If you’re looking into equity release for the first time, you may not know exactly how it works or what options that are available. Equity release, sometimes referred to as a lifetime mortgage, is a long-term financial product, so you need to think carefully about your options and consider what you may want in the future too.
It’s important that you speak to a specialist equity release advisor, but this guide will go through some of the things that you will need to consider before taking out a lifetime mortgage.
How do you feel about leaving an inheritance?
A lifetime mortgage will be secured against your property in place of a traditional mortgage. No monthly repayments are required as the loan will be repaid when your property is sold after you move into a permanent care facility or pass away.
This means that the value of your estate will be reduced by the amount that you have to repay, so you need to bear this is mind when you take out a lifetime mortgage as it will have an impact on the inheritance you will have to leave your beneficiaries.
Equity release can be used to give an early inheritance, but if you don’t want to do this then it may be worth having a conversation with your beneficiaries so that everyone’s aware of the implications.
Do you want to make interest repayments?
A lifetime mortgage does not require any monthly repayments throughout the full term of the loan, the rolled-up interest and capital are repaid together when your property is sold.
However, some equity release plans will allow you to make interest-only repayments if you have the income to do so. This will stop the interest from rolling up and building, saving you money in the long run.
An equity release calculator can be used to compare your repayment options.
Will you want to move house in the future?
A lifetime mortgage is a long-term financial product, so it may have an impact on your ability to move house in the future. You may be able to repay your lifetime mortgage early, but there will be early repayment charges to consider.
If you want to move house and take the lifetime mortgage with you, then the new property would need to be suitable security for the loan. There may need to be further valuations of the property and you may incur additional costs. If the property you want to buy is of lower value than your current property, the lender may want a partial repayment of the loan.
Do you want a lump sum, an income, or a drawdown facility?
Different equity release plans will offer different methods of releasing the loan.
You’ll need to consider whether you want the money in one lump sum, as a regular income, or if you would like a flexible drawdown plan. A drawdown plan will enable you to take out smaller lump sums as and when you need them, with you only being charged interest on the amount you withdraw.
The should be considered based on the why you’re taking out a lifetime mortgage. If it’s a gift, or to fund renovations or a one-off payment, then you may want it in one lump sum. If you would like some money to top up your pension and income, then you may want it in regular instalments. If you don’t necessarily need the money right away, but you would like to have access to it as and when you need it, then a drawdown facility may be suitable.
How will it affect your eligibility for certain benefits?
As equity release is technically providing you with an income, then it may affect your entitlement to certain means-tested benefits. This affect could be right away, or it could be in the future, so you need to consider this before you take out a lifetime mortgage as any benefits that you’re entitled to may mean that you don’t need
Your equity release advisor will be able to do a full assessment and let you know how you’ll be affected.