What is Equity Release?

Equity release, in simple terms, is a way of accessing money that is tied up in your home. Typically, it is used by those in later life who are retiring (or retired) and do not have enough cash to live on as they’d like. Cash that is supplied following equity release is yours to do what you want with and can be used to help children and grandchildren.

Understanding equity release

Wrapping your head around equity release can be difficult. The actual equity of your home is just the difference between the market value and your outstanding mortgage. Many people who bought their homes many years ago are now finding they are entitled to a large sum of equity as property prices have broadly increased over the years. Some examples can be seen below to help you better understand how equity works…

Your home is worth…Your outstanding mortgage is…Your equity value is…
£650,000£0£650,000
£400,000£50,000£350,000
£400,000£200,000£200,000
£350,000£200,000£150,000

Is equity release available to everyone?

To qualify for equity release you need to be 55 years of age or older. It does not matter if you are working or retired.

How much equity can I have?

If you want to release equity from your home you will have to take out an equity release mortgage. Therefore, it is not a decision you should rush in to. It would be beneficial to discuss the option with a financial adviser to receive their expert opinion before going ahead with anything.

You can usually borrow up to 50% of the equity on your property, with most people averaging 35%. The maximum amount of equity you can receive will be personal to you and based upon your age and property value.  You can have the cash as a lump sum or paid out monthly as a form of income.

It is worth remembering that lenders tend to charge an interest rate on the amount of cash you release.

Types of equity release

There are two ways of releasing equity from your property. In simple terms you can either take out money against your home (lifetime mortgage) or sell part of it (home reversion scheme):

Lifetime mortgage

Most people tend to opt for a lifetime mortgage when going forward with equity release. With a lifetime mortgage you borrow money against the value of your home. This mortgage is often repaid to the lender from the eventual sale of your home.

Home reversion scheme

In contrast, a home reversion scheme gives you the opportunity to sell part (or all) of your home to receive equity. Money can be distributed as regular income or as one tax-free lump sum.

The pros and cons of equity release

It is important to understand the advantages and disadvantages of equity release. The concept can be complicated, and it can be best to seek professional help from a financial adviser to help you better get to grips with what would be happening with your property and your money.

However, to set you off on the right track we have put together the key pros and cons of equity release.

Equity release pros

  • You can benefit from any rise in the value of your property
  • A lifetime mortgage allows you to continue to keep ownership and live in your home
  • Equity release is transferable meaning you can move house if you wish
  • You can receive equity as a tax-free lump sum or smaller payments

Equity release cons

  • Equity release will reduce the value of your estate in your will
  • Home reversion plans mean a company owns all or part of your home
  • Money from equity release may reduce any benefits you receive
  • If you receive council funded home care they may charge more

Things to think about

Equity release is a big decision. Your home, whilst a financial asset, is also a sentimental one too. There’s a lot to think about before going forward with equity release and seeking the advice of a financial adviser, solicitor, or both is the perfect solution to ensure you make the right decision for you.

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