Tag Archives: Negative Equity

When does the Equity Release Lender require their money back?

It is all very well to own a real estate property, but when it comes to day to day life, what is required is cold, hard cash flow! One way of turning a home into cash is to sell the property and move into another place. Another option is to get an equity release mortgage on the property. Equity release schemes allow you to free up some of the value built up on the property without the need to sell or move out.

One of the main attractions of equity release is the fact that it allows you to continue living in the same house, while giving you the flexibility to use up a portion of the equity built up on the property as cash. This is essentially a loan, which is repaid to the equity release provider once the house is sold. So when is the house sold? Equity release schemes work in such a way that the property cannot be sold until the owner has either died or moved into permanent care. Once this happens, the house is sold and the money recovered.

A common concern is that an equity release mortgage can run up huge debts that can even turn into negative equity on the house. This means that once the house is sold, if the sale price of the house is lower than the amount owed, this needs to be paid as well. While this may have been a potential risk with some equity release schemes in the past, most modern equity release plans come with a no negative equity guarantee.

An equity release mortgage is designed to last over a long period of time, however, this is not to say that the loan cannot be repaid earlier if chosen. Many equity release schemes, however, have early repayment charges which apply if the loan is paid ahead of the contract term. These charges are meant to protect the lender from losses incurred due to early repayment.

Whether it is a lifetime mortgage or a home reversion plan, most equity release schemes have certain guarantees that ensure that the owner can continue to live in the property for as long as they live, and that the property cannot be sold until then. However, an equity release mortgage is a big thing and has serious implications. It’s important to seek expert unbiased advice to find out whether it is the right option for you.

How is my Equity Release paid off?

Equity release is a relatively new concept in the world of finance. When property prices began to soar over the last two decades, a situation arose where many people owned valuable properties, but due to rising costs of living did not have enough income to support their lifestyle during retirement. Equity release was an answer to this gap in the market.

Equity release mortgages allow you to free up some of the equity built up on your property, without the need to sell the house. It allows you to continue living in the house, but free up some of the value of the house and get it as a loan, either as a lump sum or in smaller regular installments.

The two main types of equity release mortgages are lifetime mortgages and home reversion plans. A lifetime mortgage is a loan taken against the home. Interest is generated on the loan, which usually compounds and results in a debt much bigger than the original loan. However, such loans do not need to be repaid until the homeowner dies or moves into permanent care, and the house is sold.

Modern equity release mortgages have a no negative equity policy. This means that if your debt becomes larger than the sale value of the house, the negative equity does not need to be repaid and is written off by the lender. This is how lifetime mortgages are repaid. In case of a joint application, the loan is expected to be repaid only after both the applicants have either died or gone into care.

Home reversion is a way to sell a portion of the house notionally, and take the loan of that amount. The loan and interest are repaid when the house is sold. The principal amount that needs to be repaid is the same proportion borrowed of the total sale value of the house. Therefore, the amount that needs to be repaid reflects the market value when the property is sold.

When interest builds up on the principal amount, this interest is added to the principal and the next year, interest is charged on this bigger amount. This compounding interest can result in huge debts, which is one of the main risks concerning equity release mortgages. Equity release lenders now offer what are known as interest only lifetime equity release mortgages wherein unlike roll up mortgages, you only pay the interest every month and when the equity release scheme ends, the amount to be returned remains the same as the amount borrowed.

Should I tell my children about Equity Release?

One of the reasons for the increasing popularity of equity release mortgages is the rising cost of living and the inadequacy of pensions as the only source of income during retirement. Equity release mortgages are increasingly being considered as an option for financial planning during retirement by homeowners who are sitting on valuable property but need additional cash flow.

As the demand for equity release loans has increased, companies have begun diversifying the type of equity release plans on offer. Equity release mortgages available today are much more flexible compared to their counterparts a few years ago. Interest rates are also generally lower than a few years back. As such, now may be a good time to explore the market and compare equity release options available, for those who are interested in this option, as well as those who already have an equity release mortgage.

As with any financial loan, there is both an upside as well as a downside to equity release mortgages. By taking a loan against the property, the equity in the property is effectively decreased. This has repercussions for the inheritance that you leave behind for your family. There is also the chance of negative equity, where the amount you owe exceeds the value of the home, although most lenders nowadays cancel out any negative equity owed.

Equity release does provide a good way to raise additional money during retirement, whether it is for a one off expense such as a holiday, a car or home refurbishment, or a regular supplementary income. However, an equity release mortgage potentially affects not just the claimant but the entire family. It is therefore important to take the family into your confidence before opting for such a big step.

You can read up information on equity release online, as well as compare equity release mortgages, but the best thing to do if you’re considering releasing the equity on your home is to talk to an independent financial adviser. This will enable you to get objective and impartial advice on equity release, and whether it is suitable for you. Depending on how much additional income you require, whether or not you want to leave an inheritance, and other factors, the adviser can also guide you about which equity release loan works best for you.

Financial issues are a common reason for family feuds. Things like inheritance are a sensitive matter and before taking any final step relating to your property, it is advisable to understand the consequences thoroughly. There may be other alternatives to raise money, and downsizing is always an option. Equity release mortgages may not be the right choice for some, and may be the perfect choice for others. But once it is opted for, it is difficult to opt out of equity release loans, so take your time to understand exactly what it entails.