Meeting with new clients, there is one question that nearly always comes up: ‘Is my income enough?’
If that’s what you’re wondering, too, I won’t keep you in suspense: the answer is ‘Yes!’
That said, it’s an understandable and very reasonable expectation that your lender would want to scrutinise your ability to repay their loan to you. After all, if you have ever applied for a traditional mortgage in the past, you will have had to hand over payslips. Indeed, if you were self-employed, you will have had to show several years of accounts before the mortgage could be approved.
You may also have had to show proof of your earnings in order to obtain a much smaller loan – for example for a new car. But this is where Equity Release loans differ from other loans you may have taken in the past: now the only thing that matters to your lender is the value of your home and, of course, your age (Equity Release loans only start to become an option once you’re 55 years old).
Can't pay? Don't pay!
Your lender needs to know that, when your home eventually sells, there will be enough equity to repay the loan. And, when that time comes, your lender will regain not just the capital sum that was loaned, but also the interest that has accrued over the years that you have had the loan.
How much you or your heirs will pay will depend on two things:
1. How long the loan has been in place
and
2. The interest rate that was applied when the loan was issued.
Take the example of a £100,000 loan with an interest rate of 3.1%. After 10 years, your lender would be owed a total of £135097 (£100,000 + £35097 in interest). With the above example, you will not have paid back any capital or interest during the term of your loan – and, for this reason, Equity Release can be very useful if you have limited income from other sources.
However, if you do have earnings, you have the option of paying some or all of the interest as it is applied – and this will, of course, reduce the amount that your lender is owed when your home is eventually sold.
If you choose to pay all your interest on a monthly basis, you'll pay a total of £30,960 interest over 10 years; compared to £35097 if that interest rolls up.
The choice is yours
Do you want to enjoy your money without the hassle of having to make regular payments for years ahead?
Or would you feel more comfortable knowing that the final cost of your loan will be smaller because you have paid off interest before it could accrue?
There is always a lot to consider when planning for Equity Release, and these are questions that your Equity Release adviser will help you think through.
If you think Equity Release could help you balance your finances now or in the near future, do get in touch. I will be very happy to talk to you about your options.
