Equity Release Calculator

A home equity loan calculator can help you estimate how much tax-free cash you can take out of your house without selling it. That amount depends on three factors: the age of the youngest homeowner, the value of the property and the remaining mortgage balance. Most homeowners can withdraw between one-fifth and three-fifths of their property's worth, with that percentage increasing as they get older.

What is a home equity loan?

A home equity loan allows homeowners aged 55 or over to convert a portion of their property's value into cash while remaining in the house. There are two main methods: A reverse mortgage is a loan secured by the house, with interest added to the balance and only due when the last borrower dies or moves into long-term care. A home reversion is a type of sale where part of the ownership is transferred to a company in exchange for a lump sum payment and the right to remain in the property rent-free for life.

The lifetime mortgage is the more common of the two methods. There are no monthly payments required unless you choose to pay back yourself. This does however mean that your debt will gradually increase with interest accruing on it. With a home reversion, part of the house is sold already so there's no debt and the remaining share is kept.

How much can I withdraw?

With a lifetime mortgage, the company will set a maximum loan to value (LTV), which is mainly dependent on age. The older the homeowner, the higher the percentage that can be borrowed as the length of time for the loan is expected to be shorter. Roughly speaking, the percentage of equity that can be drawn down starts at about 20 per cent (for a 55-year-old) and rises to around 60 per cent for the oldest borrowers.

An example from practice: If a person aged 65 owns a house worth 350,000, the maximum loan-to-value (LTV) may be up to 32 percent, which is about 112,000. At age 80 it might be possible to take out around 50 percent, or roughly 150,000 from the same house. This calculator uses curves that are calibrated to these reference points and takes into account any outstanding mortgage balance as this must be fully repaid first.

The cost of compound interest.

With a traditional lifetime mortgage there are no monthly repayments required. Therefore interest continues to accrue on both the capital amount and any interest contained within it. This is known as the compounding effect of interest, and the longer the term plan the faster the balance will grow. The amount due after several years can be calculated using this formula:

Consider an example where 50,000 is borrowed and a fixed annual interest rate of 6.4 percent is agreed upon. After 11 years the remaining balance will have doubled to about 100,000, and this process continues at similar pace. A practical approximation says that debts double in approximately (72 divided by the interest rate) years. So if the interest rate is around seven percent, then it takes about ten years for a debt to double.

What you or your family ultimately receive is the estimated value of the house minus the remaining debt.

V is the current property value and g is the expected annual appreciation of the property. Even if your debts exceed the value of the property, a "no negative equity" guarantee caps the debt limit at the sale price so that you or your heirs are not obligated to make up the difference.

This is how this calculation tool works:

Enter the age of the youngest homeowner, property value and mortgage balance remaining. Select a product. For a lifetime mortgage, set the interest rate, expected term and expected property appreciation. The default is 2% annual growth. Leave the amount you want to draw down at zero to simulate the maximum possible amount available. Alternatively, enter a lower amount to see the impact of drawing only what you need.

The results show the amount of cash available to draw on, the debt at the end of the term, the estimated value of the property and your remaining net worth. If you turn on the interest paydown feature, you can see how much net worth is left if you pay a portion of the interest each year. With a home buyback option, enter the percentage of the house that you want to sell as well as the buyback factor offered by the provider. The calculator will then calculate the lump sum and remaining equity.

Here's how to cut your costs:

The easiest way is to reduce the loan amount since interest accrues on a lower balance. With a flexible plan you can further decrease your cost by withdrawing more money up front and leaving the rest as a reserve, thus incurring interest only on the actual withdrawal amount. If your plan allows you to pay some or all of the interest each month, then you can delay or prevent interest accumulation altogether, thereby protecting your estate.

This calculator is for general guidance and educational purposes only, not financial advice. Taking equity may reduce the value of your estate and affect your eligibility for certain benefits which require an asset test. The actual terms can vary by provider, property and your specific circumstances. Taking equity should be done through a qualified advisor. You should therefore seek independent professional advice before making any decisions.