Equity Release In a Nutshell
Come across this phrase for the first time? Well, equity release can be simply defined as a means of retaining possession of your house, and while at the same time taking a reasonable amount if capital &/or income based on its capital value. So, to our main concern here, what’s an Equity Release Mortgage calculator? This is a lifetime mortgage calculator that helps you as the client, to decide whether equity release is right for you or not.
It focuses on the maximum costs and benefits of equity release. Equity release is mostly considered by the aged who do not have any intentions of leaving their entire hard earned assets to a bunch of expectant heirs.
How Does An Equity Release Calculator Work?
In order to use an Equity Release Calculator, you will be required to give a few basic details concerning age(s), the property location and its ownership. Once you input the necessary details, the calculator shows how much you can get from the home.
You will be required to provide;
|....||The age of the home owner and spouse|
|....||The approximate value of the property|
|....||Property type and location|
|....||Health status of both spouses (for joint release)|
|....||Any outstanding mortgage|
Importance of an Equity Release Mortgage Calculator
It helps one to tell whether or not they are in a position to raise a given amount of money within certain duration. This is useful in determining whether set objectives can be met or not.
The calculations allow one to compare the different assumptions based on the interest rates, house value growth and the period the loan is expected to last. This is highly reliant on life expectancy.
Some people also use the results of an equity release calculator to make assessments on ways to supplement their pensions.
Most of the equity release companies normally provide you with up to three answers. After calculation, equity release providers could offer a number of varying arrangements. UK’s equity release market mainly offers two types of arrangements. A lifetime mortgage is the most popular, followed by a reversion arrangement.
Lifetime Mortgage (LTM)
As the name goes, this type of a loan goes on till the death, or moving into a long term care home, of the property owner. Calculations are made by compound interest from the time of the engagement till the end, when the loan will be repaid off by selling the property. One is not compelled into making regular payments as the interests can be compounded into the initial loan.
While still alive, the property owner retains all the legal ownership of the asset and responsibility. The loan tenure could be brought to an end in case the borrower moves out of the property into a permanent residence or to a nursing home for the elderly.
Lifetime mortgage interest rates are fixed for the duration of the loan and therefore provide the security of knowing the future balance at any stage of the term.
Home Reversion Plan
In this case, a mortgage owner decides to sell part or his entire home to a different individual or to a reversion company. He/she then gets monthly income but continues to live in the same property.
In the UK, both arrangements officially fall under the regulation of the Financial Conduct Authority.This body provides for and ensures several guarantees.
Other equity release plans include;
Interest Only Lifetime Mortgage
In this plan, a mortgage loan is taken, but the capital repayment is only made after the death of the borrower. When he is alive, he or she will continuously pay the interest accrued from the loan, thereby maintaining a level mortgage balance throughout.
Home Income Arrangement
This is a plan that allows a mortgage owner to borrow money by re-mortgaging their property in order to buy an annuity. This annuity provides the borrower with an income for life. Some of the income is used to repay the mortgage while the rest is enjoyed as pure income by the homeowner. Low annuity rates may not be in a position to offer reliable and steady income. The greatest advantage of the home income plan is that the interest rates are fixed. This is however neutralized by the fact that the annuity rates are also constant throughout the life of the loan.
When is Equity Release Mortgage a Good Idea
This can be a source of stable income free from the taxman. Retired workers and the aged use this as an avenue to supplement their pensions in the last days of their lives. However, there are many more favourable reasons for equity to be released such as mortgage repayment, loans & credit cards that are on expensive APR's.
Equity release could significantly reduce the inheritance tax required from your property and has therefore been used by some homeowners as a tax avoidance mechanism.
The borrower is protected by a guarantee known as the no negative equity guarantee in the circumstances that there is a nosedive in the value of the housing industry.
When is Equity Release Mortgage a Bad Idea
Most of these plans reduce your heirs’ inheritance. This is so, especially in a scenario where your mortgage interest rate increases rapidly than the total value of your released property.
Making an equity release arrangement is very expensive as compared to selling off the property once and for all. All alternatives should always be discussed with your equity release adviser, as equity release should be classed as a fall back arrangement once all other avenues have been contemplated.
Some arrangements may not create enough income for example in the home income plan where the annuity rates may be relatively low. There could be existing means tested benefits in place currently which could be affected should a release of equity be made.
Equity release has been used over time by the elderly to generate income or lump sum payments and is becoming more popular as we enter 2015 following the success of 2014 where a record £1.4 billion of lending was released through lifetime mortgages.