Edge home finance, also known as edge equity release or lifetime mortgages, allows homeowners to access some of the equity tied up in their home while still living in it. With edge home finance, you take out a loan secured against your home which doesn’t need to be repaid until you pass away or move into long-term care.
Edge home finance is offered by specialized lenders and regulated by the Financial Conduct Authority (FCA) in the UK. Major lenders include Aviva, Legal & General, and More2life.
Here’s how it works:
- You can release a lump sum, drawdown funds gradually, or take out a regular income from your edge home finance plan.
- Interest accrues on the loan and gets added to the amount owed. No repayments are due until the plan ends.
- The interest rate is fixed, meaning your debt won’t grow unexpectedly.
- When the last borrower passes away or moves into long-term care, the loan must be repaid. This usually involves selling the home.
- If there’s any equity left after repaying the loan, it goes to your beneficiaries. The lender can’t take more than the property’s value.
Edge home finance allows homeowners over 55 to access property wealth without moving. It can provide funds for retirement, help cover care costs, or enable home improvements and repairs.
Benefits of Edge Home Finance
Edge Home Finance allows homeowners to access the equity in their home through a line of credit. This can provide several potential benefits:
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Access equity in your home – With a home equity line of credit, you can borrow against the equity that you have built up in your home. This provides access to funds that might be needed for home improvements, debt consolidation, medical expenses, college tuition, or other major costs. The line of credit allows you to access funds as needed rather than taking a large lump sum.
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Flexible payments – Unlike a cash-out mortgage refinance, a home equity line of credit offers flexible repayment options. You only need to pay interest on the amount borrowed. When you borrow against a line of credit, you can choose to make interest-only payments or pay down the principal as well. This helps match payments to your budget.
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Retain ownership – With a home equity line of credit, you can tap into your home’s equity while retaining full ownership of your home. As long as you continue making payments, you don’t risk foreclosure. This differs from other options like a home equity loan or cash-out refinance which provide a lump sum via a second mortgage. The line of credit uses your existing mortgage.
Tapping into home equity can provide funds needed for major expenses, repairs, or investments. The flexibility of payments and ability to access funds as needed are key benefits of equity lending options like Edge Home Finance. However, it also introduces risk, so homeowners should weigh the benefits and drawbacks carefully.
Risks and Drawbacks of Edge Home Finance
One of the biggest risks of edge home finance loans is the higher interest rate compared to traditional mortgages. Interest rates can be significantly higher, sometimes double the rate of a typical 30-year fixed mortgage. This makes the monthly payments higher and increases the total cost of the loan over time.
Edge home finance loans also come with shorter repayment terms, usually around 5-7 years. This means your monthly payments will be higher than a traditional 30-year mortgage in order to pay off the loan faster. It also increases the risk of foreclosure if you are unable to make the higher monthly payments.
Since edge home finance uses the equity in your home as collateral, you could lose your home to foreclosure if you default on the loan. Edge home finance lenders will force a sale of your property in order to recoup their investment. This can leave you without the equity you built up in your home.
Another downside is that edge home finance loans usually have variable rates, meaning the interest rate can fluctuate over the life of the loan. So even if rates start low, they could increase over time as market rates change. This unpredictability makes it difficult to budget for the monthly payments long-term.
Overall, the risks and drawbacks of edge home finance center around higher interest rates, shorter repayment terms, and the potential for foreclosure if the borrower is unable to keep up with payments. Borrowers should carefully weigh these risks before using home equity as collateral.
Qualifying for Edge Home Finance
Edge Home Finance has specific requirements you’ll need to meet to qualify for a home equity loan or line of credit. The main criteria are focused on your credit score, income, and amount of home equity available.
Credit Score
Your credit score is one of the most important factors in qualifying for Edge Home Finance. They generally require a minimum credit score of 620 to be eligible. The higher your credit score, the better the terms and interest rate you’ll likely receive. Anything below 620 will most likely lead to denial.
Edge examines your entire credit report and history when making approval decisions. Any late payments, collections, judgments or bankruptcies can impact approval chances and rates offered. Having a strong history of managing credit responsibly will help your application.
Income
Stable verifiable income is required to qualify. Edge will want to see that your income adequately covers existing debts and living expenses, with enough remaining to comfortably make the new home equity loan or line payments.
