When finances become tight or more cash flow is desired to help pay bills or make larger purchases easier, some homeowners will consider the idea of using an equity release scheme to free up some of the value in their property.
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Types: Equity Release, Lifetime Mortgage, Drawdown Lifetime Mortgage
Although there are a number of different resources that explain how these schemes work, the best way understand the advantages, disadvantages, outcomes, and how the process really works is by examining some real-life examples of families who have been through it.
Case Study #1 – Mr. and Mrs. Bradford
Gerald and Betty Bradford are a married couple that are both 70 years of age. The couple lives in a three-bedroom bungalow in a waterfront area where they very much enjoy living. The couple brings in a comfortable income but does not have access to much capital since most of their savings was spent to purchase their home.
The bungalow was purchased just over 15 years ago and the couple paid £93,500 for the property, which is currently valued at £200,000 – an almost 115 per cent value increase over the years.
Although the couple is very happy in their home, they are interested in adding a conservatory to the back portion of their house, which will overlook the garden and make a great seating area for relaxing and entertaining friends.
Another idea they would like to explore is possibly going on a cruise vacation or two – many of the couple’s friends have been on cruises and always express how much fun the trip is and all of the wonderful parts of the world they were able to explore while on the cruise ship.
Gerald and Betty have gotten quotes for both of their projects. The conservatory, with all the needed additions including labour, underfloor heating, paving, blinds and furnishings, as well as the price for the two of them to enjoy their first cruise with their friends on the Norwegian Cruise Line vacation.
The conservatory will cost them approximately £18,000 and the cruise will cost them £1,000 for each of them. The total amount needed to complete both of their desired projects comes to £20,000.
The couple has decided that they wish to release the £20,000 needed for the projects using a lifetime mortgage from a well-known lender. They have also decided they do not wish to make any monthly payments and are aware that the remaining interest will be “rolled-up” into their existing mortgage, meaning the money they owe will double every 10 years.
This means, that by the time the Bradford’s turn 80, the £20,000 they borrowed and the rolled-up interest will amount to £40,000 with a 7.5 per cent APR.
Even with the £20,000 in equity doubling within 10 years, the amount they borrow will still be less than the property’s overall value, especially when they add the conservatory to the property. Gerald and Betty also like that they have the option to “drawdown” further funds up to £40,000 should they need or want to down the road.
This means that they will be able to enjoy more cruises throughout the years if they decide they want to spend more time vacationing.
Another benefit of the drawdown option is that the Bradford’s will only be charged interest if and when they withdraw funds from their cash reserve facility and that the minimum amount they could withdraw was as low as £2,000, making it easier for them to manage their drawdown lifetime mortgage effectively.
With this option and plan in place, Gerald and Betty were able to complete both projects on their wish list while still being able to properly manage the value of their property and their finances.
Case Study #2 – Mr. and Mrs. Engleman
Albert and Eve Engleman are 70 and 72 years of age respectively and are both retired from their given careers. The couple lives with a comfortable income and has a surplus of funds in which they have no desire to make any large purchases or have any renovations done on their current home.
Their home is located in an area which Albert and Eve enjoy living because it is close to the local shopping centre and town as well as having easy access to the public transport system. Their home is currently valued at £230,000.
The Engleman’s original mortgage terms were due to end at the same time the couple retired and by then, their endowment plan had not matured enough to clear all of the outstanding balance. This left the couple still owing the mortgage company £20,000 but they were able to negotiate to extend the mortgage term so it would then expire when Albert reaches the age of 85.
Unfortunately, the mortgage remained interest only, meaning they will not be paying off any of the actual balance of the loan.
Although the couple has managed the monthly payments without any issues, they are growing concerned about not being able to pay off any of the principle balance of the mortgage by the time the extended terms end. They have two grandchildren – Melissa who is 25 and Mark who is 19.
Melissa is trying to purchase her first home and is concerned about not being able to afford the mortgage while Mark is away at college and is worried about the amount of debt he will be in upon graduation.
The Englemans have decided that it is time to start dealing with their personal debt and, since they have no desire to spend money on themselves, setting Melissa and Mark up for financial success in the future. In order for them to pay off their existing mortgage, it will cost £20,000 – in order to help with a property deposit for Melissa, it will cost £15,000 – in order to help pay off Mark’s student loans, it will cost £15,000. This brings Albert and Eve’s total funding needed for the projects to £50,000.
After doing some research, the Englemans have decided that a lump sum lifetime mortgage will be able to meet their needs. They have found that since they can comfortably afford the interest payments on their existing mortgage they would prefer to pay the interest with Equity Release Lifetime Mortgage.
The lump-sum lifetime mortgage will give them the £50,000 they need with an APR of 7.5 per cent and help to remove about their existing mortgage, Melissa’s new home, and Mark’s student loans.