Taking out money in your home when in retirement is still possible, although the products are different from what you may have had in the past. When you reach the age of 55, you can begin to search for equity release products called lifetime mortgages or home reversion. These two products allow you to take money out without having to make a repayment during the rest of your life. For many, this is a great way to correct a cash poor, but property rich situation. Before speaking with a broker offering such products, it is best to gain your maximum equity release calculation. By attaining an estimated value of the max equity you can release, you will know if you have a potential to borrow as much as you need or desire, without talking with a person.
How the Calculation is Conducted
There are two main variables that apply to an equity release calculation: property value and age. The younger you are the less the calculation result will show as the potential maximum equity release amount.
The reason for this is based on how these companies work. An equity release provider is ultimately in the industry to make money, which they do through the money that is lent to you. By requesting interest on the money they have lent you they are able to get a certain percentage at the end of the loan. The interest is compounding, which means it adds up over time. The more time the loan is outstanding the bigger the balance will become.
A younger person should have a longer life expectancy, thus a longer period for the equity plan to be gaining interest and the balance to grow. A younger person could potentially overstep their property value creating a negative equity situation. The Equity Release Council has a code of conduct in which a ‘no negative equity guarantee’ must be in the contract, stating you will not have to pay more than the total value of your home to repay the loan. To ensure this occurs, the amount is kept low based on mortality indices which indicate the potential life span you should have, given your age.
The opposite applies when someone is older. An older individual using an equity release calculator is going to find a higher end result than a younger person. It is due to the affordability of the release. The life expectancy is shorter and thus there is a lower risk to the no negative equity guarantee.
Property Value Determiners
For the maximum equity release calculation the property value has to be a main factor. The value dictates what your home is worth. It tells the equity release lender what they can afford to provide you at your current age based on the no negative equity guarantee and the interest that will accrue.
Like age, the more property value you have the more you can release. The less value in your property the less you will be able to get in a lifetime mortgage.
Annual Percentage Rate
Each lifetime mortgage is going to have an Annual Percentage Rate (APR). Home reversion is different as it is not a loan, but a sale of your property. It still works on the same age and home value factors, but APR is not going to apply to that calculation, which is why there are different equity release calculator tools on the Internet.
For APR, most find a fixed APR is the best option. Fixed means the APR is not going to change over your lifetime. Even if the Bank of England rates increase or drop, your APR is going to remain the same. This ensures the calculation can release the maximum equity from your home.
There are several products on the market offering between 5.45% and 5.75%, with others at more than 6%. While it is a theory that more equity can be released with a lower interest rate, you still want to be careful not to exceed the maximum if you do not need it.
The way to leave inheritance behind for your family is to leave some equity in your home. At the end of your life or when you move from the home, you can sell it, pay off the lifetime mortgage, and leave some cash behind for your family. It all depends on the maximum equity release calculation, your age, the property value, and the APR you are able to get as to whether an inheritance will be left.