How does equity release work?

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This article will cover everything you need to know about equity release, from who qualifies for equity release to what you should know before releasing equity from your home.

The term ‘equity release’ will probably be familiar to you if you’re a homeowner, but it can be difficult to wrap your head around how it works.

By familiarising yourself with equity release and what it involves, you can be better equipped to make financial decisions involving your home.

What is equity release?

Equity release is the name given to a range of products that let you release some of the cash (equity) tied up in your home without having to move.

The money can be released as a tax-free cash lump sum, a series of smaller payments (a drawdown), or a combination of both.

The equity in your home is the difference between the value of your property and the amount you still owe on your mortgage and is dependent on your age and how much your property is worth. Usually, you’ll need to be 55 or older before you can release equity from your home.

However, while equity release may sound like a great way to access some or all of the money tied up in your home, there are risks involved and it’s important not to make a final decision without considering both advantages and disadvantages.

Why would I release equity release?

Some of the most popular reasons why people choose equity release are to clear a mortgage or consolidate their debt. However, you can also release equity from your home to:

  • Renovate your home
  • Boost your retirement income
  • Manage your estate
  • Help your children or grandchildren afford a wedding or house deposit
  • Adapt your home to live independently
  • Pay private medical bills
  • Fund a luxury purchase, like a holiday or a new car
  • Pay off an outstanding mortgage

How does equity release work?

The are two main types of equity release: a lifetime mortgage and a home reversion scheme. We’ve outlined them in more detail below:

Lifetime mortgage

A lifetime mortgage allows you to secure a loan against the value of your home while still being able to continue living in the property.

The whole point of lifetime mortgages is that they last a lifetime. During this time, interest ‘rolls up’ and is added to the original amount borrowed.

Home reversion plan

A home reversion plan or home reversion scheme is when you sell all or part of your home in exchange for cash and can stay living in your home but as a tenant as opposed to a homeowner.

The money can be released as a lump sum, a regular income, or both. Once your home sells, the reversion company takes all or a share of the proceeds depending on how much of the property is sold.

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Who qualifies for equity release?

Equity release can free up some or all of the cash tied in your home, but you must meet certain conditions to qualify. We’ve outlined the main eligibility criteria below:

Your age

The minimum age for equity release depends on whether you want to take out a lifetime mortgage or a home reversion plan.

For a lifetime mortgage, you (or both if you’re borrowing with a partner or spouse) must be at least 55 years old. For a home reversion plan, all parties must be at least 60 years old.

Your home

To be able to release equity, you must own a property in the UK and it must be your main residence. The home must also be in reasonable condition and worth over a certain value.

Before releasing equity, you must also pay off any outstanding mortgages or loans secured against your home.

There may be an option to release equity while you still have an existing mortgage or secured loan but this is dependent on the value of your home and how much you still owe.

Your family

Having dependents can make releasing equity challenging and they may need to sign a waiver to confirm that they understand the conditions of the arrangement.

This is because, if you die or move into permanent care, they will no longer have the right to live in the the home.

Equity release can also cause problems if a friend or family member moves in with you down the line as they’ll have to sign a waiver releasing any rights to the property.

What is the no negative equity guarantee?

Some lifetime mortgages feature something called a ‘no negative equity guarantee’ which ensures that you’ll never owe more than the value of your home.

Put simply, in the unlikely event that your home’s value falls below the amount initially borrowed, the remainder of your loan will be written off and any excess will be absorbed by the lender.

This means that the mortgage debt will be cleared from the sale of the property and your family will never be left to deal with the debt when you die.

What are the advantages of equity release?

Before choosing to release equity, it’s important to consider all the ways in which it could benefit you. We’ve summarised some of the main advantages of equity release below:

It can release tax-free cash to spend

One of the biggest advantages of releasing equity – and a lifetime mortgage in particular – is that it can free up tax-free cash to spend on whatever you like.

The money can go towards debt repayment, boosting your retirement income, or home improvements.

You can stay living in your home

When you release equity from your home, you don’t need to move out and can continue living there until you move into long-term care or die.

This means that you can still retire in the house you’ve lived in for decades as planned and can even put some of the money released towards some long-awaited home improvements if you want to.

Your monthly outgoings won’t increase

Another advantage of equity release is that the money doesn’t need to be repaid until you – or both of you – move into long-term care or die.

The only expenses you need to consider are the initial costs involved with setting up your lifetime mortgage, such as arrangement fees, solicitors’ fees, and legal fees.

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What are the disadvantages of equity release?

Despite its various advantages, equity release comes with several risks that you should be aware of before you agree to anything. We’ve outlined them below:

It can reduce the value of your home

One of the main disadvantages of equity release is that it can reduce the value of your estate, meaning those named as beneficiaries (e.g. children or grandchildren) will receive less than they would have had you not released equity.

This includes any money, savings, property, belongings, and investments.

You may not get to retain full ownership of your home

With a home reversion plan, the reversion company owns all or part of your home and you will switch to living there on a ‘lifetime lease’ until you move into long-term care or die.

This also means that you will only receive a portion of the market value of your home (typically between 40% and 60%).

There can be steep early repayment charges

Taking out a lifetime mortgage should be a lifelong commitment and there can be consequences for paying off an equity release loan early.

Most lifetime mortgages come with early repayment charges that you must pay if you want to repay some or all of the equity release mortgage early or shortly after taking it out.

What should I know before releasing equity?

Before releasing equity, it’s crucial that you do your research and understand exactly what you are signing up for.

The Equity Release Council (ERC) sets the standards that equity release providers must follow, but you should still take precautions.

Here are some things you should think about before making a final decision:

Consider alternative solutions

As previously mentioned, equity release isn’t the only solution that can help you free up some money for retirement.

Some of the most common alternatives include downsizing to a smaller home, borrowing from family or friends, using savings or investments, and claiming benefits (e.g. pension credit).

Contact a financial adviser or equity release adviser to find out what your options are.

Seek independent legal advice

Even if you’ve done your research and are confident equity release is the right option for you, you should always seek advice from an experienced financial expert.

They can introduce you to the wide range of options available to ensure you choose the right equity release provider and plan for your unique circumstances.

Only borrow what you need

Financial experts recommend only borrowing what you need and, if possible, opting for an equity release product with a drawdown method for maximum flexibility.

This can prevent you from paying interest on money you don’t need and allow you to access funds in the event of a financial emergency down the line.

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Conclusion

Equity release can be a great way to release some of the cash tied up in your home if you’re nearing retirement age, but it comes with potential risks.

By doing your research and seeking expert financial advice, you can be confident that equity release is the right choice for you.

Remember, there are other options available, such as downsizing and checking your benefits entitlement.

Key Takeaways

Equity release is a way of releasing some of the cash tied up in your home to spend on whatever you like after you've reached a certain age.
There are two types of equity release to choose from: a lifetime mortgage and a home reversion plan
Most people release equity for home improvements, to boost their retirement income, or to help their children or grandchildren afford a wedding or home deposit
To be eligible for equity release, you must be over a certain age and your home must be valued above a certain threshold
Equity release has several advantages but it also comes with various risks and drawbacks
Maxine McCreadie

Maxine McCreadie

Author/Debt Expert

Maxine McCreadie, prominent personal finance writer featured in Vogue and Yahoo News, delivers practical guidance, simplifying money management and championing financial literacy.

How we reviewed this article:

HISTORY

Our debt experts continually monitor the personal finance and debt industry, and we update our articles when new information becomes available.

Current Version

May 8 2024

Written by
Maxine McCreadie

Edited by
Ben McCormack

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