What is equity release?
Equity release is a special type of mortgage that is only available to homeowners over 55. There are a huge range of plans available, which enable you to access some of the money – the equity – that has built up within the value of your home over time.
How does equity release work?
Homeowners who bought their property years ago are likely to have seen its value increase, while at the same time they’ve probably reduced the size of their mortgage on it. The difference between the two is the ‘equity’ in the property. This equity is the money you can access by using an equity release plan – the most common type being a lifetime mortgage. Here’s a short video that explains what equity release is –
Taking out equity release is a much simpler way of borrowing money than by using a traditional, ‘residential’ mortgage. (These are also available for older borrowers in the form of Retirement Interest Only (RIO) mortgages.
That’s because equity release lenders only consider the age of the youngest homeowner, where you live and the value of your property when deciding how much they will lend you. They don’t take into account your income or outgoings, or aren’t overly concerned by your credit history, so the process is much simpler and quicker.
The main downside of equity release is that it is likely to reduce the value of your estate that you leave to your loved ones. This is because you have the option of not making any monthly repayments. If you take this option, then the interest accruing on your plan will ‘compound’ over time. For example, you borrow £100,000 at an interest rate of 4%. After year one, you owe £104,000. At the end of year two you owe 4% of £104,000 – £108,160 etc. After 18 years, the amount to be repaid will have doubled to £202,581.
The different types of equity release plan
What is a lifetime mortgage?
A lifetime mortgage is the most common type of equity release plan and is basically a loan secured against the home you live in. Typically, they run for the lifetime of the homeowner, but as they now come with fixed term early repayment charges, they can be fully repaid, without charge, at some point in the future.
What is a home reversion plan?
A home reversion plan is different altogether to a lifetime mortgage. Here, a home reversion provider buys a percentage (or all) of your property (at less than market value) and in return gives you a tax-free cash lump sum. The homeowners are then given a lifetime tenancy that enables them to live rent-free in the property for the rest of their lives.
What are the pros and cons of equity release?
The advantages
Financial freedom
At Equity Release Supermarket, no one tells you what you can or can’t do with your money. Whether you want that new kitchen or holiday you’ve always dreamed of, or want to help your children buy their first home or move up the property ladder, it’s up to you how you spend your cash. Your money is tax-free and what’s more, you can take your money as a single lump sum, or in smaller chunks – giving you more flexibility.
Flexibility
One of the most popular reasons people choose an equity release plan is because they are so flexible. For example, if you take out a lifetime mortgage, what you use your money for is entirely your decision.
It’s also possible to release your money as and when you need it via a drawdown equity release scheme, rather than in one lump sum.
No need to downsize
Equity release means you don’t have to experience the stress, inconvenience, and cost of moving out of your family home to a smaller property. It provides not only financial freedom, but importantly – freedom of choice.
No negative equity guarantee
All the equity release schemes we recommend come with no negative equity guarantees.
What does this mean? If, at the time that your plan is repaid, your house is worth less than the amount you owe, your loved ones won’t be expected to repay the difference to the lender – and so they will never be out of pocket.
The disadvantages
‘Roll up’ or compound interest
As many people choose not to make any interest repayments over the life of their plan, this means that the interest is ‘rolled up’ or compounded and included in the final repayment when the plan ends – as we explained earlier. The longer the plan runs for, the greater the amount of interest that will have to be repaid.
Early repayment charges
In the past, lifetime mortgages could come with hefty early repayment charges (ERCs) for those wanting to fully repay their plan – as they were designed to run for the lifetime of the homeowner.
Positively, that has now changed, and all lifetime mortgages now come with fixed term early repayment charges that work in exactly the same way as they do with fixed rate, residential mortgages.
Reduced inheritance
Because equity release reduces the value of your estate, it will mean a reduced inheritance for loved ones. That said, it is possible to safeguard a proportion of your property with a guaranteed inheritance plan. If this is important to you, make sure you talk this and any inheritance tax implications with your Equity Release Supermarket adviser.
Our mission is to provide you with an equity release service that puts you first.
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2023-01-05 14:00 (INTERNATIONAL TIME)
