As we grow older and settle into life, we build up a net worth to be used to help us get through our golden years and hopefully leave a little something extra for our children on the side. Using your financial resources effectively isn’t the simplest of tasks, but it is one of the most rewarding.
That leads us to the topic of equity release. Before I go into the specifics of equity release itself, it is important that I first explain how you would even find yourself in the position to be wanting it. The typical homeowner buys a house on a mortgage and then pays into that mortgage over time, hoping to eventually have paid it all off and own the house in full. The money they’ve paid off from their loan is referred to as equity. If someone owes $20,000 on a $200,000 house, there’s $180,000 of equity tied up in that house. At its core, equity release is loaning back paid debt (equity) and turning it into unpaid debt (money owed). If someone is house rich and money poor, this can be an extremely attractive option.
The Basics Of Equity Release
Equity release is sometimes referred to as a reverse mortgage because it is money derived from the value of a house except instead of paying down the debt of the home you will pay nothing until your death, at which point your house will be sold and the proceeds put towards what you owe to the bank post-mortem. It is more or less another form of loan except since you’ve already paid off that value of the house to the bank, they’re offering to return the money to you so long as it is repaid again upon the termination of the agreement or your death.
After someone has received an equity release, they are to live in the home for the duration of the agreement and take care of fees relating to things such as hydro, utilities, property tax, etc. All of the bills are still paid by the homeowner and they still get to live in the home.
The Implications Of Equity Release
A few things change if you decide to release the build-up equity in your home. Firstly, you get to decide whether or not you’d like to be paid in one lump sum payment or piecemeal with smaller, easier to deal with amounts that would function like a pension. Depending on your spending habits as well as your long term plans, one will likely seem more attractive to you than the other. Most information about equity release is geared towards those over age 55 as a long term plan, but if the evidence provided by https://www.1stukmortgages.co.uk/equity-release-under-55/ is any indication, some people are using it to enjoy their middle-aged years much more fully. Remember that if you do choose the lump sum payment to not do anything rash with the money immediately after receiving it, the risk of going into a downhill spiral and losing it all is high.
One thing that drives many people to seek equity release is that they want to leave their children some inheritance money as opposed to having them deal with owning your former property. Large amounts of cash can be freed up and spent however you please, completely tax-free.
I should remind you that the money gained from equity release is not “free money”, no matter how it might seem. Whatever money that is received is also added to the total amount of debt on the house. Interest rolls over since payments aren’t being made and compound quickly in the absence of monthly payments to keep the amount manageable. Once the borrower passes away, the bank sells the house and only whatever money is left over after paying down the debt is available to the family of the deceased.
Worried that you might end up owing the bank massively once it's all said and done? Now rules are in place to ensure that proper equity release plans have a no negative equity guarantee. This guarantee means that the borrower can never owe more than the total value of the property. Whatever your house is worth, that is the maximum amount you can ever owe to the bank.
The decision to seek an equity release mortgage is not one to be taken lightly, it is imperative that you have no plans on downsizing or changing homes if you want to choose equity release. You are essentially beholden to the property as it is the sole reason why you were allowed massive sums of money from the bank. The bank enjoys this arrangement because they stand to profit from the eventual house sale & interest payments. Functionally, someone is allowed to live in the house & maintains it until the bank makes the eventual sale.