How Does Equity Release Work?
Equity release involves unlocking some, or even most, of the equity held up in your home to spend on any number of different things. Homeowners can utilise equity release either in one lump sum or spaced out over several instalments over a longer period of time. Some of the most common uses for equity release in the UK including:
- Making home improvements
- Helping to give homeowners more money in retired life
- Clearing and consolidating debts
- Paying for nurses and carer fees
- Treating yourself or your family to a new car or holiday
What is Equity Release?
Equity release can be taken out by homeowners who are aged 55 or over, but this will vary between providers of this service, who will set their own age limits.
Those considering equity release should seek the help of an independent financial advisor prior to signing off on equity release. An independent and accredited financial advisor can help take your personal details and circumstances into account and help to not only advise on whether this is the right product for you, but also to help find the most suitable path if it is.
The two main types of equity release products available are known as Lifetime Mortgages and a Home Reversion.
What Is a Lifetime Mortgage?
A Lifetime Mortgage, as the name suggests is a type of mortgage that is paid off by the homeowner either in death or when they are no longer able to care for themselves independently and go into long-term care. The mortgage is secured against the main residence, and can help homeowners to still retain ownership of the house whilst releasing money from it through the value it holds.
With a lifetime mortgage, homeowners can choose to either make repayments on the interest as the term of the equity release programme rolls on, or let it build up and have it paid off in death or when they go into care in years to come.
Features of Lifetime Mortgages
A lifetime mortgage does not have to entail releasing all of the equity from the property and homeowners can choose to preserve a chunk of the property in question and its value to be left for their family as inheritance.
- Lifetime Mortgages usually come with the following features:
- The ability to borrow a maximum of 60% the property’s value. However, this is dependent upon the mortgage provider
- Homeowners are allowed to live in their property until death or until being moved into long-term care
Most Lifetime Mortgage providers will accept applicants that are aged either 55 or over, however age limits could vary between providers. Taking out a Lifetime Mortgage can have an impact on your family’s future finances and the amount of inheritance you can give them. It is therefore important to discuss an equity release not only with a financial advisor but also with the family.
What Is Home Reversion?
A Home Reversion is when a homeowner can sell all, or a chunk, of their property to a home reversion provider. In return for the property, the homeowners will receive, as with a Lifetime Mortgage, either a lump sum or payments in several, spaced-out instalments.
Whilst the property might be either partly or entirely owned by someone else after a home reversion, the original homeowners are able to stay in their property until they require long-term care or die.
As with a Lifetime Mortgage, homeowners can save a portion of the house or property and the value it holds for their family as an inheritance. After either the death of the homeowners or their transition into long-term care, the house is sold with the sales from the sale divided up between the property’s owners. The minimum age requirement for a home reversion plan can vary, with most providers requiring applicants to be over the age of 60 to 65.
Who Is Eligible for Equity Release in the UK?
Eligibility for any type of equity release in the UK will vary between providers and will be very much dependent upon the way in which you choose to release the equity from your home. There will be a minimum age requirement for homeowners to meet before being eligible for an equity release product in any form, which will typically be an age over 55 for a Lifetime Mortgage, and 60 to 65 for a Home Reversion plan.
You do not have to have paid off your mortgage to apply for equity release and these products can actually be used to pay off the remainder of a mortgage. However, equity release providers will require you to have very little if any of your mortgage left to pay off.
Is Equity Release the Right Choice?
Equity release can be a great way for homeowners to unlock some of value that is held up in their property, and can be used to fund various things that may not previously have been an option. However, this can be a major financial move that is possible to impact the amount of inheritance you can provide for your family.
To ensure that equity release is the right option for you, it can be important to discuss these options with the family, letting them know what will happen to the house in their death/move into long-term care.
It is also vital that you speak to a financial adviser, who will evaluate your situation and provide professional advice on whether an equity release is the right option for you, and the best way to go about releasing this equity from your home.
Financial advisers can help to find the best equity release products available for you. It’s important to check that your adviser is FCA approved and does a whole of market search to ensure you get the right product from a reputable and trustworthy source