What is Equity Release and how does it Work?
Equity release offers a way to turn the value of your property into money you can spend. If you are aged over 55, there are several policies available to you that allow you to ‘release’ the money, or equity, from your home.
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It is not essential to have paid off your mortgage to be eligible. You can usually choose the money released to be given in several small amounts or several smaller amounts, or a combination of the two. It is essential that you choose the right option for you, or you could end up paying a lot in interest.
There are two main types of equity release products:
Lifetime mortgage
The most common form of equity release is the lifetime mortgage. This is when you borrow against the value of your home at a fixed or capped interest rate. In contrast to a normal mortgage, with older lifetime mortgages you do not make repayments, so the interest rapidly accumulates, and the amount owed increases all the time. Though some options do allow you to pay back the interest, and some others also let you pay back some capital too. With this type of mortgage, you can take equity out of your property bit by bit up to a certain amount and the interest is charged on the amount you take out, rather than the entire amount available.
Home reversion plan
A home reversion plan is available for those aged 65 and over. Here a mortgage provider pays you a lump sum (tax-free) for a share of the value of your home at below market value. You can then remain living in your home rent-free until you die. When it is sold, the proceeds are divided between the share owned by you and the share owned by the lender. This means that if the value of your property rises significantly, so does the amount they receive.
For instance, if you have a £200,000 property and you sell a 40% share for £40,000, the money you are getting is a huge reduction compared to the £80,000 the share is worth at the market rate. This is mainly because the provider will have to wait a long time to get their money back. If years later, when you die and your property is then sold for £300,000, the provider would then be entitled to 40% of the sale proceeds, which would amount to £120,000.
Is equity release available to me if I'm under 55?
Equity release is not available to those aged under 55. if you own your own home and need finance, you may be able to re-mortgage your home. It is worth speaking to a mortgage broker, or if you have more a complicated financial situation, it may be better to speak to a financial adviser.
Re-mortgaging your home is a good way to lower your mortgage repayments each month, and in some instances, you may be able to borrow more cash against the value of your property. The option of re-mortgaging may also be open to older homeowners who are not interested in equity release. In recent years, numerous mortgage lenders have increased their age limits for who is eligible to apply for a mortgage.
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