Equity release-how does it work?

[hackjam]

Am thinking of buying a property in the UK, Edinburgh, as an investment, just to rent out. Something for around 400K.

As I don't have any kids and missus will be well healed when I die-from other investments, I was thinking about equity release, as I am just 55.

So how does it work? If the figures were healthy, I would have no hesitation to sign over property to an equity release company.

[Oxx]

Equity release is normally not available for buy-to-let properties - only for your own home.

 

However, there is one company which has recently started doing it, http://www.retirementadvantage.com/products/equity-release/landlord

[Peterw42]

Equity release-how does it work?

 

You slowly sell your house back to the bank, at today's value, not what its worth when the bank finally owns it.

[dotpoom]

3 minutes ago, Peterw42 said:

Equity release-how does it work?

 

You slowly sell your house back to the bank, at today's value, not what its worth when the bank finally owns it.

Really good explainatipn in a few simple sentences. Thank you....another new thing I have learned today.

[Oxx]

57 minutes ago, Peterw42 said:

Equity release-how does it work?

 

You slowly sell your house back to the bank, at today's value, not what its worth when the bank finally owns it.

 

Sorry.  Hopelessly inaccurate.  For a start, there's no bank involved.

 

There are two forms of equity release available in the UK:  lifetime mortgage and home reversion.

 

With a lifetime mortgage you borrow money secured on your home.  You keep ownership of the home.  You are charged interest on what you've borrowed.  You can either pay it, or add it to the amount you owe.  When you die (or move into care) the money you borrowed plus any interest owed has to be repaid, usually by selling the home.

 

With home reversion you sell your home (or a percentage of it) to a home reversion provider in return for either a lump sum or regular income.  You have the right to continue living in the property rent free.  When you die the home is sold, and the home reversion provider gets its cash.

[topt]

7 minutes ago, Oxx said:

When you die (or move into care) the money you borrowed plus any interest owed has to be repaid, usually by selling the home.

In the contracts what happens if the sales value does not cover the outstanding loan?

[Oxx]

39 minutes ago, topt said:

In the contracts what happens if the sales value does not cover the outstanding loan?

 

Most contracts come with a "no-negative equity guarantee", so if the eventual debt is more than the value of the home, the provider can't charge anybody for the shortfall.  They take the loss.

[glasswort]

Sorry but am I missing something here? Why would you spend the money just to get it, or a percentage of it, back almost immediately on the form of equity release?

[Pat in Pattaya]

What on earth are you talking about..

[Oxx]

9 hours ago, hackjam said:

If the figures were healthy

 

They're not.  You'll pay 6.5% interest on the equity release, and probably only make 7% on the rent.

 

I think with the lifetime mortgage you could well end up paying tax on the sale of the property.

Edited October 14, 2017 by Oxx

[Jonmarleesco]

You would put in K400, then arrange equity release? Upfront, your equity is what you've put in; people tend to utilise equity release when they have accrued a value over and above what they invested in the property. Why not simply mortgage the property on a buy-to-let basis?

[Chongalulu]

Equity release is designed for people who have a large asset in the form of their house but are short of disposable funds. Equity release loans them money against the security of their house at a fairly high rate of interest which is all recouped by the lender on the eventual sale of the house. Not at all suitable for your plan.

As it is not your main residence you will be liable for CGT (capital gains tax) on any price appreciation when it is sold (less your capital gains tax allowance at the time - around £11300 currently)

 

[bazza73]

Equity release is otherwise known as a reverse mortgage. Fees and interest rates are usually higher than with a traditional mortgage, as the bank or other financial institution is factoring in the risk of a slump in the value of the underlying equity. The fees and interest rate is added to the loan balance, so equity that can be left to heirs may disappear entirely. Usually the amount released in cash is 50-70% of the appraised value.

I understand this type of financial instrument should only be used as a last resort when all other retirement financing options are exhausted.

 

[sirineou]

I am very confused, perhaps I did not understand the OP

In order that you have a reverse mortgage in a property you need to have equity, so I assume the OP will be buying the house cash, 

So if you have the cash, why would you spend it to buy a house and then try to get the money back at a cost? Why not just keep the money and invest it.

Are you trying to put the money in the house , then take it out slowly via a reverse mortgage and at the same time collect rent?? if so it is a very inefficient investment IMO.

any return in rent will be offset by the opportunity cost  . ie while the money is tied up in the property it is not out working for you.any appreciation in the property will be taken by the reverse mortgage co. 

My annuity managed by Prudential  did 11.75% this year if you have that kind of money talk to an investment advisor.

PS : liquidity is also important.

Edited October 14, 2017 by sirineou