Self-employed borrowers may need to provide tax returns and business financial statements to document income. Retired borrowers can use retirement account distributions and social security income. All income sources must be verifiable.
Higher incomes relative to the loan amount requested tend to have greater chances of approval. A debt-to-income ratio below 36% is generally recommended for the highest approval odds.
Home Equity
The amount of equity available to borrow against is the other big factor. Home equity loans allow you to borrow against a portion of your equity, while home equity lines give you access to a revolving credit line up to your available equity.
To qualify, Edge requires a minimum of 15% equity in the home. The more equity the better in terms of maximizing how much you can borrow and the likelihood of approval. The Loan-to-Value ratio compares the loan amount to home value, and Edge prefers an LTV of 85% or lower.
Home value is determined based on an appraisal done during the application process. Higher appraised values allow for larger loan amounts since you have more equity available.
How Much You Can Borrow
When taking out an Edge Home Finance loan, the amount you can qualify to borrow depends on two key factors – your loan-to-value ratio and your debt-to-income ratio.
The loan-to-value (LTV) ratio compares how much you want to borrow to the appraised value of the home you plan to purchase. Lenders usually allow up to 80-97% LTV on a home loan. The higher your LTV, the riskier the loan is for the lender, so you may get higher rates or fees. With Edge Home Finance, LTVs up to 95% are common.
The debt-to-income (DTI) ratio compares your total monthly debt payments to your gross monthly income. This helps lenders ensure you can afford the new mortgage payment. Many lenders allow DTIs around 36-45%. With Edge, total DTIs up to 50% may be allowed if you have good credit and steady income.
To maximize your chances of approval and get the lowest rates, it helps to aim for LTVs below 90% and DTIs below 40%. But Edge does offer more flexibility than standard lenders if your finances are outside typical approval guidelines. Pre-approval can give you an estimate of the max loan amount you may qualify for based on your specific financial situation.
Getting pre-approved before you make an offer on a home allows you to shop and bid with confidence, knowing your price range and monthly payments. Work with an Edge Home Finance loan officer to determine the optimal loan amount you may be able to borrow.
Interest Rates and Fees
Edge Home Finance offers competitive interest rates and fees compared to other mortgage lenders. Here are some key details to understand:
Interest Rates
- Rates are variable and tied to the prime rate. Your rate will fluctuate up and down with the market.
- Rates are typically 0.5-1% higher than prime. For example, if prime is 5%, expect around 5.5-6% with Edge.
- Your credit score, down payment amount, and other factors determine your rate. Those with excellent credit and 20%+ down can get the lowest rates.
- Rates are locked in once your loan closes. Your rate won’t change after closing.
Origination Fees
- Edge charges a 1-2% origination fee on the total loan amount. On a $200,000 loan, expect to pay $2,000-4,000.
- This covers processing costs. It gets deducted from your loan amount at closing.
Closing Costs
- Closing costs average 2-5% of the loan amount. They cover title fees, appraisal, inspections, taxes, insurance and more.
- Closing costs are paid upfront before your loan funds. You can’t finance them in your mortgage.
- Your actual closing costs depend on your state, loan amount, and other specifics.
Overall, Edge offers competitive rates and fees. Pay attention to the interest rate and origination fees when comparing lenders, as those have the biggest impact on long-term costs. Closing costs vary less between lenders.
Repayment Options
Edge Home Finance offers borrowers flexibility when it comes to repaying the loan. You can choose between several different repayment terms, ranging from 10 to 30 years. The longer the term, the lower your monthly payments will be. However, you’ll end up paying more interest over the life of the loan.
When it comes to making payments, you have a couple different options:
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Principal and interest – With this option, your monthly payments go towards both the loan principal (the amount borrowed) and interest. In the beginning, most of your payment covers interest charges. But over time, more goes towards paying down the principal. This approach builds equity faster.
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Interest-only – For the first 5-10 years of the loan, your monthly payments only cover the interest charges. You aren’t paying down the principal at all during this period. Once the interest-only period ends, payments convert to principal and interest. This option offers lower payments in the short term, but you pay more interest over time.
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Partial interest-only – This is a mix of the two options above. Your payment is divided into part interest-only and part principal and interest. This balances affordability with building equity.
