Equity release is the process of allowing homeowners to access the equity (cash) tied up in their homes if there is still an outstanding mortgage.
This option is generally only available to homeowners aged 55 and over. The amount of money you can release is usually dependant on your age and the value of your home. There are a number of different ways to go about taking equity out of your home, with the option for cash to be claimed as one big lump sum or multiple smaller amounts, but withdrawals are always tax-free. The money is normally repaid when the last borrower moves into long-term care or dies.
There are two main types of equity release:
Equity release involving a lifetime mortgage is the most common type. A lifetime mortgage allows you to take a loan secured against your home whilst still owning it.
The less common type is where you sell all or part of your property for less than market value but stay in the property as a tenant. This is known a home reversion scheme.
Should I consider equity release?
Whether or not you should take out equity from your home will depend on factors including your age, your income, how much equity you wish to release and what your plans for the future are.
Equity release is a good option if you are looking for extra money but don’t want to move house. You can use the money however you wish, for example if you are looking to pay off a loan, make vital improvements to your home, free up extra money for retirement or help children with buying their own property, equity release is a quick way to make larger sums of money available.
However, there are downsides that you should be aware of. For example, if cash is released through equity release, you might not be able to rely on your property for money you might need later in retirement.
For lifetime mortgages, there is usually no fixed “term” or date by which you’re expected to repay your loan. The rate of interest of a lifetime mortgage will not change during the life of your contract, unless it’s a variable rate. The interest rate you pay on any drawdowns will be determined at the time of drawdown and not at the time the contract is entered into so this may be different to the previous rate. If you take any additional borrowing the interest rate, you pay may be different and it will only be applicable to that cycle of extra borrowing.
Although you can take your lifetime mortgage with you, if you decide you want to downsize later, you may not have enough equity in your home to do so and may need to repay some of your mortgage.
When taking out equity, you will also need to pay arrangement fees which can range from £1,500 to £3,000. The schemes can also be complicated to undo should you change your mind, so it is something you should be certain about before committing to.
Equity release may also affect the amount of inheritance you are able to pass down, so it’s vital you discuss your plans with family to avoid to potential conflict.
What are the alternatives
There are alternatives to equity release if you need extra money.
If you already have savings, it is worth using these instead of resorting to equity release.
Alternatively, you could downsize and receive funds through the sale of your home. It might also be worth considering a personal loan or looking into local authority grants or getting help from family members before committing to equity release.
This article was written by an online estate agent House Sales Direct. If you wish to sell your house fast and for free, then head over to the House Sales Direct website for more property related information and enquiries.