What is equity release?
If you are an home owner you may have heard a lot about equity release schemes but have still found yourself asking what is equity release and how does it work? Equity release schemes are a range of products offered by certain lenders that allow you to access some of the money (equity) your home is worth without having to move. This money is tax free and can be spent however you like.
Types of equity release scheme
Lifetime mortgages are a type of loan you can take out for usually up to 56% of your market value, this loan is secured against your home. The amount you borrow is repaid along with any interest through the sale of your property after you die or move into a care home. If you choose to have a ‘roll up’ lifetime mortgage then the full amount is repaid through the sale of your home, however because you cannot repay any of the interest on it, it gets compounded on your debt meaning the amount you owe can increase quickly. Interest only mortgages give you the option to repay some of this interest through monthly payments to help reduce the amount ultimately paid off through the property sale. There are also fixed rate mortgages, with this option there is no interest on your loan, instead during the application you agree how much more will ultimately repaid to the lender from the sale of the property.
Lifetime mortgages registered with the Equity Release Council carry a ‘no negative equity’ guarantee. This means if the amount you ultimately owed to the lender was greater than the value of your house you would not owe them any more than the amount your home sold for, so the debt cannot be carried onto your estate.
Any revenue left over from the sale of your home once the debt is repaid can be passed on to your beneficiaries, you also have to the option to move as long as the lender approves that the new property is a suitable replacement.
Home reversion schemes
The other type of equity release scheme is home reversion. This works by you selling your home, or a part of it, to a reversion company for less than its market value. They will in return let you continue to live in the property as a tenant either for free or at a discounted rate of rent. After you die or move into a care home they will sell the property on.
Many reversion plans give you the option to be paid from a one off lump payment or to receive regular ‘income’ payments. Some reversion providers will also let you move as long as they approve of the new property.
It is important that you carefully consider all of your options before committing to any plan, equity release is not right for everyone and it will reduce what you can leave behind to your loved ones and it can affect your entitlement to certain state benefits. Equity release is normally a lifetime commitment so you may wish to look into alternatives to raise capital such as downsizing or relocating to a more affordable area, you could also see if you are entitled to any state benefits you are not currently in receipt of.
Find out more about equity release
To find out more about the different types of equity release and if there is a plan right for you, simply click on the link and fill in the quick form and an equity release specialist will get back to you with free, no obligation quotes and advice