There's a lot of mystery surrounding equity release, as many homeowners don't even know it exists or aren't sure what it is. However, if you're over the age of 55 and you're a homeowner with a decently-valued property, you may want to take advantage of an equity release.
An equity release is a financial arrangement that allows homeowners to turn their home's equity into tax-free money they can use. Homeowners still retain ownership of their property. You can commonly access home equity through a lifetime mortgage or a home reversion plan.
An equity release scheme is the method by which you release your equity. Most homeowners will use a lifetime mortgage, but a select few will prefer a home reversion plan. Here's why.
When you release equity with a lifetime mortgage, you have to be over the age of 55 and take your funds out via a lump sum or multiple payments. With a lifetime mortgage, you'll borrow against the value of your property, and you don't have to make monthly repayments.
However, some lifetime mortgage deals allow you to make repayments to reduce interest charges, so there will be less to pay when you transition into a care home or pass away.
With a home reversion plan, homeowners sell all or a portion of their property below market rate to a provider. This provider will reclaim their portion of the property when you transition into a care home or pass away, but you're still able to live in the house rent-free for the rest of your life.
Like a lifetime mortgage equity release, homeowners can be paid via a lump sum or multiple payments. However, you usually have to be over 65 to use a home reversion plan.
To see whether you're eligible for an equity release, go to responsibleequityrelease.co.uk.
There are a few factors that determine whether you should or shouldn't get an equity release:
The equity held up in your home is determined by the property's value. Also known as the loan-to-value (LTV) ratio, you can typically borrow 30% of your LTV on a lifetime mortgage and up to 100% on a home reversion plan.
30% of a $1,000,000 home will be worth more than 30% of a $200,000 home. You'll have to consider if releasing your equity is worth the hassle.
If you plan on moving, only take out a portable home reversion plan or lifetime mortgage. Otherwise, you'll be locked into your current home.
Some lenders will only offer an equity release product if you've paid back your mortgage. However, there are lenders who will give you an equity release product, provided you have a great financial track record.
With a home reversion scheme, your family will have to move out your possessions in less than a week, and they can't receive your home when you pass.
With a lifetime mortgage, you can leave early, but this will cost you. You should consult a financial advisor if you're rethinking your equity release.
If you've hired a solicitor who can ensure your equity release contract benefits all parties and doesn't come with any red tape, an equity release plan could be a good option.
You could use the extra funds to supplement your pension or enjoy a more comfortable retirement. Or, you could carry out home renovations that make your space easier to live in once you age. It can also be used to give your loved ones an early cash inheritance.