Equity release is a term often used to describe a variety of products that are designed to give you access to cash from your home. It’s a financial option that is offered to homeowners aged 55 or over and the money can be taken in the form of a lump sum or regular payments. There’s also the option of combining both should you prefer it.
There are two equity release options available; lifetime mortgages and home reversion.
In most cases, people who take out equity release do so through the use of lifetime mortgages. Lifetime mortgages involve borrowing money relative to the value of your home at a fixed or capped interest rate. Not all lifetime mortgages can be repaid, meaning that the interest will compound rather quickly and the amount you owe will continue to increase over time compared to a regular mortgage. Instead, it’s paid back when you pass away or if you move into long-term care.
The home is sold and the money gained in the sale is used to pay off the loan. Anything left over can be given to your beneficiaries, but it’s also possible to pay it off without having to sell the property if you have the means. If there’s not enough money, then your beneficiaries will need to pay whatever is left of the loan, but there are ways to prevent this from happening. Many lifetime mortgages offer a no-negative-equity guarantee which essentially means that you will never need to pay back more than what the home is worth, but this only happens in the event that the interest accumulated exceeds the value of the property.
Home Reversion Plans
The other equity release option is a home reversion plan. This is only available to people 60 or over. It involves selling a portion of your home to a provider at below the market value. You then live rent-free in the property until you pass away. When the property is sold, you will receive your portion of the split and it can be distributed to your beneficiaries or to whomever you have listed in your will.
The amount of money offered to you will be substantially lower than what the share of your property is actually worth. In some cases, you may only receive around half of what the share is worth, meaning you will be giving up your home for a very low price in exchange for a convenient lump sum of cash.
Tips for Equity Release
Remember that lifetime mortgages are generally more predictable due to the rates being set in stone, whereas home reversion plans often depend on the value of property in your area. If they rise, then you’re not going to get a great deal but if they stay flat, then it can be worth your time.
It’s also important to remember that getting cash from your property could affect benefits like pension credit, so it’s worth speaking to an advisor to understand the effects it could have on your other sources of income.