Equity Release Mortgage
Note: An equity release mortgage may also be referred to as a 'lifetime mortgage'. They are both the same thing.
What is equity?
Equity is the difference between the current market value of a property and the outstanding mortgage capital still left to repay. If the market value is greater than the remaining mortgage value the owner is said to have positive equity. This can occur if the market value of the property has increased due to supply and demand or if the borrower has a repayment mortgage and they have reduced the mortgage by repaying loan capital each month. If a property has decreased in value so that the market value is less than the amount still left to repay on the mortgage the owner will be in negative equity. This could occur if the economy is generally experiencing negative inflation, and most commonly would be experienced by a borrower with a 100% mortgage. However most borrowers are likely to experience positive equity over their mortgage term because the trend in the UK economy has been for an increase in house prices rather than a decrease in the long-term.
What is an equity release mortgage?
An equity release mortgage (otherwise known as a lifetime mortgage) is designed for older homeowners who have either fully repaid their mortgage or almost fully repaid their mortgage. It allows the homeowner to release the equity in their home without having to make monthly repayments as with a second mortgage. Instead an equity release mortgage is repaid by selling the home after the occupiers leave. This usually happens when the homeowners die or go into care / a retirement home. It does not mean you lose ownership of the property while you still live there, and with many policies you may still move home, during the equity release mortgage term.
The money gained from selling the property is used to pay the lender and their interest charges. If there is still money left over this goes to beneficiaries. If the property does not sell for enough to cover the equity release loan the debt may be passed on to relatives unless the lender has a negative equity guarantee, which is common.
Releasing equity can provide the homeowner with a lump sum of money, monthly payments or a combination of the both. Equity release mortgages are usually only sold to people of the age 60 and over. In general, the older you are the greater the percentage of equity you can release.