What is Equity Release : How does Equity Release Work

Equity release lets you access the equity or cash that you have built up against the value of your house. If you have heard of the term lifetime mortgage, it belongs to these equity releases types.

Under this scheme, you can sell your house or a portion of it to draw an amount of money from lenders. You and your family can still live in the property and have your name on it. This applies until you die or go to long-term medication or care. Let’s dive in detail.

What is an Equity Release?

We hope that you have already got an idea of this. You can lend money or equity in return for your property or a part of it. Well, you can use this scheme when you are over 55 years old. 

You can release the money as a lump sum or several small installments, as per the agreement with your lender. But, to apply for this scheme, you must know how does equity release work. That’s why this guide is here.

Different Types of Equity Release

There are two types of equity releases. They are lifetime mortgage, and home reversion. Let’s get a brief introduction to these types.

Lifetime Mortgage:

You can opt for this when you are willing to get a mortgage secured on the property of yours. But you need not hand over the ownership of your property to the lender straight away. 

You will get an appropriate value for your house that you can use until you die. Even, you can decide whether to repay the interest of the mortgage or let them roll-up for the expiration. Once you die or go to long-term care, the lender will be able to grab your property. So, the property will be summed up to repay the mortgage plus interest amounts.

Home Reversion:

For a lifetime mortgage, you have to offer your property to the lenders for evaluation. But for a home reversion process, you can sell your home or a part of it. 

In return, you will get money in the form of frequent or lump sum payments. Besides, you still have the right to live in the property until you pass. In this case, you have to maintain and insure the property. 

Additionally, you can leave the money or remaining part of your property for your inheritors. But, the percentage may vary due to the change in the value of properties. So when you die, the property is sold by the lender according to the agreement between you and him/her.

What to Consider for Lifetime Mortgage?

If you are worried about what will happen to your house after your death, then a lifetime mortgage is a good option. Here, you need not worry about repaying the interests of the mortgage at all. 

You can even switch to regular installment options to repay the interest to keep some money for your inheritance. 

If you are thinking about a lifetime mortgage plan, then please go through the tips below. Also, it will be better if you seek an expert’s advice as well.

  • You can apply for this lifetime mortgage policy only when you are above 55 years. Otherwise, the criterion fails.
  • There’s a limited amount which you can borrow. So, you can borrow at most sixty percent of your property value. This depends on different factors like your age, the value of your property, and so on.
  • Generally, interest rates are fixed. Though there is an upper limit of interest, whose rate may vary up to the maximum limit. 
  • You can use the property as long as you are alive. Besides, the property gets handed over the lender if you go on long term care.
  • In this scheme, you are not forced to pay the interest amount. But, if you wish, you can pay the interest on a regular basis. Basically, it depends on the type of lifetime mortgage that you have applied for.

You are also free to withdraw huge cash in return for your property. Otherwise, you can take out the money whenever you need it.

Things to Know About Home Reversion

You can access from 20 to 60 percent of the market value of your property when you select a home reversion policy. But, you should check the following points when you are thinking to give this scheme a try.

  • You can withdraw cash for a lump sum or several frequent payments.
  • Check the minimum age mentioned by the lender. Many lenders set this age as 60 or 65.
  • The percentage of the property value gets an increment when you get older.
  • You can live in your property until you die. The property also remains in your name.
  • Moreover, the product has no negative equity guarantee. This means that if the property is sold at a lower rate, the lender won’t demand anything more from the mortgage holder or owner’s family. 

But you have to maintain your property as the lender may come on inspection to your house. 

Moreover, you can estimate the property value through the equity release calculator as suggested by the lender that you choose. 

Benefits of Equity Release

Equity release seems a good option when you are short in cash and need a huge amount urgently. Plus, it has loads of benefits. So, go through this section to discover more about the advantage of grabbing an equity release plan. 

  • No Tax

Yes, you read it right. You need not spend income tax on the funds for your equity release. 

  • Much Convenient

You can easily grab a huge amount of money that you can spend as per your wish. Even, you can withdraw the cash at a regular interval or via several payments. 

With drawdown equity release mortgage, you can pay interest on only what you borrow. This scheme helps you to lower the expenses and also lowers the risk with the equity release policy.

  • Your Home Still Remains yours

The lender allows you and your partner to stay in the house even after applying for a lifetime mortgage. They will seize the property only when you pass or move to long term care due to illness. Also, the property remains in your name in terms of documents.

  • No Need to Make Payment

You don’t have to repay the interest at regular intervals. The mortgage amount along with the interest is set as the market value of your property. But, you can still opt for installment payments to reduce the complications at the expiration.

  • Guaranteed with No Negative Equity

You can’t pass the debt to your family through equity release mortgage policy. Whatever the price of the house is, you don’t have to invest additional money from your pocket if the value of your property reduces.

Pitfalls of Equity Release

With equity release, you and your partner are safe inside the property while you are alive. You don’t have to face the risk of losing the property. But there are some disadvantages, which you can’t ignore. Let’s go through them to get a clear concept.

Additional Expenses

When you are applying for equity release, you might need to spend extra money initially. You need to pay for the valuation of your property, application fees, solicitor fees, etc.

Difficult Remortgaging

You have to repay the charges as soon as possible to terminate the equity release. This makes the remortgaging process more difficult.

Not Beneficial for your Inheritance

The house sells at the mortgage loan plus the interest. So, there’s nothing much left for your inheritors unless you opt for the easy installment scheme to repay the interests.

Is Equity Release a Good Option for you?

If you are over 55 years and thinking ‘Is equity release a good option for me?’, the conclusion depends on many factors. Your age and the property value have a large impact on this decision. We have already mentioned the pros and cons along with how the equity release really works. So, if you think that it suits your circumstance, then feel free to consult with any financial advisor.