If you’re a homeowner over the age of 55 in the UK and looking for ways to unlock some extra cash from your property, then you’ve probably come across the term ‘equity release’. But what exactly is it, and how does it work?
In this article, we’ll walk you through the basics of equity release, helping you understand whether it might be the right option for you or a loved one.
The Basics of Equity Release
Equity release is a way for older homeowners to access some of the value tied up in their property without needing to sell up and move. Essentially, it’s a loan that’s repaid when the homeowner either passes away or moves into long-term care. It’s designed to allow people to enjoy the benefits of their property wealth during their lifetime, all while still being able to live in their home.
In simple terms, the equity in your home is the difference between the value of the property and any outstanding mortgage or loan secured against it. For example, if your home is worth £300,000 and you still owe £50,000 on your mortgage, your equity is £250,000. Equity release lets you access a portion of that equity, typically as a lump sum, a series of smaller payments, or a combination of both.
Types of Equity Release
There are two main types of equity release: ‘lifetime mortgages’ and ‘home reversion plans’. Let’s break these down so they’re easier to understand.
Lifetime Mortgage
A ‘lifetime mortgage’ is by far the most popular form of equity release. It allows you to take out a loan secured against your home, but you don’t need to make monthly repayments like you would with a regular mortgage. Instead, the loan, plus interest, is repaid when your property is sold after you pass away or move into long-term care.
One important point to note: although you’re borrowing against your property, you still own 100% of it. The amount you can borrow depends on your age and the value of your home. Generally, the older you are, the more you can release.
Most lifetime mortgages also come with a ‘no negative equity guarantee’. This means that even if your house decreases in value, you’ll never owe more than the value of your home when it’s sold.
There are also flexible options available, such as ‘drawdown lifetime mortgages’, where you can release smaller sums of money as and when you need it, rather than taking out a lump sum all at once. Some plans also allow you to make voluntary repayments to reduce the total amount owed.
Home Reversion Plan
With a ‘home reversion plan’, you sell part (or all) of your home to a reversion company in exchange for a lump sum or regular payments. You can continue to live in the property rent-free until you pass away or move into care, but you won’t own the full property anymore.
The catch here is that you typically won’t get the full market value of your home when you sell a portion of it. For example, if you sell 50% of your home, the cash you receive might only be worth 20-30% of its actual market value. This is because the reversion company needs to make a return on their investment when the property is sold.
Is Equity Release Right for You?
Equity release can be a great option for some people, but it’s not for everyone. Here are a few factors to consider before making any decisions:
You want to stay in your home – One of the main attractions of equity release is that it allows you to stay in your home while still benefiting from its value. If you’re emotionally attached to your property or don’t want to downsize, this could be an ideal solution.
You need extra funds – Whether it’s to help with day-to-day living costs, home improvements, or even to support family members, equity release can provide a significant cash boost. Many people also use it to supplement their retirement income or pay off an existing mortgage.
You have no plans to leave your home to heirs – While it’s possible to ring-fence a portion of your property’s value to leave as inheritance, equity release will reduce the amount you can pass on to loved ones. If leaving a financial legacy is important to you, this might not be the best option.
You’re over 55 – Equity release is generally only available to homeowners aged 55 and over. The amount you can borrow typically increases as you get older.
Consider the costs – As with any financial product, there are costs involved. Interest rates for lifetime mortgages are generally higher than for traditional mortgages, and the debt can grow quickly if interest rolls up over time. Home reversion plans may offer less than market value, so it’s important to weigh up the long-term impact.
Key Benefits of Equity Release
Equity release offers several potential benefits:
Access to tax-free cash – The money you release from your home is typically tax-free, so you won’t have to worry about a chunk being eaten up by HMRC.
Flexible payment options – Many lifetime mortgages allow you to make voluntary payments, meaning you can reduce the overall cost if your circumstances change.
No monthly repayments – Unlike a standard mortgage, you don’t need to worry about making regular payments. The loan is repaid when the house is sold.
Stay in your home – You can continue to live in your home for the rest of your life (or until you move into long-term care).
Things to Watch Out For
Interest compounding – With a lifetime mortgage, interest can build up quickly over time. While most plans have safeguards in place, such as the no negative equity guarantee, it’s still important to understand the long-term implications.
Impact on inheritance – Equity release reduces the value of your estate, meaning there may be less to pass on to loved ones when you’re gone.
Eligibility for benefits – Releasing cash from your property could impact your entitlement to means-tested benefits such as pension credit or council tax support.
Final Thoughts
Equity release can be a fantastic way to unlock the value of your home and enjoy the benefits in your retirement. However, it’s not a decision to be taken lightly. Before proceeding, it’s always best to seek independent financial advice to fully understand the costs, risks, and alternatives. At the end of the day, it’s all about finding the right balance for your individual needs and circumstances.
If you’re considering equity release, our team of experienced mortgage advisors is here to help. We can guide you through the process, answer any questions you may have, and ensure you find the best product to meet your needs. Contact us today to learn more and take the first step towards unlocking the value in your home.