How To Release Equity From Your Home
How Can I Release Equity from My Home?
Equity release refers to a range of products that allow you to access the money you have tied up in your home once you have paid off your mortgage. These products are generally available to the over 55s and there are two types of product available.
You take out a new mortgage secured on your property while retaining ownership with the right to live in your home for life, or until you enter long-term care. The property must be your main residence and you can choose to ring-fence some of the value of your property as an inheritance for your family. You usually have to be 55 or older to take out a lifetime mortgage, and you can normally borrow up to 60% of your property’s value, but the amount you can borrow will vary according to your age and the value of your home.
You don’t usually have to make repayments while you’re alive, instead interest ‘rolls up’ – i.e. it is added to the overall value of the loan – and then the entire amount (loan plus interest) is paid back when you die or move into care and your home is sold. By law, interest rates must be fixed, or if they are variable there must be an upper limit that is fixed for the duration of the loan.
Some lifetime mortgages do now offer an option to pay all or some of the interest, while some let you pay off the interest and capital so that the debt reduces.
A lifetime mortgage will come with a no negative-equity guarantee. This means that if, when your property is sold and all fees have been paid, there is not enough to repay the outstanding loan neither you nor your estate will be liable to pay any more.
Some providers will allow you to choose to withdraw the equity in small amounts as and when you need it, rather than in one lump sum (though there may be a minimum withdrawal amount). This can make a big difference to how much interest you pay, as you will only start to accrue interest once money is withdrawn.
With this option, you sell part or all of your home to a home–reversion provider in return for a lump sum or regular payments, which are normally between 20% and 60% of the value of your home (or the portion that you sell). The percentage you can receive will normally increase as you get older, and some providers of home-reversion plans require you to be 60 or 65 before you can apply.
As with a lifetime mortgage, you have the right to remain in your property for life or until you need to move to long-term care, provided the property remains your main residence and you abide by the terms and conditions of your contract. You will be expected to carry out a certain level of maintenance to the property and the lender will carry out periodic inspections.
You also have the right with this option to ring-fence a percentage of your property for later use or inheritance. When the plan ends your property is sold and the sale proceeds are shared according to the remaining proportions of ownership. The no negative-equity guarantee also applies to home-reversion plans.
Things to Consider
Equity release can be a good way of releasing money you have tied up in your home without the hassle and upheaval of moving to a smaller property, but be sure to consider the possible implications:
- A lifetime mortgage is often a more expensive plan than an ordinary mortgage, with higher rates of interest that can quickly build if you choose to let the interest roll up.
- Home reversion plans will usually not give you the true market value of your home, so you could get more if you sell your property on the open market.
- Releasing equity from your home means you might not be able to rely on your property for money later in life, for example if you need to pay for long-term care.
- Although you can move home and take your lifetime mortgage with you, if you decide you want to downsize you might not have enough equity in your home to do this.
- Any state benefits you receive could be affected by receiving money from equity release.
- You will have to pay arrangement fees, which are usually between £1,500 and £3,000 in total.
- Equity release could mean there is less inheritance left for your family.
- There might be early–repayment charges if you change your mind, which could be expensive.
If you decide that equity release is right for you, be aware that the options from different lenders will vary, so it pays to shop around to find out what is available and find the plan that best suits your needs. Consulting an independent financial adviser could help you find the right scheme but be sure to find one that has a specialist qualification for equity release and is a member of the Equity Release Council.