The hows and whys of equity release
Date: 03/05/2007by Lisa Hartwell
What is equity release and why should I consider it?
Equity release is a term commonly used to indicate the release of capital in some shape or form. If you own a property that is unencumbered (i.e. without mortgage), or even if you have a mortgage on it, this capital is the equity you have in the property. You can release some of this capital to make improvements to the property or to use at your own leisure for a personal project.
As an example, if you are living in Spain and need more than 15,000 euro ($20,000), it makes financial sense to release equity in your property, rather than take out a personal loan. The interest rate is likely to be half that charged on a personal loan, plus you don't need to go through a notary and the accompanying expenses: normal loans of 15,000 euro and upward must, by law, be overseen by a notary in Spain.
How do I decide which product is for me?
Various products are available on the market today-as an example, the chart below shows Orange Finance's current range-and choosing one that best suits you depends very much on how much capital you want to release from your property. If you need 40% or less of your capital, you don't have to prove income today, as there are banks willing to release this amount as a normal mortgage, or, in some cases, terms of up to five years, interest-only.
Releasing equity can also be used as an income spinner. For example, if you release 120,000 euro ($160,000) over five years and let Orange Finance invest it for you using guaranteed tangible assets, this returns 20,400 euro ($27,000) after the interest-only mortgage payments have been made.
Up to 75% of the value of the property can be released, but, to do this, you must show proof of your income. If 65% of the property is enough for you, a term of 35 years is available, whatever your age*, as is an interest-only period of 10 years.
The offset mortgage
This is a different form of equity release where the bank will advance up to 80% of the value of your property. Part of this capital can be for your personal use, while the remainder is invested on your behalf. The mortgage cost for these products is normally offset against the income you receive, hence its name.
Some of these products have high set-up fees (be wary of anything charging more than 4%), as well as yearly charges and administration fees for the investment vehicle, all of which will take years to recover. Returns in the region of 15% are often quoted-while this is achievable, extreme caution is advised when looking into these offers. Be sure to get all figures on any of the recommended products before committing: they can turn out to be costly and the returns promised may not be realized as you planned.
*In Europe, unlike the U.S., life insurance is generally required when you take out a mortgage, therefore age is often an issue.
| Interest Rate | Loan | Term | Interest only | Set up | Maximum age | Redemption Fee |
| E + 1% | 60% | 20 | No | 1,25% | 70 | 1% |
| E + 1,7%* | 60% | 30 | indefinite | 1,5% | none | 0%-1% |
| E + 0.75% | 50% | 15-25 | No | 1,35% | 73 | 0%-1% |
| IRPH + **0,7% | 40% | 35 | 15 years | 1,5% | 75 | 1% |
| IRPH + 0,7% | 60% | 30 | 10 years | 1,75% | 75 | 1% |
| 1%-2%*** | 65% | 35 | 10 | 1% | none | £250 |
| 1,8% / month | 50% | bridging | indefinite | 2% | none | 0% |
|
* First six months 5,5%. The term is 30 years, however this may be extended upon maturity
E = Euribor rate |
||||||
[Editor's note: Lisa Hartwell works for Orange Finance, website: www.orangefinance.eu.com and is happy to answer any questions you may have. E-mail her at: lisa.hartwell@orangefinance.eu.com. Orange Finance has special arrangements with financial institutions that are not available directly to the general public.]
Rate this Postcard:
Rating: 3/5 (24 votes cast)