15 January 2023
Everything You Need To Know About Equity Release
More often than not, when investing in a property here in the UK, people will require a mortgage. Homeowners tend to only put down the required deposit when purchasing, but over the years after making a considerable number of payments towards their mortgage, they may eventually end up owning their property outright. It is fair to say that it can take an incredibly long time to pay off a mortgage though and it isn’t necessarily something that everyone manages to do.
When you’re a homeowner and you get to the age of 55, you may be informed of something called ‘equity release’ and presented with the option to release some of the equity in your property. It isn’t uncommon for people to not really know what equity release is, but it is undeniably important to fully understand this before deciding whether or not to go ahead. So, to help, here is an easy to understand guide covering all of the basics about equity release.
What is equity release?
In short, equity release is fairly self-explanatory and it is a way that you can ‘release’ the ‘equity’ in your property. So, essentially, you’re able to unlock the value of your property and turn it into a lump sum of money that you’re then free to use in any way that you’d like.
Equity release is only available to those over 55, but it is important to note that you don’t need to have fully paid off your mortgage to access the money tied up in your home. When releasing equity, you can have the money in a lump sum, in several smaller amounts or as a combination of the two.
How does equity release work?
Ultimately, there are two different types of equity release; a lifetime mortgage and home reversion. As you may expect each of these options has pros and cons, so we will explain them in more detail to you below.
Lifetime mortgage
From the outset you should know that a lifetime mortgage is different from the mortgage that you have on your property currently. Yet, they are probably the most popular option for those who are interested in releasing some of the equity in their home.
When opting for a lifetime mortgage, simply put, you will borrow some of the value of your home from a lender and you won’t pay this money back to them until you pass away. However, the money you borrow isn’t interest-free and typically, the interest rates on lifetime mortgages are significantly higher than most standard mortgages.
Not only is the interest rate high, but the interest you owe will also quickly add up due to the fact that you aren’t making any repayments to the lender. Nowadays, you may find that some lenders do allow you to pay back the owed interest over time, enabling you to reduce the overall cost. You may also find they allow you to pay back some of the capital too.
With a lifetime mortgage, when you pass away, the beneficiary of your property will be required to pay back the lender in full.
Home reversion
This option tends to be more popular amongst those who are over 65, yet it is still worthwhile taking into consideration at any age when releasing equity.
When you choose home reversion, you will essentially be selling all of, or a percentage of, your property to a home reversion provider. They will provide you with a lump sum, but you will still be able to live in your property, rent-free, until you pass away. You can usually expect a home reversion provider to pay below market value for your property though.
You should also be aware that due to the fact that the provider will own a percentage of your property, whenever your home is sold, they will get this same percentage of the proffits. So, if your property rises in value, the amount they get does too. This often means they end up getting a lot more than they originally gave you.
Similarly to a lifetime mortgage, when you pass away, the beneficiary of your property will have to pay the provider their percentage of the sale price.
Speaking to a solicitor about equity release
Hopefully, you will now know a little bit more about equity release and it is fair to say that releasing equity from your property is a big decision to make. Ultimately, whether equity release is worthwhile for you will depend on a number of different factors such as; how much you’re interested in releasing, your age, your income and also your plans for the future. When choosing whether to go ahead, it is always advisable to seek both legal and financial advice.
Foster Harrington are able to advise you on equity release from a legal point of view and can recommend mortgage brokers to assist you in finding the right product for you.
