You may have seen adverts on TV about equity release, but what is it and should you do it? Read on to see if it’s a decision you should make…
What is Equity Release?
As you pay off your mortgage, you build equity. Later down the line when you have built up a large amount of equity, you’ll be able to release it if you meet the minimum age requirements of 55 or older. Releasing it is a way to gain some of the cash value of your house without having to move home.
Why do People Choose to Release Equity?
Often people opt to release equity because they find that they are rich in assets, meaning they have their own house, furniture, car, etc. but they don’t have any actual cash to speak of. Releasing the equity you have built up is a quick way of gaining this cash.
Some of the most common things people use the money they gain from equity for are:
- To make home improvements
- To pay off the mortgage or other debts
- To pay for something like a holiday or a car
- To help family
Though it may sound good, before taking any steps, seek advice from professionals such as financial advisors, you can also contact an online mortgage advisor, who may have alternative options like remortgaging.
What Are The Options For Releasing Equity?
There are two options for equity release: a lifetime mortgage or a home reversion.
A lifetime mortgage is the more popular option, available to those aged 55 or older. It involves taking out a mortgage on your main residence, you will retain ownership of the property. While with some lifetime mortgages you don’t have to make any repayments, others you can either choose to make repayments or let the interest “roll up”, which means the unpaid interest will be added to the loan.
The loan amount plus the built-up interest will not need to be paid off until the last borrower dies or moves into long term care and the property is sold.
Something to keep in mind is that a lifetime mortgage usually comes with a higher interest rate than a regular mortgage, so the debt can increase quickly, especially if you select the option to roll up the interest.
With a home reversion, you can either sell all of your home to a provider or only sell part of it in order to keep a percentage for later use or to leave as inheritance. You will either receive a lump sum or regular payments from the sale. Home reversion plans have a minimum age of 60 or 65.
You will still have the right to live in the property but as a tenant rather than an owner, and as part of the agreement it will still be your responsibility to keep it maintained as well as insured. You’ll need to check with the provider how often your property will be inspected.
One thing to note, you will not get the true market value of your home, instead you will receive around 20% to 60% of the money you would get if you sold the house because unlike with selling the house and moving, you’ll still be allowed to live in the house for the rest of your life.
What You Need to Know
Choosing an equity release option with a “no negative equity guarantee” will make sure that even if the amount left after selling your property is not enough to pay off the loan, you or your estate will not be liable.
Releasing equity will affect the inheritance that you’ll pass down to your children and other family members. Before opting for an equity release scheme, consult with your family and inform them of your plans so that everyone is on the same page and there are no hard to resolve complications later down the line.
Should You Release Equity?
Releasing equity can seem like a good option if you need extra money, but as you may have learned from the above information, it’s not for everyone. Releasing equity should be done with caution, so speak to experts for advice.