest rates increase you can be paying less than you would on a variable rate.
Every lender will have their own standard variable rate (SVR), which is considered their basic mortgage. This interest rate goes up and down, usually in line with the Bank of England’s interest rates but the lender is free to raise this at any time.
This means that your monthly payments can go up or down depending on what the interest rate is at a given time. Some months you could be paying more whilst other months you could be paying much less.
A discount mortgage is when a reduction is applied to the lenders Standard Variable Rate (SVR) for a certain length of time (typically 2-3 years). Discount mortgages are attractive as they can allow you to pay slightly less than the bank's standard rate. However as the SVR can still fluctuate they are not ideal for people who are looking to stick to a strict long term budget.
A tracker mortgage is basically a type of variable rate mortgage. What makes them different from other variable rate mortgages is that they follow – track – movements of another rate, the most common rate that is tracked is the Bank of England Base Rate.
A capped mortgage is the same as a variable rate mortgage; however the interest rate can never rise above a set “cap”. These mortgages can work well for people who can budget for different mortgage repayments each month but want the reassurance that their payments will never go above a certain amount.
Offset mortgages are linked to your savings account. Instead of earning interest on your savings, the money is offset against your mortgage. As a result, you pay less interest on the mortgage debt.
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