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How does equity release work?

You may have heard the words ‘equity release’ in the media recently.

Do you know how equity release works and how can it help you acquire funds in later life?

If you’re over 55, then according to the statistics, the chances are you own your home, either still with a mortgage on it, or completely paid off. With house prices continually on the rise and many people reluctant to downsize, the demand has grown for a type of loan called ‘equity release’. Equity release means that a tax-free sum of money is released calculated by the value of your home year on year. There are no monthly repayments to make as the balance plus interest is collected when you sell your home or pass away. You maintain ownership and enjoy living in your home for as long as you are able.

A range of options to consider

There are several ways you can release equity based on your personal circumstances:

Lifetime Mortgage

The most popular type of equity release package, a lifetime mortgage simply means you take out a loan secured against the value of your property. You can either choose to take a lump sum payment, or smaller chunks of money as and when you need it. Many people opt for a lifetime mortgage if they still have a mortgage to pay off on their property, then use the rest to fund home improvements or helping family. Unlike a residential mortgage with a maximum term of say 25 years, a lifetime mortgage runs for the duration of your life, or when you need to move into care. With a no-negative equity guarantee, you can be sure that your family will not be burdened by any costs when you pass away, as you ringfence money to pay off the loan and interest when that time comes.

Home Reversion Plan

If you are over 65 and need to fund care then you may opt for a home reversion plan to release equity. This type of loan involves you selling part or all of your property for less than the market value but stay in your home rent-free. You receive a tax-free sum of money to stay in your own home, and when you pass away the property is sold. This type of loan does diminish inheritance you leave to family and you do not own your home. Be aware that this type of loan can affect any benefits you may be currently receiving.

Other Options

Equity release is a great option for those who need a larger sum of money. For amounts of £10,000 or less, a credit card or small loan may offer a better rate of interest and terms. You may be able to re-mortgage but may banks may not offer loans past a certain age. Downsizing by selling your property is another option, but can be stressful experience to leave at an older age.

Why equity release?

Equity release is generally a good option for people who have limited savings, pension funds or shares to see them through later life. If you do, then you may be able to fund living in later life by purely relying on these.
As many banks do not lend past a certain ages range, equity release gives an elderly section of the population options they may not have thought of. Many wish to pay off looming debts and be free from the burden of this worry in order to enjoy their later years.
Those who own their home and perhaps do not have any dependents to pass on inheritance to may benefit from the cash injection, and not worry about the diminished value when they come to sell their home. Similarly, those who do have children and want to help fund the purchase of a property or enjoy inheritance money whilst they are still alive may also benefit from this type of loan.

Are there any risks?

As long as you choose a reputable financial advisor – preferably one accredited by the Equity Release Council – then all repayments, interest that will be generated and all the terms have been fully explained. Equity release is one of the most regulated financial products on the market to protect you, your money and your property.
One major disadvantage, however is that the inheritance you may wish to leave to your children diminishes as the interest accrued on the value of your home will be less year on year. You can ringfence an amount if you wish though.

How do I find out more?

Use our handy calculator to see how much equity you can release, or get in touch with a member of the team for expert partners and to talk through your options.

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