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Equity releases are on the rise, do you need to take risks? Equity release

NSHome prices are a double-edged sword for many families. Older generations have seen the value of their homes increase while their children and grandchildren struggle to ride the property ladder. Today, many parents are immersed in the fairness of their property to help their children buy their own homes.

Equity releases, a way for people over the age of 55 to withdraw cash from their assets without having to go home, are becoming more mainstream due to higher transaction volumes and lower available rates. There are twice as many commodities in the market as they were two years ago, and competition is lowering interest rates. Currently, the minimum interest rate is around 2.5%.

However, costs can be added, and critics warn that it is a risky move. Between April 2020 and the end of June 2021, older homeowners will be able to withdraw £ 830 million from their homes and use it in a variety of ways, according to a study by equity release advisory firm Key. I gave it to my descendants and others. More than half (£ 425 million) was handed over to children and other family and friends to help them ride the property ladder.

Key CEO Will Hale said money was effectively “recycled” and one of the driving forces was the stamp duty holiday, which began to be phased out at the end of June. increase.

“In recent years, it has become more and more common to use IPOs to facilitate the transfer of wealth between generations,” he says.

How does it work?

The most common equity release transactions are mortgage-based products, which are mortgages. Normally, there is no monthly repayment. Loans that include interest accrued will be repaid from the sale of the property when you die or care for you. These are known as “lifetime mortgages.” Loans can be received in one-time payments or in small sums.

Lenders are based on the amount you can borrow based on your age, the value of your property and sometimes your health. Lifetime mortgage rates are usually higher than standard mortgages.Comparison site Equity release supermarket Shows rates for many providers from 2.86% to 6.9%.

According to the Equity Release Council, an industry group, the minimum age to sign up is usually 55, but the average age of new customers is now 68-70. Major providers include Aviva, Legal & General, Just, more2life, LV = (Liverpool Victoria), Canada Life, Pure Retirement and OneFamily. Many corporate websites have calculators that you can use to figure out how much you can borrow.

For a lifetime mortgage, the interest on the loan is added to the loan amount. The following year, you will be charged this large amount of interest. In other words, you can quickly increase the amount you owe.

The most flexible transactions are those that include a feature called drawdown. This feature allows you to withdraw money when and when you need it. Not everyone needs a large lump sum payment in the first place, and with a drawdown lifetime mortgage, interest accrues only on the money you release.

Equity Release Council data show that the average lump sum released is £ 113,000, but drawdown customers have the first £ 85,000 and an additional £ 34,000 reserved.

The supercharged performance of the housing market in most of the pandemic has made the calculation of stock releases more favorable for some existing customers. According to government data, the annual rate of increase in house prices has exceeded 7% since January this year.

Based on that number, the industry argues that last year’s rise in home prices may have offset the compound interest impact of some publicly traded clients. “For example, a customer who pays 6% interest may have seen equity grow faster than an asset, while a customer who pays 3% interest grows equity more than twice as fast. You may have seen it, “says the Equity Release Council.

However, as with investments, past performance does not guarantee future results. Of course, there is a risk that real estate prices will fall, which will completely change the calculation of stock releases. Members of the Equity Release Council must have the “No Negative Equity Guarantee” feature on their products. This means that you or your property will never be in debt beyond the value of the property when the property is sold, even if the property price plummets.

Disadvantage

While equity releases have become much more common and mainstream, lifetime mortgages can be a complex product with disadvantages. Former pension minister and Conservative Ros Altmann said taking an initial public offering loan in his 50s or 60s is a risky proposal and should not be underestimated. “The problem with using equity release loans at such a relatively young age is that many things can change in the next 30 or 40 years, but once fixed to equity release loans, then It can be difficult to get out, “she says.

“I believe that publicly traded mortgages are still expensive and still pay large fees to advisors or brokers who find customers for publicly traded companies that sell them. This is good for lenders, but borrowers. It may not be so good for you. Extracting tens of thousands or more from your home may seem attractive, but be aware of the long-term risks these products can hit you. please.”

Borrowers who realize that they can repay their loans early may face the potential for “early repayment costs”. These can occur if some or all of the contract is repaid before the date of the contract.

Equity releases may have the image of a way for wealthy seniors to leverage their wealth to raise extravagant funding, such as new greenhouses and cruises around the world, but to change their lives. We can also provide you with something. Financial assistance to family and friends. But for most people, the most economically effective way to free cash is to move to smaller real estate or cheaper areas.

Two scenarios

A 70-year-old woman who owns a £ 368,000 home is trying to free her money from her property. Key considered two scenarios for the observer.

In the first, the woman wanted to withdraw £ 78,000 as a lump sum. Based on more2life’s 2.73% interest rate, the outstanding amount (loan and interest) after 10 years will be £ 102,452. Twenty years later, it will be £ 134,570.

In the second scenario, at the same interest rate, she first paid £ 10,000 and then £ 5,000 a year. She will borrow £ 71,403 (a total of £ 60,000 withdrawn) 10 years later and £ 152,057 (a total of £ 110,000 withdrawn) 20 years later.

Many equity release products offer borrowers the opportunity to repay interest if they so desire. If the same 70-year-old chooses a lump sum and pays 50% of the monthly interest (£ 85 per month), the total payable after 10 years will be £ 90,298 and the total unpaid amount after 20 years will be £ 106,452.

Equity releases are on the rise, do you need to take risks? Equity release

Source link Equity releases are on the rise, do you need to take risks? Equity release

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