Equity release allows homeowners aged 55 or older to release tax-free money from the value of their homes. How much money they’re able to release depends on their age and the value of their property. This money can then be claimed as one lump sum, or as several smaller payments.
Although equity release allows people to use the money they’ve built up in their property (without having to move or sell), it does come with certain risks.
In this article, we’ve explained what equity release is, how it works and whether it’s the right choice for you.
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Through equity release, homeowners aged 55 and over can release tax-free money from the value of their homes. This is a long-term loan that will be eventually repaid using your home once you pass away or need to go into long-term care (such as a residential care home or nursing care home).
There are several reasons why people get an equity release, including:
To be eligible, you must be at least 55 years old. This is the case for an equity release lifetime mortgage.
To be eligible for a home reversion plan, you may need to be at least 60 or 65 years old (this varies from provider to provider).
To be eligible, you’ll also need to meet the following criteria:
We’ve gone over the different types of equity releases in the section below
There are two main types of equity release product. We’ve gone over both of these below:
This is a loan secured against your home and is the most common form of equity release. It allows you to release tax-free money without needing to move and is usually available to homeowners aged 55 and over. Money can be taken as one cash lump sum or several smaller sums.
You don’t repay anything on a lifetime mortgage until you pass away or permanently move into long-term care.
You can either make monthly payments on the interest rate or let the interest rate build up. If you do make payments, the amount of interest added throughout the mortgage will be less.
A home reversion scheme is often used to pay for long-term care, particularly when you plan on remaining at home.
You’ll sell all or part of your property at a below-market value in exchange for a tax-free lump sum or regular payments. Usually, you’ll get between 20% and 60% of the property’s market value (or of the part you sell).
For example, if you sell a 50% share in a £500,000 property in exchange for a lump sum of £125,000, the amount you receive is greatly discounted from the £250,000 this share is worth. The reason for this discount is that the provider will likely have to wait a long time to get the money back.
You’ll then remain at home as a tenant but won’t pay any rent.
Be sure to check the minimum age when considering a home reversion scheme. Some providers have a minimum age of 60 or 65. You’ll also want to find out the percentage of the market value you’ll receive, as well as how you go about releasing equity.
The following companies offer home reversion plans in the UK:
When getting an equity release, this is how the process normally works (although it may vary slightly from person to person):
To start, you should speak with an expert financial adviser. They’ll make sure you’re eligible before explaining all the different options. This will help you figure out whether this is the right choice and if so, which option is best suited. They’ll likely recommend an equity release provider as well
If you’re still set on equity release, the next step is appointing a specialist solicitor. This solicitor will offer independent equity release advice where needed
Your adviser will help you submit your application to your chosen lender
The lender will visit your home and value it
The lender will send through the terms of the equity release scheme to your solicitor (once your valuation and application have been processed)
If you’re happy with the offer, the lender will release the money to your solicitor through the method you agreed (e.g. as one lump sum amount or as several smaller amounts)
Money Saving Expert says that when considering all the costs associated with releasing equity, the total cost can end up being between £1,500 and £3,000.
The amount of variance in price can be put down to the number of variable factors, including things like different lenders charging different application fees and the same for solicitors.
Often, higher-value properties will incur higher fees across the board as well.
How much equity release costs also depends on how much interest you end up paying.
Here are the biggest advantages associated with equity release:
And here are the biggest disadvantages associated with equity release:
Here are a few other things you should know about and consider before deciding if an equity release scheme is the right option for you.
There are lots of different costs involved with equity release schemes. These include:
Interest rates - The lowest is currently at 6.1%
Valuation fees - An independent surveyor will value your house
Arrangement fees - A fee for setting up the scheme to begin with. This could either be a fixed price (e.g. £1,000) or a percentage of the loan amount)
Solicitors fees - These will vary, depending on how much time you spend with your solicitor and the level of service they provide
Consultation fees - This is a fee your broker will charge for their services. Just like arrangement fees, this could either be a one-off payment or a percentage of the equity release amount (usually around 1.9%)
In theory, equity release can affect any benefits you currently receive. It can also affect any benefits you may receive in the future.
However, if you release equity from your home to pay off your mortgage or any loans, these funds will likely be paid directly to the mortgage company or loan company. So, any money released for this reason won’t affect your benefits (including means-tested ones).
If you release money as cash and don’t spend it on anything, you may pass the savings threshold and see some or all of your entitlement to benefits affected.
Unless you have a surviving spouse or civil partner to inherit your estate, your beneficiaries will often have to pay inheritance tax of 40% on assets and other wealth above £325,000 when you pass away.
Money used from the sale of your property to repay the equity release loan is subtracted from the inheritance, so isn’t liable for inheritance tax.
Negative equity is when your property becomes worth less than the remaining value of your mortgage. To get around this, many lifetime mortgages have a ‘no equity guarantee’ or ‘negative equity guarantee’. This means when your property is sold, your estate won’t have to pay the extra cost if there isn’t enough to repay what’s owed.
There are several alternatives to equity release schemes, including:
Yes - equity release is designed to create additional income, so it can be useful if you have to pay for care.
Though equity release isn’t the right option for everyone, for some people it’s perfect.
This is a highly regulated and really popular way of accessing money tied up in a property (which depending on your financial situation, can prove invaluable). Being able to access this money can help you do lots of things, including making home improvements, helping out your loved ones or paying off other loans.
If you’re unsure as to whether it’s the right option for you, be sure to speak to a qualified financial adviser. They’ll discuss whether you’ll benefit or not. If the answer is yes, they can then discuss which type of equity release will be best suited (e.g. a lifetime mortgage or home reversion), depending on your individual circumstances.
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