What is equity release and how does it work?
Equity release lets you access a portion of the equity tied up in your property, whilst you continue to live in it. What are the different schemes and how do they work?
What is equity release?
Equity release is when you borrow money against the value of your home, while you still live in it. An equity release lender will give you either a lump sum or regular smaller payments, and the loan is tax-free.
If you sign up to an equity release plan you will be able to remain in your property for life, or until you move to a care home.
Who is eligible for equity release?
In order to qualify for equity release, you will usually have to be:
- Over 55
- Mortgage-free
- Using your property as your main residence
Depending on your circumstances, there may be a limit as to what portion of your home you can borrow against. You may be able to use equity release to pay off what remains of your mortgage.
The most common types of equity release
Lifetime mortgage:
A lifetime mortgage is the most popular equity release plan.
The home owner either borrows a lump sum, or receives smaller regular payments. The loan is repaid when the house is sold the owner passes away or the owner enters long term care.
Interest on the loan is paid when the house is sold. Some equity release lenders will allow the home owner to pay the interest monthly in order to reduce the amount owed when the property is sold.
Home Reversion:
Home reversion means selling either part or all of your home to a lender. You will receive either a lump sum or a regular income, while being allowed to stay in your home for the rest of your life (or until you enter a care home).
Home reversion will offer you between 20% and 60% of the market value of your home.
There is no interest to pay, as you are effectively selling your home at a reduced rate.
Which type of equity release is right for me?
The key difference between a lifetime mortgage and a home reversion is that, with a lifetime mortgage, you retain full ownership of your property.
With home reversion, you are selling part or all of your property to the lender.
If you take out a lifetime mortgage you will still benefit fully from your home increasing in value, which could help in paying off what you owe when the time comes to sell the property.
With a home reversion there is no interest to pay. The property is sold to the lender at less than the market value, so the lender is looking to make a profit when they eventually take possession of the property.
The risks of releasing equity too early
It is worth considering that the earlier you take out equity release, the more interest you will accrue as the years pass. If the interest plus the amount of equity you released is worth more than your home when you pass away, your family could face a large debt.
Beware also of releasing equity in your home if there is a chance you may later want to move. If there is not enough equity left in your home to buy another property, you could end up stuck where you are.
‘No negative equity’ clauses
An equity release scheme that has a ‘no negative equity’ clause will guarantee that you will never owe more than the value of your property. This eliminates the risk of your family owing more than your property is worth after you die.
You can also consider a scheme that allows you to ring fence a portion of the value of your home for your children to inherit.
Is equity release a good option for you?
Equity release offers many benefits, not least a more comfortable retirement financially .
The older you are, the more likely you are to receive a generous equity release offer. Equity release best suits those who are looking to stay in their property for life, due to the issue of selling becoming more difficult once equity has been taken out of the property.
A lump sum or regular income could be life changing. If you are unsure as to whether equity release is right for you or which scheme you should go for, take independent financial advice.
What costs are involved?
If you decide to apply for an equity release plan, you will most likely need to pay for the following:
- A solicitor
- The lender’s application fee
- A valuation on your home
- A financial advisor or equity release advisor
The equity release process will usually take between 6-8 weeks.
Home reversion tends to take longer to finalise than a lifetime mortgage.
Other things to consider
- If your property is bigger than you need, downsizing can also be a good way to unlock some of the equity from your home.
- If you are on means-tested benefits, some of these may be affected if you draw down money from your property.
- Check the interest rates on any equity release plan you consider: are they fixed, or variable? If they are variable, there should be a cap on how much your repayment can grow.
