Home Equity Release Vital To get Advice
Home Equity Release Vital To get Advice
Home Equity Release Vital To get Advice
Equity release is a type of home equity loan which mainly consists in borrowing money from the value of your home with the benefit of keeping your home. This assures the applicant a constant income, using the market value of his house.
There are two types of equity release loans:
lifetime mortgage
home revision
The borrower's eligibility depends entirely on the following main factors: he has to be over a pre-established age (most financial institutions state the age of 50) and he has to own his home.
A lifetime mortgage provides a loan that is secured on the applicant's home, representing a guarantee for the lender that they can get their money back after selling the home. This doesn't mean the borrower doesn't own his home anymore, as he keeps the legal title to the home and holds the responsibility of ownership also having to pay the costs adjacent to ownership, although he has to pay back the mortgage on it.
The borrower repays the mortgage after the procedures of selling his house in case he dies or moves out to a care home. Interest payments are included in the capital throughout the whole term of the loan.
A home reversion has other procedures that differ a bit from the lifetime mortgage ones, as the borrower sells the entire or a part of his home to a third party which could be either a reversion company (a company that buys or arranges someone to buy) or an individual. The difference is that the borrower doesn't own the part or the whole home anymore but continues to live in it as long as he wants, as a tenant to the individual or the reversion company. The home is sold after the borrower dies or moves out to a care home.
There are many types of lifetime mortgages:
Roll-up mortgage, which provides the applicant a loan consisting in a constant income or a cash lump sum. A fixed or a variable interest is being added to this loan every month or every year. But the interest isn't paid but until the borrower's home is sold, this happening when the applicant dies or moves out to a care home.
Interest only mortgage that gives the borrower a cash lump sum. He pays the interest on the loan monthly on either a fixed or a variable rate. In the case when the borrower chooses the variable rate, he might find it difficult to repay it with his pension or other income source.
Fixed repayment mortgage in which the applicant gets a cash lump sum. The applicant agrees to pay the lender a higher sum that he borrowed, when his home is sold and so he isn't charged with the interest on the loan. Life expectancy and age reveal the maximum level at which the higher sum can be agreed at the outset. When the home is sold, the lender takes the higher sum in repayment for the mortgage.
Home income plan which consists of a loan of a cash lump sum. The cash lump sum is used to buy annuity that offers the borrower a constant income, most of the times fixed, for life. The interest of the loan is being paid from the income, at a fixed rate, the rest being used freely by the borrower. This type of loan proves profitable especially if the borrower is older, because the older the applicant is when buying the annuity the higher the income he gets is.
Shared appreciation mortgage - this type of loans include a shared appreciation element, meaning the borrower agrees with the lender that they can have a share in increases of value of the borrower's home when sold, in exchange the borrower not being charged at all or being charged partially on the loan.
Which are the advantages of these types of loans?
they can offer the borrower a lump-sum of tax-free money or a constant income for the rest of his life
they can reduce the inheritance tax to be paid by the borrower's estate.
there is no need to move out of the house as there is no such requirements is home equity release
there still is the possibility to move home with the permission of the company providing Equity release. These vary depending on the financial institution chosen. It's best to read the terms and conditions before signing the agreement.
if the interest rates fall, the borrower can refinance his mortgage at a lower cost
Which are the drawbacks of Equity release?
it might decrease the amount of money the applicants' family will inherit after his death
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