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Equity release mortgages are an increasingly popular option for older couples thinking about the future. As you reach retirement age, needs change, and an equity release loan that boosts income can be desirable at this stage in life.
But many homeowners are asking a valid question – can you release equity from a house and move? We’re going to answer this question and delve a little deeper to help you find out how equity release works in the UK.
Types of equity release plans
There are two main types of equity release schemes:
- Lifetime mortgages
- Home reversion plans
Lifetime mortgages are the most popular by far. This is because you are not obliged to make any payments as part of this mortgage and retain 100% ownership of your property.
These mortgages have become more flexible, so owners have more options when they wish to release equity from their home. For example, some will allow the homeowner to guarantee an inheritance by protecting a sum of their home’s value. However, the amount of equity that can be released will be lower as a result.
If you are considering a lifetime mortgage, here are some of your options:
Lump-sum lifetime mortgage
A lump sum lifetime mortgage is secured against the property and gives homeowners a tax-free lump sum, and there are no monthly payments required.
With no payments, the amount of money you release gains interest over time and will usually be repaid when the last homeowner on the deed dies or enters long-term residential care. Most of the time, this is achieved upon the house sale.
Drawdown lifetime mortgage
A drawdown lifetime mortgage is similar to a lump-sum lifetime mortgage, but there is more flexibility in how you can withdraw money. It allows you to withdraw in stages, rather than having to take a single lump sum.
Interest is only applied to the withdrawn sum released, accruing slower, resulting in a reduced cost compared to a lump sum lifetime mortgage.
Interest only lifetime mortgage
A relatively new kind of equity release plan, interest-only lifetime mortgages allow you to make monthly interest payments to prevent the size of the loan repayment from going up.
The interest rate can be fixed for the duration of the plan, and if your circumstances change, you have the option of switching to a lifetime mortgage that does not require repayments. This will mean the conditions change, and a higher interest rate may also apply.
Home reversion plans
Home reversion plans take up less of the market than lifetime mortgages and allow homeowners to sell a portion or all of their home for a tax-free cash lump sum or receive a regular income. When doing so, the homeowner maintains the right to stay in their home for as long as they choose, without rental costs.
The house is sold when the owner dies or enters long term residential care. Then, the revision company takes its share of the sale, leaving the remaining percentage to your beneficiaries. This is unless the property was sold in its entirety as part of the plan. In which case, all proceeds go to the company.
Please note that if you are considering an equity release scheme then you must be 55 years of age or older to qualify.
How to release equity from my home?
The most common reason for remortgaging a property is when a mortgage deal is coming to an end, or a homeowner wishes to consider better deals as they now have more equity and lower LTV.
However, some homeowners wish to borrow more money against their property, so releasing equity from their home is another option. This means that if your property has risen in value, and there is enough equity, you can borrow more money and release a portion of it, often without increasing your monthly repayments.
Homeowners who wish to release equity from their home will need to take out a mortgage larger than their existing one.
For example, if a property has risen in value from £200,000 to £250,000, changing the LTV from 75% to 60%, you have two options. You can look for a lower repayment rate, or you keep the current rate and borrow the additional £50,000.
Selling your home is another way of accessing equity. Most homeowners put this equity towards a new house but however you use the money from a sale, there are several costs to selling a property, including solicitors fees and removal costs.
How much equity can I release?
There are several considerations that a lender will check before you can release equity in your home. After checking your credit record, you will receive an offer based on your current financial situation and their lending criteria.
The offer will depend on the equity you have in the property and your age, but the typical amount of equity you can release is between 20% and 50% of the value of your home, with most people averaging 35%.
Typically, most homeowners asking “can I take equity from my house?” will release between £10,000 – £100,000. £10,000 is the minimum so lenders can ensure the release is justifiable.
Want to know more? Many lenders have calculators on their websites to give you a more accurate indication of how much equity you can release.
How can I sell my house if I have an equity release?
The lender will need to approve the property move first, but many equity release schemes allow you to move your mortgage to a new property if you decide to sell.
The new property and mortgage must align with the current lending criteria. However, with flexible deals available, selling a house with a retirement equity release deal is often achievable.
In some circumstances, a company will decide against lending all the money when moving to a home that is worth significantly less than your current property. Repaying some of the mortgage early can help make such a move possible, but there could be early repayment charges to pay.
Some equity release providers will not accept a move to certain properties if they are not likely to result in an easy sale when the plan finishes. Retirement homes are an example of this.
Are there alternatives to porting my equity release?
Releasing equity is a big decision, so it is best to think it through over a while to be sure your decision is right for you.
Some homeowners extend their mortgage term instead of porting their equity release plan, especially if they haven’t paid their mortgage by retirement age. If you find yourself in this situation, your lender may agree to extend your home loan term by another 5 – 10 years.
By doing so, you would ease some of the financial pressure by decreasing your monthly mortgage payment.
Alternatively, downsizing or moving to a less expensive property can be an option. Some people choose to ask family and friends for help, sell assets, and even apply for a grant for home improvements from their local council should they be eligible.