Edge Home Finance also lets you choose your payment frequency – either monthly, biweekly, or weekly installments. More frequent payments reduce interest charges and help you pay off the loan faster.
When weighing repayment options, consider your budget and goals. An interest-only or longer-term loan costs more but offers lower payments. This maximizes cash flow but doesn’t build equity as quickly. Opt for principal and interest payments if you want to pay off your loan faster.
Using Edge Home Finance Strategically
Edge Home Finance can be a useful financial tool when used strategically for certain goals. Here are some of the smartest ways to utilize Edge Home Finance:
Consolidating Debt
One of the most popular uses for Edge Home Finance is to consolidate higher-interest debt into one manageable payment. This can mean rolling credit card balances, personal loans, and other debts into your home loan. The key benefit is securing a much lower interest rate, which saves substantially on finance charges over time. It transforms multiple payments into one, provides possible tax deductions, and can help pay off debt faster with lower costs.
Home Improvements
Instead of putting home upgrades and renovations on credit cards with high rates, Edge Home Finance allows you to fund improvements at a lower cost. Whether it’s a new roof, upgraded kitchen, adding a pool, or other major home projects, the equity in your home can act as a reusable line of credit. There are also specific Edge Home Improvement Loans designed for this purpose.
Major Expenses
Edge Home Finance gives homeowners access to equity needed for major expenses like college tuition, medical bills, emergency costs, and other large unavoidable payments. Having a loan against your equity makes it easier to come up with funding for major costs. The debt is secured against your home but it offers better terms than other financing options.
The key with Edge Home Finance is having a plan for how you’ll use the funds and repay the loan. Used strategically, it can provide affordable financing for debt consolidation, home improvements, and major expenses. But it’s important to only access amounts you can reasonably manage.
Alternatives to Consider
One alternative to consider instead of an edge home finance loan is a home equity line of credit (HELOC). A HELOC allows you to borrow against the available equity in your home, up to a set credit limit. With a HELOC, you typically have a draw period where you can access the funds, then a repayment period with interest-only or principal and interest payments.
The benefits of a HELOC include potentially lower interest rates, interest-only payments during the draw period, and access to your home’s equity. The drawbacks are variable interest rates, closing costs, and risking your home with the debt.
Another option is a cash-out mortgage refinance, where you refinance your mortgage for more than what you currently owe. This converts your home equity into cash while keeping your loan balance and payments the same. The benefit is accessing significant funds at potentially lower rates. The downside is refinance costs and extending your loan repayment term.
Withdrawing or borrowing from your retirement accounts can also provide funds without a separate loan. This avoids fees and interest but loses out on future tax-deferred growth and could incur penalties. Use this option strategically if needed for important purposes.
Carefully weigh the pros and cons of these alternatives as you decide if an edge home finance loan is the right fit for you. The best option depends on your specific financial situation and goals.
Deciding if Edge Home Finance is Right for You
When determining if an edge home finance product is the right option, there are several key factors to consider:
Assessing Need
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What are you planning to use the funds for? Edge home financing is best suited for major home projects like renovations or repairs, not everyday expenses. Carefully consider if this financing is necessary for your goals.
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Have you explored lower cost alternatives like savings, HELOCs, or personal loans? Edge financing often comes with higher rates and fees compared to other products. Try to exhaust lower cost options first before taking on expensive edge debt.
Ability to Repay
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Can you afford the monthly payments? Factor in the payment size, frequency, and duration. Will it fit within your budget? Don’t take on more debt than you can realistically handle.
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Do you have a stable income and emergency savings? Job loss or an unexpected expense could put you at risk of missing payments or default. Make sure your finances are healthy enough to take on the new debt load.
Weighing Pros vs Cons
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Consider the advantages of edge financing such as high approval likelihood, flexible use of funds, and fixed payments. Do the benefits outweigh the cons for your situation?
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Don’t overlook the downsides like higher costs, risk of foreclosure, and minimum equity requirements. Factor in all potential risks and costs before deciding.
Carefully weighing all these aspects can help determine if an edge home finance product aligns with your financial situation and home finance goals. Avoid moving forward unless the clear benefits outweigh the substantial risks involved. Thoroughly analyze your options to make the most informed decision for your home and financial wellbeing.