Equity release – what is it and how can it help you?
Equity release is a way of securing a loan against the value of your home. The money is paid back when the house is sold. There are two main types of equity release, home reversion and lifetime mortgage.
Home reversion
With home reversion you sell a share in your property to the provider of a home reversion scheme. You can usually sell between 25% and 100% of your property. It's important to note that the amount you get in return for your share will be significantly less than what you sell. For instance, a 20% payment given to you of your house value can mean you end up surrendering 70% of the property.
Lifetime mortgage
Lifetime mortgage is the most popular option for equity release. A loan is given against the value of your home which is then paid back when you die or move into long-term care. With this option you don't have to make any monthly repayments. Usually the interest on the loan is rolled up which means the interest is added to the loan and as a result the loan amount grows over time. With some options the homeowner is still allowed to make repayments.
Requirements for equity release
There are a few criteria which applicants for equity release must meet.
- You need to be 55 and over
- You need to be a UK homeowner
- Some companies require your home to be in good condition or to have a certain minimum value
Why should homeowners consider equity release?
Equity release can be a great way of freeing up capital which would otherwise be tied up in the value of your home. For older people, it can be a way of bridging the gap between pension payments and retirement costs. It allows you to generate income from your property whilst, unlike downsizing, you don't have to move home.
Most schemes are well-regulated. There are protections against you owing more than what your home is worth (negative equity). You are also protected against ever losing your home.
The disadvantages of equity release
Interest is charged at a rate which is typically double that for a conventional home loan. There can be significant costs in setting up an equity release scheme. In addition, state benefits you receive can be affected by equity release and this could significantly lessen any financial gain you make. Equity release also reduces your estate and what you can pass on to your beneficiaries.
Other considerations with equity release
The amount of money that can be released from your home depends on different factors including your age and the value of your property.
You can take the loan as a lump sum, in smaller, regular amounts or as a combination of both.
Look out for the equity release council sign. This is the industry body that regulates equity release companies and products. It has a series of standards and safeguards in place to protect customers.
It's highly recommended to take independent financial advice before moving ahead with the long-term commitment that is equity release.
There are lots of companies offering this sort of product, and it is very important that anyone considering equity release takes independent advice, head to our mortgage section to get free mortgage advice.