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What is equity release?
Equity release is a way of accessing the money in your property. Normally, your property is an asset you can’t make use of unless you sell it. Equity release allows you to ‘release’ some of that cash from the property whilst continuing to live there. Depending on what type of equity release deal you go for (a Lifetime Mortgage or Home Reversion) you can take out a lump sum of money, or have access to ‘drawdown’ which means you can access the cash as and when you need it. Most often with equity release, you do not have to worry about paying interest, because the equity release company will deal with it when you leave your property, either after moving into care or until the end of your life.
You can also put certain elements in place to ringfence your property for your kids or grandkids, so you won’t be at risk of losing all of your assets. These details really depend on what type of equity release you choose, as well as how old you are when you release equity in your home.
What is a lifetime mortgage?
A lifetime mortgage is the most popular form of equity release. It’s a mortgage available to homeowners that runs for the rest of your life. When you pass away or go into care, the capital borrowed and interest built up will be need to be repaid, usually by the sale of your property. Or in cash if you or your beneficiaries wish.
You will always own 100% of your home with a Lifetime Mortgage, you’re simply borrowing against it. You do need to own your home outright, with no mortgage, to access this option. Lifetime Mortgages have fixed or variable rates of interest and you can decide to make monthly payments to cover the interest, or not. The minimum age of application is 55.
What is home reversion?
Home Reversion means selling part of your home to a reversion company. You’ll receive a cash lump sum, or a regular income, depending on your preference. You can draw down an amount into your account, or receive a monthly payment. Or a mixure of both.
You are then allowed to continue living in your home until you pass away or go into long term care, under a lease agreement. The property will then be sold, and you or your beneficiaries will receive their share, minus what the reversion company are owed. If you are an older homeowner who might not be able to repay elements in a Lifetime Mortgage, Home Reversion may be a better option. The minimum age of application is 60.
Frequently asked questions
How does equity release work?
Most people are concerned with equity release that they might build up negative equity, borrowing more than their home is worth. All Lifetime Mortgages have to meet the Equity Release Council’s standards, which have a no negative equity guarantee. It also doesn’t stop you moving home, or selling – you’d simply pay off the Lifetime Mortgage, or port it to your new home. You can also ringfence a portion of your property’s value for your beneficiaries, so there will always be an amount to leave as inheritance after the Lifetime Mortgage has been repaid. In the case of Home Reversion, this is really better for later in life, where you have no intention of paying off a mortgage or interest, and instead want to harness the value in your home.
Can I still sell my house if I release equity?
If you are using a Lifetime Mortgage equity release product, then you can move home. You simply pay off the Lifetime Mortgage with the proceeds of the sale, or take it with you to your new home, like porting any other type of mortgage. If you take out a Home Reversion, you cannot move home, as the reversion company now owns part of it.
How do I apply for equity release?
The best thing to do is to talk to a legal expert who knows about equity release, to make sure it’s the right choice for you and your family. Your offer from an equity release firm will depend on your age and the value of your property. A solicitor experienced in setting up equity release will be able to ensure you qualify, that it’s in your best interest and that you’re getting the best deal. They may ask what you want the money for, as that will impact what kind of equity release product works best for you. Compare quotes for equity release lawyers, and go from there.
What are the downsides to equity release?
It’s really key to go into the process completely understanding what product you have and how it works for you. A Lifetime Mortgage gives you flexibility and continued home ownership, but you need to consider whether you’ll pay back a monthly fee to cover the interest, or let it build. You’ll also need to be aware of the interest and whether it’s variable or fixed. Most people are fearful of the interest building up and them losing all value in their home altogether. This can’t happen with a Lifetime Mortgage. Home Reversion companies will likely make more money from owning a portion of your property by the time it is sold after your passing, and it limits you from moving unless you are going into a care facility.
How much will setting up equity release cost?
In order to apply for an equity release product, you’ll need both legal and financial advise. Your legal advice could cost around £1000, depending on the complexity of the case. Your solicitor is there to ensure you fully understand all the elements of the equity release product and the terms and conditions it comes with. Similarly, a financial advisor is there to confirm you are financially able to take advantage of this product and it wouldn’t leave you in a negative financial situation.
