What is an equity release? We’ve got the answers you need.
Want to be able to access the money that is tied up in your home as an older person? Then you can get what is called an equity release. This is a range of different services that allow you to access the equity that is tied up within your property. You can take the money that you release as either a single lump sum, in several small increments, or as a combination.
What is an equity release? Is the equity release scheme a good idea? Should you consider an equity release as a homeowner? Do you qualify for the equity release scheme? Let’s take a look at what you need to know.
When Can You Get an Equity Release?
The equity release scheme is available to homeowners who are above the age of 55. It allows them to release amounts of tax-free cash from the value of their property.
The amount that you can release via the scheme depends on your age and the value of your property. Depending on the type of equity release product that you choose to go with, you can either claim your cash as one lump sum or several smaller increments. Some equity release products offer both options.
The good thing about a scheme like this is you can do whatever you like with the money you receive. You could help your children to move home or perform vital improvements to your own property.
Alternatively, you could simply have money for retirement.
How Much Equity Release Could You Get?
As previously stated, the amount of equity that you can receive through an equity release product depends on the value of your property and your current age. However, it is possible to receive a reasonable percentage of the value of your home as cash through the scheme.
What are the Types of Equity Release?
There are two different types of equity release options that you can choose from.
The first option is a lifetime mortgage.
Take a mortgage out and secure it to your property, provided that it is your main residence and you still retain ownership. You may even be able to ring-fence some of the property value as an inheritance for your family. You have the option to either make repayments or simply let the interest build. The amount that you took out for the loan and any built-up interest that you have accumulated is paid back by selling the property, which happens when the last borrower dies or moves into a long-term care situation.
The second type of property equity release scheme is available as a home reversion.
Sell all or part of your home to a home reversion provider. They will pay you either a lump sum or give you regular payments. You are allowed to continue living in your property until you die, but you have to agree to maintain and insure the property. The percentage that you retain of your property will always stay the same regardless of the change in the value of your property. When the last borrower in the scheme dies or moves into long-term care, the property is sold and the proceeds from the sale are divided according to the proportions of ownership between the family and the provider.
Lifetime Mortgage
The bulk of people who use an equity release product tends to take out a lifetime mortgage.
The benefit of a lifetime mortgage is that you don’t have to make repayments while you’re alive. Instead, unpaid interest and repayments are simply added to the loan. This can increase your debt quite quickly over a period.
Thankfully, there are lifetime mortgages that do allow you the option to pay off some of the interest. The type of lifetime mortgage that you can get will vary from one lender to another, just like an ordinary mortgage.
Home Reversion
The home reversion is all about selling some of your property to a home reversion provider.
So, the provider co-owns your home with you, unless you have sold your entire property, but you are allowed to live there for the rest of your life potentially without paying rent. In return, you get access to either regular payments or a lump sum. You can get anywhere from 20 to 60% of the market value of your property, or of the proportion that you sell.
What You Need to Know About an Equity Release
The equity release might seem like a good idea if you want to make some extra money and don’t want to sell your property. However, there are some things that you should consider before going for an equity release.
First of all, the equity release can be more expensive than an ordinary mortgage. If you take out a lifetime mortgage, which is what the first option is, you will be paying a higher rate of interest than you would on a basic mortgage, and your debt can rack up quite quickly.
Lifetime mortgages have no fixed date or term by which you are required to pay back the loan. However, the rate of interest that you do have to pay won’t change during the contract unless you specifically take out a variable rate mortgage. The interest rate that you pay on drawdowns will be determined at the time of the drawdown, and not at the time that the contract begins, so it might be different to your previous rate.
If you take out any additional borrowing during the lifetime mortgage, the interest rate that you pay will be different, and it will only be applicable to that extra borrowing.
The home reversion plan will not give you a proper market value of your property due to the fact that you are allowed to keep living in it for the rest of your life, which you couldn’t do if you sold your property on the open market. It’s also worth noting that if you do release equity from your property, you might not be able to rely on it later on for money that you might need.
While you can move house and take a lifetime mortgage with you, if you decide that you want to downsize later on, you might not have enough equity in the home to do this. This will mean you will need to pay back some of the mortgage. Some lenders do offer downsizing protection, but you must discuss this with a qualified equity release adviser. It’s also worth noting that your access to certain government benefits can be restricted or even declined if you receive money from an equity release program.
You will have to pay an arrangement and advice fee as well as legal fees. If you take out an interest roll-up lifetime mortgage, then you can’t pass as much on to your family as part of their inheritance.
While it is true that the schemes are monitored and regulated by the financial conduct authority, they are quite complicated to get out of if you want to change your mind. it’s also worth noting that these kinds of schemes can have early repayment costs if you do change your mind, which can be quite expensive, but if you move into long-term care or die they are no longer applicable.
Finally, it’s important to understand these types of schemes impact the amount of inheritance that you can pass to the rest of your family, so you need to discuss these plans with them to make sure that potential complications are avoided later on down the line.
Final Thoughts
The benefits to an equity release scheme are that you gain access to your money early. If you need it for something important, it is available, but it is also vital to remember that there are considerations.
The scheme is not suitable for everyone, and you could lose a significant portion of the value of your property, which could impact of your beneficiaries in the future. Home reversion schemes often require you to be at least 65 before you can take advantage of them.
However, if you are prepared to work out a simple plan, the equity release scheme can be a great way to get access to tax-free cash from your property which you can use for whatever purpose you want. Some people choose to secure their retirement, and others use it to help family members. It’s up to you what you do with a lump sum given as a result of an equity release scheme, just make sure to do your research beforehand.
