Equity Release

Equity Release

This little study explains what the equity value of a property actually is and how it is can be accessed

In basic terms, the equity value of any asset. Is the net value after securities  have been taken off. As below

The asset value is £400.000

Loans secured against it are £250.000

The net value of the asset is £150.000.

that net value is the equity value, or value once all associated debt has been cleared.

With regards to residential property the same situation occurs. When a property is purchased, the equity value is determined by
the mortgage loan required to buy it.

This is a simple example used for explanation purposes.

Purchase price of the property £100.000

Mortgage required £75.000

This leaves an equity value of £25.000

The illustration equates to what is in effect a 75% loan
and assumes the buyers were able to lay down  £25.000
as a deposit.


Equity Access

Equity access is a thriving market and basically works in this manner. Owners can access additional funding by transferring some or all of the equity value into cash.

This is done by raising additional loans against the property.
The methods used are the Re-mortgage, and third party secured funding. Both have similar ways of working.

Re-Mortgage: Here The borrower will take out a complete new mortgage loan on the property

Using the previous example, the borrower wishes to access equity and raise a sum of £10.000

Property valuation is £100.000.
Existing mortgage is £75000.

The new loan will have to pay off the previous loan and provide the additional capital for the equity release. Therefore the new loan will have to be £85.000.

This is achievable as there is £25.000 of equity value in the property.
Once the new loan takes effect the equity value will be
reduced by £10.000 to £15.000

That is the basic form a re-mortgage takes. Funding schemes like these are available from most lenders. In many cases the original loan is repaid using funding from a different lender.

Third party secured funding.

Using the same scenario the borrower wishes to raise £10.000 from the equity value in their property. However instead of a complete re-mortgage. Funding for the extra £10.000 is obtained from a second lender. This means the borrower has two debts secured to the property.


Once again a highly used method, It is not without some issues, as the main lender, the one with the largest loan secured against the property. May take a very negative view of any other lending
secured against the property.
In exceptional cases they may refuse to allow the borrower to obtain additional funding in circumstances where the equity
value is very marginal.

In cases where the original loan  exceeds 75% of the valuation
less equity is available. See below

Example
Property Valuation £100.000

Mortgage Amount £87.000

Equity Value £13.000

Any loans where lenders issue funding which exceeds 75%,  is
considered very high risk. Usually offered with strict terms and conditions attached.  Which must be accepted prior to the funding being issued.


Prior to organizing additional funding for equity release it
is always a good idea to research for the best available options.
Also to check on your current position before embarking
on the search. Over recent years property prices have steadily risen, however the market can and has collapsed in the past. Leaving many in a state of negative equity.
Where the amount of the loans secured on the property far exceeds the current market value. The more recent and concerning trend is, that numerous lending institutions have been swallowed
up by larger entities. In fact there are many borrowers
whose original lender no longer exists.
Therefore terms and conditions for the loan
may have long since changed.

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