Equity release allows you to access your property’s value for more cash when you retire. It can be an attractive option if you’re facing a pension shortfall or have an unexpected expense. It also means you can benefit from the capital your home holds without having to sell your home and move. However, it is important to remember that it can be an expensive commitment which will last your lifetime.
There are two types of equity release which we have outlined.
Lifetime mortgage
People aged 55 or over who own their home can boost their income later in life by releasing some of the equity they have in the property. A provider will offer you a tax-free loan secured against your home which is paid off when you die or go into long-term residential care. In the case of a joint application the sale happens when the last named person living in the house dies or moves to long-term care.
A lender may offer up to 60% of the value of your home. The older you are, the more you can borrow.
You are not required to pay the loan off during your lifetime unless you want to sell your property or remortgage with another provider for a better deal. Most schemes do not allow you to pay off the loan early and may demand an early repayment charge.
You can choose to ring fence some of the equity in your property to ensure you have an inheritance to leave to family members. This can be a good idea, because the interest can grow on these loans quickly, and can eat up the value of your home. Interest rates vary according to the provider you use but at the moment seem to range from 3-5%.
Check your provider offers a no negative equity guarantee (Equity Release Council standard) which should ensure your beneficiaries don’t have to repay any extra above the value of your home from your estate. This is the case even if the debt is higher than the value of the home.
Interest rates must be fixed or, if they are variable, there must be a “cap” which is fixed for the life of the loan (Equity Release Council standard).
There are two ways to pay your lifetime mortgage:
Interest roll-up mortgage – this is when you get a lump sum and the interest is left to accrue. This means you don’t have to make any regular payments however, the total you owe can grow quickly. The loan, plus the rolled-up interest, is repaid at the end of your mortgage term when your home is sold.
Interest repayment mortgage – you get a lump sum but can make monthly or ad-hoc repayments to stop the interest from growing too much. Again, the loan is repaid at the end of the term when your home is sold.
Equity release
Home reversion, or equity release, is when you sell a part of your home to a provider in return for a lump sum or regular payments. Typically you can receive 30-60% of the value of your home. You may want the money for renovations, a holiday or to pay off debts.
There is often a minimum age for these plans which is usually 65. You have the right to live in your home, rent free, but must keep it insured and maintained. You can ring-fence some of the value for future use if you want to leave family members an inheritance.The percentage you retain will always remain the same, regardless of the change in property values and, like lifetime mortgages, providers should have a no negative equity guarantee.A home reversion plan is higher risk and it could affect your tax, benefits, inheritance and long-term financial planning. Always think carefully before securing other debts against your home.Use our Equity Release Calculator to work out how much cash you could release.
It is important to take expert advice on equity release before deciding whether it is right for you. Contact us to find out more from one of our highly trained advisors.
