There are many reasons why people buy a second home abroad. Some rent theirs while others use them as vacation spots. Now, second homes cost a fortune. And unless you have saved up enough, you may need some financial aid. While there are many mortgage loans available, equity release plans offer the most convenient way of funding your home without affecting your retirement benefits.
Experts say that equity release is an easy solution for retirees who want to buy a second home. However, as it is not as straightforward as it seems, it’s best that you understand what it really is.
Equity Release Meaning
Many people are using equity release for funding their property. In 2018, the Equity Release Council, a trade body, reported an increase in 29% of homeowners releasing equity, compared to 2017. Equity release is simply unlocking the value of one’s property then turning into a cash lump sum, using several release plans.
In most cases, individuals must not have completed their mortgage to do this. However, most lenders limit these programs to people over 55 years.
Steve Wilkie, Equity Release- Responsible Life, managing director says, many people are now releasing the equity (cash) in their UK property to purchase a holiday home abroad.
Buying a Holiday Home Using Equity Release
Equity release is only for people who are at retirement age. It involves releasing wealth from your home that can either be used as a lump sum or in multiple smaller amounts. Doing this allows individuals to save cash conveniently for purchasing a holiday home. One can also use this cash for paying for ongoing mortgage repayment or making a mortgage deposit.
Now, there are different types of equity release plans including home reversion plans and retirement mortgage plans. However, the most common plan is the lifetime mortgage that allows borrowing money against your home while still living in it. Using this plan, homeowners can release equity in three ways:
- As lump sum
- As regular income
- In a drawdown facility
With a drawdown method, individuals don’t make regular payments. Therefore, the interest is added to your mortgage and compounds rapidly. If you pass away or move into long term care, your house is sold to pay for the loan. However, note that some drawdown versions allow early paying of interest and even capital, hence reduce your overall cost. With such plans, one can take money from their property in small amounts as per the agreed limit. Interest is added to the amount you take rather than the total amount available.
Equity Release: Should I Consider It?
While equity release seems like a good funding option, it also comes with some drawbacks that you should be aware of. Bear in mind that you’ll need to continue staying in the UK. Equity release plans require that you live in your UK property for at least six months every year. Therefore, they’re not suitable for people who want to relocate permanently.
Again, as you’ll be making regular repayments, this can interfere with your retirement income. Also, lenders impose an age limit on mortgage products, plus most of them are hesitant to lend retirees.
Well, many people when releasing equity only focus on the immediate financial boost they’ll get from unlocking the wealth in their property. However, one should also think of how this decision will affect your financial situation later on. It’s therefore wise that you get expert advice before making a decision.