Retirement is a scary point in time. You have ended a lifetime of work and now have your days to fill doing anything you wish; however, money is no longer coming in. What you have saved up has to last you, but most statistics clearly show retirees have not saved enough for the increase in longevity that has occurred. Considering equity releases as a means to help during retirement provides you with a steady income or lump sum depending on the product you choose. Equity release calculators can tell you a lot about equity release schemes available to you.
Defining Equity Release Products
Home reversion or lifetime mortgages are the two choices you have for releasing equity. One is a loan with interest accruing for the life of the loan; the other, home reversion, allows for a sale of your home all or in part. You do not owe the money back with home reversion.
Lifetime mortgages are available at the age of 55 and not a year sooner. Home reversion requires sellers to be at least 65 years of age. Your home has to be worth £60,000 to take out a loan at least with More2Life. Other companies may require £70,000 as a starting home value. As long as you fit the age and home value amount, you can use the calculator to determine if this type of loan is right for you.
Calculating the Details
Equity release calculators are designed to show you that the older you become the higher the maximum equity that can be released from your home. The rationale behind this for companies is that the older you are, the closer you are to the end of your life. From the lender’s viewpoint, the older you are, the less time the equity release plan will be outstanding. From an actuarial viewpoint, this means the equity release loan-to-value can be increased as one becomes older.
Specifically, with loan-to-values, it increases 1% each year you get older. This is why age is a massive factor in determining whether you should take out a loan now or after your next birthday occurs.
Another lesson the equity release calculation can provide, is to take only what you need. There is no rule that you must take the maximum release the lender quoted you as you researched products. Taking more than you need can lead to negatives during the payback period, which is often after your death. It can also be when you decide to move to a long term care facility. In either case, the home loan plus any APR accrual is due as soon as you sell or death occurs. The more you take out, the more interest accrues and thus the more you owe later on.
A better option is actually a drawdown equity release scheme offered by a few companies in the UK market. With this scheme you can take money in stages, instead of one lump sum. This allows you to take the money as and when you need it, with interest accruing only on what you use.
How to use Calculators
Now that you understand a few of the things you can learn, there is one more lesson in how you use them. You only want to use these calculators and results as a guide. For example, an enhanced lifetime mortgage calculator only approximates a lump sum based on known health issues, and therefore it cannot accurately assess your individual maximum tax free lump sum.
You can also use the calculator as you head into retirement. Perhaps you have five years left before you will retire. By using the calculation, you can plan in those five years how to make money that would negate the need for the loan or make more as a means of lowering the amount you would have to take. Of course, in five years things can change greatly. Interest rates can increase or decrease, property values can appreciate or depreciate. All of these economic changes affect the products that remain on the market. You will need to recalculate when retirement actually occurs, but by that time you have obtained and hopefully followed a plan that helped you increase your retirement income.
As equity release calculators are a guide, you should also look for another type of guide in an independent financial broker. This broker should be regulated by the FCA and have all of their qualifications to discuss equity releases to help you make a sound decision.
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