Equity release allows you to withdraw either a lump sum or a monthly amount from the value of your property. It shares similarities with a mortgage process.
How does equity release work?
Equity release is a type of lending. Once a lender accepts you, they will either give you a lump sum or regular instalments against the value of your home.
The lender will recover the amount they lent you from the property once you no longer own it. This may be because you have passed away, moved into a care facility, or sold the home. Interest is then added to the amount taken from the property when it is sold. In some cases, you can pay the interest monthly.
Lifetime mortgages vs home reversion
There are two main types of equity release plans.
1) Lifetime mortgage
A lifetime mortgage is the most popular type of equity release product. With a lifetime mortgage, you borrow against your property. This is then repaid when you die or move into long-term care.
The interest rolls up, so there are no repayments, which can add up quickly. Some providers let you pay the interest monthly. With monthly interest payments, the amount owed will be lower when the house is sold.
2) Home reversion scheme
A home reversion plan is where you sell all or part of your home to a lender. You can receive 20% to 60% of your home’s value and still live in it for the rest of your life. This is also true if you sell only a portion of the property.
You can receive the money as a lump sum or a regular income. There is no interest because you are effectively selling your property at below market value.
What are the main differences between a lifetime mortgage and a home reversion?
With a home reversion plan, you have effectively sold your property but are allowed to live there rent-free. You will not benefit from any increase in the property’s value over time, except on the portion you still own.
With a lifetime mortgage, you still own your home. If the value goes up, it can still benefit you or your estate and can be used to repay the mortgage.
There is no interest in a home reversion plan because you receive less than market value for the property. The lender takes the risk that the property’s value will have increased when they take possession. With a lifetime mortgage, the interest rolls up on the total payable amount. This can add up over the years, although in some cases you can pay the interest monthly.
Who qualifies for equity release?
You typically need to be over 55, and usually older for home reversion schemes. There may also be limits on how much of your home’s value you can release.
Bear in mind that the younger you are when you start borrowing, the more debt and interest you could build up. Your property also needs to be your main residence. In some cases, you may be able to use equity release to pay off the remainder of your mortgage.
What are the risks?
If you borrow a large amount early on, you might build up significant interest over time. If your released equity and its interest are worth more than the property when you pass away, your family could be left with less from your estate.
Some equity release schemes include a no negative equity clause. This caps the total amount owed at the value of the property. There are also schemes where you can ringfence part of your property’s value so your children can still inherit it.
There have also been cases where equity release was started too early and older couples later wanted to move home. Ensuring there was enough equity left in their home to buy another property became harder after using equity release. This left some people unable to move closer to family or friends.
What are the advantages?
A major advantage is that you will have more money available for retirement and to enjoy later life.
Your home is often your biggest asset, and you may want extra money to supplement your pension. Some people use the money for travel and leisure. Others use it to help their children or grandchildren with a property deposit.
It also allows you to benefit from the value tied up in your home without having to downsize or move into rented accommodation. You can continue living in your home while accessing the money.
Is equity release right for me?
Whether equity release is the right choice for you will depend on many factors, including your age. The older you are, the more likely you are to qualify for a more generous offer. This may also be true if you have certain health conditions.
Although equity release can be available from the age of 55, you may live for many more years. Because of this, interest can build up significantly and may end up costing the lender more than they would otherwise make. This is especially relevant where there is a no negative equity clause.
Older people who are certain they want to stay in their property for life often fare better with equity release. This is because selling the property can be more difficult once equity has been taken out.
Equity release can provide a fresh start if you manage your money carefully and monitor the interest. Doing this can help you avoid paying for funds you do not use. This is especially true for those who take smaller drawdown amounts only when needed, whether to make life more comfortable or to treat the grandchildren at the weekend.
In the right circumstances, equity release can be a valuable tool.
Similarly, if you do not have children or family members you are leaving the property to, you may prefer to enjoy the money tied up in your home. The lender will simply take possession of the property later on.
What are the costs?
There are four possible costs when it comes to an equity release application:
- An equity release adviser or financial adviser
- The cost of solicitor fees
- The lender’s application fee
- Valuation
If you are interested in equity release, speaking to an expert equity release adviser who understands these schemes can help you find the right option. When you are ready to proceed, a conveyancing solicitor with experience in equity release can help get the process started.
Home reversion plans can take a little longer than lifetime mortgages to finalise, but the process usually takes around six to eight weeks.
Will it affect my benefits, pension or income tax?
If you receive means-tested benefits, some of these may be affected by drawing down money through equity release. Things like reduced council tax, income support, or other benefits may be reduced. It is therefore worth speaking to your equity release adviser, as well as your local authority or benefits office, before making a decision.
What other options are there?
In some cases, it depends on what you want the money for, as equity release may not be the right option.
If you want a one-off sum, a personal loan may be an easier option.
If you are looking to make changes to your property to make later life, or living with a disability, easier, there may be grants available.
If you are simply looking to free up some money from your property, downsizing may be a good option. However, do take into account the other costs associated with moving, including conveyancing, surveying, removals, and Stamp Duty. You can use the reallymoving Moving Cost Calculator to get an idea of what you might expect to pay.