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An equity release scheme can be an excellent way to gain access to cash when you are near or at retirement age. Here, we delve into the benefits and pitfalls of these schemes and help you decide whether equity release is a good idea.
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What is equity release?
An equity release scheme allows you to extract value from your property without having to leave it.
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This is usually done through two primary types of equity release schemes – lifetime mortgage and home reversion.
Lifetime mortgage
A lifetime mortgage allows you to borrow cash against the value of your property. The lender then sets an interest rate against that loan which compounds over time. At the end of your plan, typically, when you pass away or go into full-time care, your property is sold to pay off the loan and the interest incurred.
Now, there are different types of lifetime mortgages on the market to meet different needs. Through an interest-only lifetime mortgage, for example, you can pay the loan’s interest monthly so that you only have to pay the borrowed amount at the end of the plan. This is a great way to stay on top of interest. On the other hand, you can opt for a lump sum lifetime mortgage and receive the funds in one go, without paying anything until the end of the plan.
Home reversion
Through a home reversion equity release plan, you can opt to sell part or the whole of your home whilst retaining the right to live in the property rent-free until you pass away. Unlike a lifetime mortgage, you aren’t paying any interest since you aren’t borrowing money. Instead, you are selling your share in a property.
You can also opt to retain a share in the property to leave as an inheritance when you pass away, and you can pass this plan on to a different property if you ever decide to move.
What are the benefits of equity release?
The benefit of either lifetime mortgages or home reversion plans is that you get an immediate cash injection to use as you please. There are no restrictions on how you can spend your money. This is especially useful if you’re in retirement and come across an unexpected expense, such as medical bills. Many applicants also choose this type of plan to help a loved one on to the property ladder in the UK.
Regardless of your reasons, equity release plans provide you with a fantastic financial cushion should you ever need it.
Who qualifies for equity release?
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Unfortunately, there are specific requirements that need to be met to qualify for an equity release scheme.
- The youngest applicant needs to be at least 55 years old for lifetime mortgages and 65 for home reversion plans.
- Your property has to be worth at least £70,000 and meet the lender’s assessment. They will measure your property’s sale potential when your plan ends. This is usually not a problem unless your property is in a flood zone, in an area of significant commercial development, or in poor condition.
- Most companies have a minimum amount that you must release to be eligible. Typically, it’s set at £10,000.
- The property you plan on using has to be your primary residence.
What should you consider before deciding on equity release?
Equity release plans don’t come without their pitfalls. It’s essential that you are aware of the risks involved with equity release schemes before making a decision. The best way to avoid pitfalls is to ensure that you are properly educated on the subject and research each project thoroughly. Here are some points you should consider:
- Inheritance: You’ll leave a much lower inheritance to your loved ones, especially if you borrow the maximum amount.
- Interest roll-up: This only applies to lifetime mortgages. If you opt for a plan that allows interest to compound, your mortgage will be much more expensive at the end of your plan.
- Early repayment penalty: You’ll be faced with an early repayment charge if you decide to exit the plan early. Depending on how far into your plan you are, the fee can be significant and force you to stay within the plan even if you want out.
As with any financial decision, you should ensure that you’ve sought help from a professional advisor who will guide you through your options. You might find that other loan products on the market are more suitable to your needs than equity release.
Can you get equity release if you already have a mortgage?
You can apply and be approved for an equity release plan if you still have payments due on your first mortgage. However, your equity release lender will use part of the funds you release to pay off the outstanding balance of your first mortgage. This is because they need to be the first charge mortgage on your property.
As a result, if you still have a considerable amount left to pay on your first mortgage, chances are you won’t be approved for an equity release plan, or you won’t get enough money to make it worth your while.
Is your property safe with equity release?
If you opt for a home reversion plan, your property will be sold, but you can still live there until you pass away. Remember that you should discuss your options with your family and dependents before making a decision. This is because an equity release plan only protects you, the homeowner, so your dependents won’t be allowed to stay when you pass away.
As for lifetime mortgages, your property is entirely safe. You retain the right to live at the property until the end of your plan, and the FCA regulates schemes. You also can’t take out an equity release plan without proper financial advice, so make sure to clear all your questions and queries before making a decision.