You may have heard of the term ‘equity release’ or seen adverts and wondered what exactly this is and if it can benefit you.
Understanding equity release does not need to be a hassle and I’ll explain it simply in this blog post.
Read on to learn what equity release means and if it might be suitable for you.
What is equity release?
Equity release put simply, means you release the equity in your home. It means you can exchange some or all of the value of your property (minus any outstanding mortgage) in exchange for a cash payment.
It’s an option for those in retirement to release more money to live off without needing to move home.
It can be advantageous to those who do not have enough pension or savings to live off in retirement.
However it is an expensive and serious commitment which is usually lifelong, so it needs to be thought through thoroughly.
How does equity release work?
In essence, equity release is essentially a huge loan that is based on the value of your property and paid back when your property is sold, usually after your death.
Equity release is only available to people age 55 and over. It’s intended to help people in retirement by unlocking cash from the value of their home.
There are two ways to release equity:
1. Home reversion scheme - a company will buy a share of your house, such as 20%. However, as they won’t get their money back for a long time i.e. when your home is eventually sold, they will massively undervalue the share. This means you will receive much lower than the actual market value.
2. Lifetime mortgage - this is the more popular option and you can borrow money based on the value of your house. It is effectively a loan that is secured against your property value. Unlike regular loans, you don’t have to make monthly repayments. In fact, you don’t have to repay anything until you die or sell your house. The interest is higher than most regular loans and the interest is ‘rolled up’ meaning the amount you owe increases every month as more interest is added on to an ever increasing balance. However, you can choose to pay off the interest as you go.
Benefits of equity release
- Useful way to raise money in later life. Equity release can benefit people in some financial situations. For example if you need to clear debts, have a major expense or purchase to make or if you simply don’t have enough savings for retirement and can no longer work.
- Instant access to money. It will give you cash you can spend right away, rather than it being locked up in your property. Most people’s wealth is tied up in their property and this is one way to access it without moving home.
- No need to move house. It means you can stay in your home if this is important to you. You won’t need to downsize to release money and leave your beloved home that might have much meaning to you.
- Opt for a ‘no negative equity’ guarantee. You can ensure your estate won’t have to pay any extra by opting for a lifetime mortgage with a ‘no negative equity’ guarantee. This means when your property is sold, even if there’s no enough to pay back what is owed on the loan, there will be no extra to pay.
Disadvantages of equity release
- High early repayment fee - if your financial situation changes and you can pay back the equity release loan early, you may be hit with an early repayment penalty of up to 25%.
- Reduces the amount of inheritance you leave. If you spend all the money received from an equity release and the value of your home, or most of it, is required to pay back the equity release loan, then you won’t be able to leave your family an inheritance or as much.
- There may be cheaper ways to borrow money. If you are considering equity release then you need to seek professional financial advice from an independent adviser. There may be other options that are cheaper for your circumstances.
- It may affect your tax position and eligibility for benefits.
Equity release is a big decision and you should do plenty of research and contact a financial adviser to cover all your options.