The biggest question you have with any mortgage product is — can you afford it? You may not be ready to talk with a mortgage expert yet, so how do you determine the affordability of the product? It is easy to find that there are only mortgage calculators including an equity release calculator for retirement mortgage products. The purpose of any calculator is to tell you mathematically whether you can afford something or not—that being said there are different types of lifetime mortgage and home reversion calculators. Before starting further research find out if you can truly afford one of the lifetime mortgages or home reversion packages available to you.
How Equity Release Calculators Work
An equity release calculator works in different ways depending on the type of equity release scheme you are interested in. It is important that you use the correct calculator for the type of product you are looking to get. If you have not decided between home reversion and lifetime mortgage that is okay. You can decide after you use the equity release calculator to determine the affordability of both options. To help explain this further, examine the different calculators, mortgage criteria and some examples.
Home Reversion Calculators
Home reversion is not a mortgage, but a form of equity release. This is an important distinction as it determines the outcome of the calculation you can perform with the home reversion calculator. Home reversion requires you to sell a portion, or your entire house in return for a place to live for the rest of your life and enough cash to live on. You are selling some or your entire home as a way to access the equity in your home.
The first step is determining how much of your home you want to sell: 0% to 100%. Obviously most home reversion companies have a specific minimum of what you can sell for example you may be able to sell 20% initially, whereas another company may require at least 50% of your home sold.
There are no interest rates with this. You also need to state if you are single or a couple, your age, and the value of your property. If your home is worth £150,000 you might be able to release up to £46,000. This would be a little more than 30% of the property value based on someone who is 65 years of age. There are also enhanced versions that would offer up to £75,000 or 50% of the home value should the youngest homeowner have a shorter life expectancy.
Lifetime Mortgage Calculators
Lifetime mortgages are equity release loans where you have the option of repayment of interest or not. The option to repay the interest or not are the two major differences between lifetime mortgages & home reversion plans. You also have different lifetime mortgage plans including roll-up, drawdown, interest only, and enhanced or ill-health. Depending on the type of lifetime mortgage the amount you can obtain in equity will different. As you learned in home reversion if there is a health issue you can access more equity. The same rule applies to lifetime mortgages; if you have health that lowers your life expectancy such as cancer issues you can unlock more equity via the enhanced lifetime mortgage schemes.
The calculator will need to know your sex or if you are a couple the age of youngest homeowner, and current property value. The calculation will then return a value based on your age, property value and current interest rates. You will be given a loan to value or LTV total that is based on a percentage of the home.
With lifetime mortgages you cannot take out 100% of the value of your home. Instead, the lending company determines the loan to value percentage they are willing to offer whether it is 11% to 52%. Most do not offer anything higher than 54% loan to value to avoid the no negative equity guarantee that is part of your loan. The interest accrual over the years you have left plus the initial sum taken cannot reach a value of more than 100% of the home value. To protect against depreciation lifetime mortgages provide a LTV percentage that is significantly lower than the home value based on your age.
A person 65 years of age with £200,000 value home and no health issues may be able to release up to 30% of the home value or £60,000. A person that is 85 could release 52% of their home value or £104,000. A person 65 with a health condition could release the same amount as the person age 85. Make certain you are using an appropriate equity release calculator based on your health issues, age, and the type of equity release to obtain a more accurate estimate.
What do the equity release calculator results tell us?
Depending on the type of equity release scheme you are looking towards, the relevant equity release calculator will advise the maximum release available. However, this isn’t the final chapter of the research episode. Once the maximum equity release lump sum has been established, the parameters of the borrowing facility are now known & will hopefully encompass the amount needed to meet the financial objectives planned.
The secret is not to automatically think this maximum equity release should be taken. It mustn’t unless absolutely necessary. The reason being, that any excess equity released if just left languishing in a bank account, will not be earning as much as being charged on the equity release scheme. This would therefore be bad advice. Therefore, consider a drawdown lifetime mortgage if the maximum equity release is not required.
But the two lessons learned would be the equity release calculator comes in two forms; lifetime mortgage calculator & home reversion calculator and that only the necessary amount that should be taken is the principle sum to meet the first year’s financial objectives. Equity release calculations therefore provide the starting point for one’s research into enhancing the retirement lifestyle’s for the over 55’s.
