An equity release mortgage is an attractive package for anyone whose home is their most valuable asset, and who have the desire to tap into the pot of cash it represents without having to sell up and move on.
The amount of equity you can release as part of this process will of course be dependent on the valuation that a lender gives for your property.
You might assume that this would be identical to that which you’d receive as part of a standard mortgage package. However, since equity release mortgages don’t require any repayment until the property is sold, there is more potential variability and volatility at play.
Lenders can look at historic house price indexing data to make predictions about how values will change going forward. Let’s explore what this means for prospective customers of equity release mortgages, and whether or not you should be concerned if you take one out.
Provisions to protect homeowners
If you own property and work with equity release specialists to get a loan against the value of your home, you will also automatically benefit from a guarantee which is put in place to prevent the amount you owe exceeding the eventual sale value of your home.
This type of mortgage accrues interest like any loan, but the idea is that rather than paying this off month by month, the lender will instead recoup the amount originally paid out plus any accumulated interest in one fell swoop.
House price indexation can therefore be used to predict how much a property will be worth at different points in the future, and thus form the basis for the offer a lender makes to a prospective customer.
And of course even if a home does end up selling for less than the amount that’s owed, the provision in the original agreement protects the beneficiaries from repercussions; in short, an equity release mortgage won’t force your family to inherit debt.
Concerns over accuracy
The issue with house price indexation as it relates to equity release mortgage calculations is that it can be somewhat inaccurate, and that this varies from property to property.
For example, if a home has been sold and purchased many times over the years, there will be plenty of data points available to project forward and provide a fairly precise idea of how its value might increase further down the line.
However, if a home is purchased and then lived in for several decades by just one owner, the amount of historic valuation data will be limited or even non-existent. This opens up a larger chance of inaccuracies occurring.
This is an issue for lenders because it means that they might overvalue a property and find that when it sells, they don’t get as much as they’d anticipated.
It also has the potential to hurt homeowners as well, in the sense that if a projected, index-based valuation is not accurate, then they might not be able to borrow as much money as they’d like right now when taking out an equity release mortgage.
Alternative routes taken
There is no question that house price indexation is useful in lots of spheres, and can be broadly applicable in the equity release mortgage market. However, it is not necessarily the ideal option for predicting future valuations accuracy if it is used in isolation.
This is why most lenders will turn to other property valuation modelling solutions to get a clearer, broader set of insights into what they might expect. Thus they can balance risk, and give customers better deals as well.