More people are making use of equity release loans, but what are they and how do they work?
Equity release products are available to over-55s and let people take value out of their home in the form of a lump sum or smaller regular amounts.
There are many equity release loan products on the market and a number of pros and cons to be aware of, so we’re providing a short guide to the main points. Before considering releasing equity from your home, it’s always best to seek independent financial advice.
Types of equity release
There are two main types of equity release. Lifetime mortgages are loans which use your home as security. The difference is that you don’t make repayments. The loan amount gathers interest and is typically paid back by your descendants when you pass away, or by you when you move house.
The other type is home reversion, where you sell some or all of your home to a provider who pays you a lump sum or regular smaller amounts in return. You keep the right to live in your home for life, but you must maintain and insure it.
Pros and cons of equity release
Equity release can be a good option for people who want to avoid inheritance tax on their property, as you could then pass on the money without attracting tax. However, if you’re in this category you’ll want to look carefully at the small print. Lifetime mortgages vary widely in the amount you can borrow, and all of them have a much higher interest rate than ‘normal’ mortgages. If you go for a home reversion product, you should find out first what the conditions are – for instance, how often your home will be inspected to see if you’re maintaining it as required.
For those who have property under the inheritance tax threshold, releasing home equity comes with a much louder note of caution. Reducing the equity in your home may give you less freedom in later life. If you borrow too much, or at too high an interest rate, there’s a risk that you won’t have enough equity to downsize if you want to, or to pay for nursing care if you need it in later life.