Equity release allows you to draw on the value of your home without having to sell it or move out, helping you to raise funds for your retirement.
Home equity release is a way of allowing you to access money based on the value of your home. As you begin to make plans for your future and that of your family, equity release provides the chance for you to pass on a tax-free legacy to your loved ones, offer children help getting on the housing ladder, or simply the chance to enjoy a higher standard of living in your retirement. We take a look at the process involved to help you decide whether it is the right choice for you.
What is equity release?
Equity release is a financial product like a mortgage or personal loan, and is only available to older homeowners. It gives those who are asset rich yet cash poor the chance to draw on the value of their home in their retirement.
What are the requirements?
You must be a homeowner aged between 55 and 95.
How much can I borrow?
It is important you only ever consider borrowing what you really need, and be aware that it could also reduce how much you could earn from means-tested benefits. Most providers of equity release plans guarantee that your debt will never be greater than the value of your home, so the amount available to borrow is strictly limited. An average borrower would be able to release only up to 35% of their property value, so if your house were worth £250,000 you would be able to release around £80,000.
What types of equity release plans are available?
There are two types of equity release plans available: the lifetime mortgage and the home reversion plan. With a lifetime mortgage you receive a tax-free lump sum as a loan secured on the value of your home. When you die, the loan and interest are repaid using money from the sale of your house. The home reversion plan enables you to sell your home or part of it for a tax-free lump sum or regular payments, whilst allowing you to live in it rent-free until you die or move into long-term care. The lender sells your property to recover the share it owns.
How much does a loan cost?
Interest rates are fixed for the term of the equity release plan at around 6%, but you should be aware of the effect of compound interest, which can cause debt to mount significantly. If you borrowed £50,000 at 6% you would accrue £3,000 interest in the first year. In the second year you would then pay 6% interest on £50,000 plus the first years interest of £3,000, increasing your debt to £56,180. The debt continues to grow in this manner and after 12 years it would be £100,609.82, over double the original loan amount.
When do I have to pay back the home equity release loan?
As there are no monthly payments to make with equity release products, any debt owed would be repaid when you die using money from the sale of your home. To reduce the interest due over the term, you could choose to make regular monthly payments, paying off the interest as you go, or opt to withdraw the money in stages rather than in one lump sum. Check the terms should you become unable to live at home and need to move into a care home, as some equity release plans may make you repay the loan in full at this point.
If you are approaching retirement and looking to free the cash tied up in your home, then equity release plans may be the right choice for you. However it is important to seek professional advice from an independent financial adviser before considering releasing equity from your home.