Equity release calculators are helpful in how they determine if it is worth continuing on in your research. It is important that you do not use equity release calculations literally, but for advisory purposes only. Even if the calculator says you can release £100,000, this does not mean you should release that much.
Why Keep the Value Low
Equity release is calculated based on your current age and property value. It is designed to never exceed the equity you have in your home as interest compounds onto the loan. Yet depreciation of homes can occur and has with the last two recessions and subprime mortgage crash. Taking more than you need to spend could actually put you in a tight spot later on. You may be out of cash and unable to access more. You may need to sell your home, but get nothing for it. At your death your beneficiaries may sell the home to repay the loan and mortgage, but due to the high maximum you took, they do not receive any inheritance. These are just a few of the reasons the rule of thumb states only to take what you need for immediate expenditures plus what you might require in the first 12 years of the loan.
Another Important Reason
When you take out an equity release you are dealing with an APR or annual percentage rate. This rate is currently between 5% and 6% with most lenders, although it can be higher. The amount your money would make in a savings account for the unused portion is much less than the interest rate you are going to pay on once the loan becomes due. In other words, you would accrue more in interest than remains unpaid until death than you could possibly make in an annuity or savings account. If you take advice to take out the entire maximum amount in an equity release then you are taking advice that is possibly not the best for you.
Rather than looking for the maximum lump sum at the lowest possible interest rate in the market, you can consider a different choice in the drawdown lifetime mortgage. A drawdown equity release provides you with a lump sum for the first 12 months spend. The remainder of this money is left in a reserve account with the lender. You can withdraw from the account again after 12 months and as you need it. You are not held to 12 months each time you withdraw money, just in that first year.
As the money is with the lender and not technically in use by you it is not going to gain interest. It is only when you release more money from the drawdown account to use it that you are going to be charged interest.
If you never take any more money from the equity release then you would owe the initial lump sum plus the interest on it. This actually leaves more money for an inheritance for your children. In fact, with a drawdown mortgage you have the potential of leaving an inheritance where a maximum lump sum lifetime mortgage might not allow for any inheritance. If you want your children to be comfortable than using an equity release calculator to consider the maximum amount and then asking about drawdown options will help you leave something for your children.
Calculators are Guides
You need to be aware that any equity release calculation is only a guide line. It is an estimate of possible funds based on your age and current property value. It is not until you have spoken with a broker, an independent one, that you will be able to check this value and see if there is a potential higher maximum or something like a drawdown that you qualify for.
An independent broker will look at the industry as a whole. A person that is tied to a specific company will only be able to tell you about those products. They will want to sell you their product and make it sound like it is the best out there. Rather than being tied to something that could be more expensive later on consider all of your options. By getting equity release calculator results you can determine what is possible and make an educated choice as to what is better for you. Always remember the youngest homeowner has to be at least 55 years of age for you to qualify for any equity release product.