What is equity release?
Equity release refers to a range of products letting you access the equity (cash) tied up in your home if you are older. You can take the money you release as a lump sum or, in several smaller amounts or as a combination of both.
Who qualifies for equity release?
You may be eligible for equity release in the form of a lifetime mortgage if:
- You’re a homeowner over the age of 55 – and if you’re borrowing jointly you both need to be over 55.
- Your home is worth at least £70,000.
- Your home is in reasonable condition.
- The home you want to release equity from is your permanent main residence and lived in by you for over six months of the year.
- You own the home you want to release equity from.
Why would I release equity in my home?
You can use the cash from equity release for anything from improving your property, to gifting an early inheritance or clearing an existing mortgage (but be aware there might be cheaper ways to borrow money). The money doesn’t need to be paid back until the last homeowner on the deeds dies or goes into long-term residential care.
If you have a family home which you don’t want to sell – but you need more money for your retirement, for example – equity release may be a good option for you.
There are two equity release options.
Lifetime mortgage: you take out a mortgage secured on your property provided it’s your main residence, while retaining ownership.
- You secure funds against a portion of your home’s value. There are usually limits on the percentage you can borrow. Like other loans, there will be interest added to your mortgage, but you don’t need to make any payments until you either die or enter permanent long-term care. After which, the amount borrowed plus interest will be repaid with the sale of the property when the last borrower dies or when they move into long-term care.
- Home reversion: you’re essentially selling a stake in your home, usually at a rate much lower compared to its market value. There are no payments to make with these either, and again the debt owed will be repaid once the house is sold
Most people who take out equity release use a lifetime mortgage.
Usually you don’t have to make any repayments while you’re alive. Instead, interest is ‘rolled up’, which means the unpaid interest is added to the loan. This means the debt can increase quite quickly over a period of time.
However, some lifetime mortgages do now offer you the option to pay all or some of the interest, and some let you pay off the interest and capital. In the same way ordinary mortgages vary from lender to lender, so do lifetime mortgages.
Things to consider when taking out a lifetime mortgage:
- How much can you borrow?
The amount that you can borrow is dependent on your age and the value of your home. The older you are, the more you can release, normally up to a limit of 60% of the home’s value. Make sure that you speak to an adviser about the different products available, as this could vary between providers. Sometimes, the amount that you can borrow can also be impacted by your health and whether you have any medical conditions.
- Do you want it in a lump sum or not?
You can take the mortgage amount either in one lump sum, or in smaller regular amounts. The lump sum might seem like the more attractive option, but if you don’t actually need it in one go, you’re better off taking it in chunks as you’ll be paying interest on the money you withdraw. So, don’t take it until you need it.
- Will you pay any of the interest?
While you don’t have to, you can choose to pay some of the interest as you go, to save on the overall cost when you move into care, or to preserve the value of your estate for your beneficiaries when you die.
- What’s the loan rate?
Make sure to compare rates when looking for the right lifetime mortgage. Depending on how long you continue to live in your home for, this can make a big difference, as the interest can build up significantly over a long period of time.
You can look for a no-negative-equity guarantee
A no-negative-equity guarantee means that, in the event that the property’s value has fallen to the point that the sale isn’t enough to cover the outstanding loan, your estate (and therefore your beneficiaries) won’t be held responsible to make up the difference. The difference will instead be written off.
- Are you likely to move again in future?
If you think you might move to another home in later life, after you’ve taken a lifetime mortgage, you need to be very careful.
A lifetime mortgage usually sees you until you either die or move into long-term care. However, it is possible to move to another permanent residence, but you’ll need to get in touch with your lifetime mortgage provider and make sure they’re happy with the property you’ll be moving to, as that’s the home that’ll now be secured against your loan.
For more information on equity release, please get in touch with our conveyancing department by contacting us on 0121 820 0112.