Here’s everything you need to know about equity release.
What is equity release?
Equity release refers to a range of financial products that let you access the equity in your property in form of money that you can use. You can access this cash as a lump sum, or in smaller quantities, or as a mixture of both.
The funds are usually repaid upon death or if you move into long-term care.
What are the different kinds of equity release?
Lifetime mortgage Here, you obtain a lump sum in the form of a mortgage while keeping possession of your property.
When you pass away or when you move into long-term care, the loan amount together with any built-up interest is eventually repaid from the sale of your property.
The interest is compounded, so the more time you keep the loan, the more interest you’ll pay. That said, some lenders will allow you to make regular repayments to reduce the overall interest you’ll be obligated to repay at the conclusion.
To qualify for a lifetime mortgage, you have to be at least 55 years old.
Home reversion With home reversion (which is only offered to those aged 65 and above), you sell your home to a provider for a lump sum payment or regular income.
You’ll have a legal right to continue living in the house, but you’ll have to agree to maintain and insure it.
You can sell the whole property, or retain a percentage of it, perhaps to transfer on to your descendants as an inheritance.
On passing, the home will be sold, with some of the proceeds going to the rest and the company to whoever you left it to.
How much does equity release cost?
Interest rates for equity release used to tend to be higher than for a standard mortgage due to the perceived higher lending risk of this scheme. The typical average rate for a lifetime mortgage, for example at the moment, is around 3%.
On top of the interest rate, you’ll have to pay setup fees. These can reach from ₤ 1,500 to ₤ 3,000, depending on the plan chosen.
What are the advantages of equity release?
It gives you cash to spend now rather than having it remain secured away in your home
You still get to live in your home rent-free
You continue to benefit from any rise in the value of your property
You retain ownership of your home if you take a lifetime mortgage.
Since equity release is transferable, you can move to an alternative property in the future (subject to meeting suitability criteria set by your equity release company).
What are the disadvantages of equity release?
It minimizes the value of your property, impacting the amount you can leave an inheritance to your beneficiaries.
Having extra income from equity release may reduce or totally eliminate your entitlement to means-tested benefits such as pension credit and universal credit.
With home reversion, the company owns all or part of your home.
Is equity release right for me?
Whether equity release is suitable for you will depend on your individual circumstances including:.
The amount you want to release.
Your plans for the future.
The Money Advice Service advise that when releasing equity from your home, it’s vital that you do not just concentrate on the immediate boost you’ll get from the cash you unlock, but also on how it will affect your future choices and financial situation in later life.
What are the alternatives?
Equity release might not be ideal for everyone. Before you go for it, it might be useful to think about the available options. Here are a few worth looking at:
Downsizing: selling your current property, moving to a smaller one and pocketing the difference.
Accessing credit: if you only need a small amount, then a personal loan or a credit card with a 0% interest rate might be a much better option.
Letting out a room: if you have additional space in your home, consider renting it out to raise extra income. If you furnish the room before letting it out, you can earn up to ₤ 7,500 tax-free annually through the government’s Rent a Room Scheme.|You can earn up to ₤ 7,500 tax-free annually through the government’s Rent a Room Scheme if you furnish the room before letting it out.
Remortgaging: this can enable you to borrow more than equity release.
It might be useful to first seek advice from a financial adviser with an equity release qualification if you’re thinking about equity release. The adviser will help you find the best deal if equity release is appropriate for you.