How Does Equity Release Work?
Equity release allows you to unlock money that is currently tied up in your home or property. It is popular for those over 55 years of age who are looking to free up some funds, without having to move home.
With the increased cost of living and people now living longer, it is no surprise that homeowners are looking for extra ways to supplement their income and maintain a good quality of life.
If you have been paying your mortgage for years, you would have built up quite a lot of equity or perhaps your own your property outright. Equity release allows you to sell off part of your property (20% to 80% of its value) to a lender or bank and receive a large sum upfront, which is completely tax-free.
The best part is that you can continue to live in your house until you die or go into long-term care. After that, any money left over is divided between your beneficiaries and the lender so that they can recover all their fees.
- Release 20% to 80% of your property’s value
- Receive a large lump sum or in stages
- Continue to stay in your home
- Do not need to have paid your mortgage outright
- Used for home improvements, gifting, holidays and debt consolidation
- Interest rates around 5.1% APR per month
What The Types of Equity Release?
There are actually over 100 different types of equity release that can be adjusted according repayments, inheritance, draw downs and other options.
However, equity release mortgages generally fall under two categories:
Lifetime mortgages – This is designed to last a ‘lifetime’ and you continue to pay interest every month or you can have this rolled up and added to the final overall payment. You can usually borrow between 20% to 60% of the value of your home and because you still own equity in it, you benefit if the property continues to go up in price – and this can be passed onto your beneficiaries too.
Home reversion – This allows you to sell off a greater chunk of your home (up to 80%) although some equity release lenders can offer 90% or higher. Since you are parting with a large stake in your home, you receive a much bigger amount upfront, but you do not benefit if your home goes up in price over years.
What is Equity Release Used for?
Equity release is used for a number of reasons and with the average household receiving around £60,000 when they use this source of finance – it can go a long way.
Many households use equity release for home improvements, whether it is to spruce up their existing home, maybe because they have decided that they do not wish to move and would like to adjust it for senior living.
Some couples using equity release for debt consolidation, whereby they take all existing debts such as education loans, credit card bills, personal loans, car finance and more and use equity from their home to pay it off in one go.
Other popular reasons for using equity release schemes include gifting to their children (to avoid inheritance tax), holidays, school fees, weddings and more.
Am I Eligible for Equity Release?
- You must be over 55 years of age
- Do not need to own your property outright
- Property must be in good shape (not sinking or abandoned)
- May require proof of income
- Minimum property value (some lenders will require this)
- Level of debt and credit status
What Are the Benefits of Equity Release?
The main benefit of equity release is that you can continue to live in your home until you die or go into long-term care. You also have peace of mind that your partner or spouse can also live in the house for the duration of their life too (they are not suddenly asked to leave).
The product is designed to help those over 55 and offer some financial peace of mind. All products are tax-free and you have the option to receive funds in one lump sum or in stages if you prefer.
With equity release, you never owe more than the house is worth due to a regulatory requirement known as the ‘no negative equity guarantee.’ So even when you die, your beneficiaries will not inherit any outstanding payments or debt on your behalf.
If you are concerned about leaving money to your children as inheritance, you will have the option to allocate money aside for your children. The only thing you should know is that the overall inheritance could be diminished if you lived significantly longer than expected, since you will be paying interest to the lender each month or year.
How Much Does Equity Release Cost?
The rates for equity release plans are incredibly competitive at the moment with most lenders offering around 5.1% APR and some companies offering less than 3% APR.
You can choose to pay every month, every year, make overpayments or roll it up into the final payment of your overall loan – and this will be covered when you pass away or go into long term care and the lender recovers any fees.
Is it Safe?
Yes, it is a safe product. Equity release companies are regulated by the Financial Conduct Authority and there are a number of strict measures in place to ensure that customers will be able to stay in their homes and never owe more than the value of their home or leave their beneficiaries in debt.
There are also different payment options is you require them, such as making overpayments or exit clauses.
You will consult your solicitor beforehand who will help you with the transaction and you can always ask the equity release companies for advice along the way.
How to Apply for Equity Release with Forces Compare
We have partnered with a number of equity release providers in the UK. Simply use our form provided and enter some basic details including the value of your property and how much mortgage you have outstanding. An equity release advisor will get in touch with you immediately to discuss the different options available and help you every step of the way.