How Does Equity Release Work?
Equity release allows you to get rid of equity in your property while you are still living there. A lot of people consider their property their largest asset. However, all of their savings are tied up in it.
Equity release is very similar to a mortgage. You can withdraw a lump sum, or a monthly amount from the property’s value.
This blog will explain all about how equity release works.
What is equity release?
Equity release is a form of lending. A lender will accept you and give you a lump sum or regular amount against the home’s value. The lender will take the loan amount from your property if you die, sell your home or move into a care facility. It’s either added to the sale price or paid monthly.
Lifetime Mortgages vs. Home Reversion
So there are two different types of equity release that are available that you can have.
1. Lifetime Mortgage
A lifetime mortgage is the most common method of equity release. The loan can be secured by your assets and paid back when you die or move into a long-term care.
There are no repayments as the interest “rolls up” it can be quickly added up. Some providers may allow you to pay the interest monthly, which can reduce the amount that is due when the house has been sold.
2. Home Reversion
A Home Resversion will allow you to sell part or all of your house to a lender. Your property’s value can be divided between 20-60%, you can sell the entire property and keep it until your last days or until you’re able to move into long-term care.
You can receive the money as a lump sum or a regular income. As you sell your property at lower rates, interest is not earned.
What are the major differences between a home reversion and a lifetime mortgage?
A home reversion is when you sell your property but you can still live rent-free. This means that you will not benefit from any increases in your property’s value over time, or only the portion that hasn’t been sold yet. A lifetime mortgage allows you to keep your home and this means that even if your property’s value rises, it will still be your home and benefit your estate.
A home reversion is exempt from interest because the market value of the property has been less than the amount that you have received. The lender assumes that the property will be more valuable when they take it into their possession.
The interest on a lifetime mortgage adds up to the total amount payable, which can add up over the time or you can pay the interest monthly in certain cases.
Here are some key points to remember for both Home Reversions and Lifetime Mortgages.
- How old you need to be to apply?
- What’s the maximum about that you can borrow? However, this all depends on your home’s value, your age, and your health. People who are more senior or have specific medical conditions may be eligible to borrow a greater amount.
- Are there any fixed interest rates or a maximum amount that can be repaid?
- You should ensure that you’re able to continue living in the property until you move into a long-term care.
- Ask about the consequences of moving home. How can you sell and what might the equity release impact?
- You should check if there is an “no negative equity” guarantee. This means that your estate won’t have to pay any if your debt exceeds the property’s value.
- You might be able to choose whether you want to take out a large lump sum or smaller amounts as you need them. Or a combination of both. You’ll earn less interest if you take out smaller amounts. However, make sure you check the minimum amount that you have to pay.
- You can ‘ringfence’ a portion of your property to allow family members to inherit it. This amount would be protected by either your home reversion or your lifetime mortgage amount.
Who is eligible for equity release?
To qualify for equity release, you must be at 55 years old to borrow against your home. Keep it in mind that you accrue more interest and debt the younger you get when you borrow.
You will need to make sure your property is your primary residence in order to repay your mortgage. You may also be able to use your equity release to pay the remainder of your mortgage.
What are the potential risks with equity?
It’s possible to accumulate a lot of interest if you begin taking out money early or take large items. Your family will have a large amount of debt to repay if the equity you release and the interest exceed’s the value of your property. A few equity release plans have a clause that prohibits negative equity. This will limit the property’s total value. You can also ringfence certain portions of the property’s value.
Sometimes the equity that was initiated too soon and older couples want to move home. It was difficult for older couples to ensure that there was enough equity in their home to purchase a new property.
This was due to equity release leaving them in the property while family members are away.
What are the benefits of equity?
You will have more money to save for retirement and enjoy your old age. You are the most value asset in your home and to make life easier or supplement your pension, you might need a little more money. You can use the money to travel or enjoy, while others save it for your their grandchildren or children’s property.
You can also enjoy the capital that you have invested into your home and not need to move into a new rental property or downsize. The money can be accessed while you continue to live in your home.
Are equity releases right for me?
It will depend on many factors including your age and whether equity release is right for you. Although it might sound unfavourable, equity release is more common for those who are older and have had any health issues.
Equity release is available for some providers starting at 55, however, you are likely live longer and your interest will accrue. This could mean that you end up costing lenders more especially if there is no negative equity clause.
Equit release is more beneficial for older people who plan to remain in their property indefinitely. Sometimes if you sell the property it can be complicated when equity has been taken out. Equity release can give you a fresh lease of life if you are able to manage your finances and keep track of the interest. Equity release can make your life easier, or allow you to access cash for the weekend.
Similar to the above, if your family is not involved in the mortgage, you can benefit from the money being locked up in your property, and the lender taking possession of the property later.
Are there other options?
It depends on the purpose of the money, so equity release may not be an option. A personal loan might be a better option if you need a large amount of money. Grants may be available if you want to make improvements to your property in order to improve your quality of life, or to help with living with disability. Downsizing is a good way to save money on your property. However, you should consider the cost of moving (including conveyancing and stamp duty).
What are the cost?
Applying for equity release comes with four costs:
- A solicitor
- A financial advisor/equity release advisor
- Application fee for lender
- Valuation
Talking to an expert equity advisor will help you find the best equity release scheme. Once you’re ready to move forward with the process, a conveyancing lawyer who is experienced in equity release will be able help you. Although home reversions may take longer than life mortgages for the process to be completed, it is usually within 6-8 weeks.
Will it affect my benefits/pension/income tax?
Some means-tested benefits may be affected if you draw money from an equity release. You may lose income support, council tax reductions, or other benefits. It is worth speaking to your equity release advisor to find the best option for you.
We hope that you have enjoyed reading this blog post and if you would like to read more, we have a whole full list of posts for you to read!