The first and obvious question to be asked when looking at an equity release mortgage is: what exactly is it?
The answer is that this type of mortgage is a means of retaining use of your house or other object which has capital value, while also obtaining a lump sum or a steady stream of income using the value of the house. However, eventually this lump sum then has to be repaid, usually when the borrower dies. This system is, therefore, suitably for elderly people who do not intend – or indeed are not able – to leave a large estate for their heirs.
In what other situation might it be sensible to take out such a mortgage? If you are facing a pension shortfall, for example, and need to meet some unexpected expense, equity release is an attractive proposition because it allows you to tap into the wealth you have accumulated through your property without having to move from your home. It is not a cheap option, however. Rates for lifetime mortgages, which are the most common form of equity release, remain high.
With a lifetime mortgage you borrow a proportion of your home’s value. Interest is charged on the amount but nothing usually has to be paid back until you die or sell your home. The interest is compounded over the period of the loan, which means your debt would almost double in 11 years at current rates.
The other option is the home reversion scheme, whereby you usually sell a share of your property to a provider for less than the market value. You then have the right to stay in your home for the rest of your life. When you die or move into long-term care, the property is then sold and the provider gets the same share of whatever your home sells for as repayment.
You can take out some lifetime mortgages from the age of 55, but home reversions are available only to people aged 65 or older. Some enhanced products offer more favourable terms if you’re a smoker or have health problems Equity release schemes are designed to be a lifelong commitment, so if you change your mind, need to move house, or want your equity for something else later, you could find yourself seriously restricted.
If you do take one out, you should consider checking to see if you can get a better deal once the early repayment charge period has ended.
Finally, do speak to an independent financial adviser and obtain independent legal advice before taking out an equity release scheme; explore other options; borrow the minimum amount you need; think about taking out a scheme that allows monthly interest payments; and choose one where there are no early repayments. Equity release is one way of raising money at a difficult time – but it is not suitable for everyone. So do think it over very carefully before deciding to go ahead.