You may have heard lately about equity release, or people wanting to release equity from their properties. What this involves is the property that they previously bought on maybe a 25 year mortgage during their lives, and the releasing of some of the money that is tied up in the house.
Reverse mortgages as they are also known work on a similar principle to a mortgage, but the other way around. For example, with a standard mortgage, you will pay your contributions each month until the capital sum balance is cleared, which is typically the term of the mortgage.
With the release of equity or reverse mortgages, it works in a similar way, except instead of clearing the sum at the term of the mortgage, the reverse happens – the debt will be at its biggest and when you leave the house, sell the house, go into a residential home, or if the executors of the estate are called in, then at this point the equity or mortgage company will require for their debt to be paid off from the proceeds. So each month the debt you owe gets bigger rather than smaller as more interest gets added to the capital balance.
Since the population is aging, and interest rates are at an all time low and have been for some time, more and more retired folk are taking out this type of equity release in order to have some income each month, with the shortfall or their savings income or pensions.
The other point worth considering is that the longer the debt exists, the bigger it will be since interest normally capitalises on the debt monthly, so each month it will get bigger. It may be worth looking into along with all aspects of raising finance and chatting with an independent financial advisor for further advice on the release of equity.
Lucy Devere is an entrepreneur and a Mom too.