How does equity release work?
If you are over 55 and own your own home either outright or with most of the mortgage paid off, an equity release mortgage could enable you to use your property to supplement your finances.
Although owning a property outright has many benefits, there may be times when it’s more useful to have access to a sum of cash that’s available to spend. Equity release works by freeing up the money that would otherwise be tied up in the value of your home. You get to unlock some of the equity associated with your property, and instead of paying the money back, it is taken off the value of your home. Some arrangements also allow you to make repayments.
Types of equity release plan
There are two types of equity release plan to choose from, and we can offer independent advice on the pros and cons of both choices, for your own situation.
- A lifetime mortgage essentially involves remortgaging your home, taking out a loan that is secured on the value of your property. Unlike a conventional mortgage, an equity release mortgage doesn’t require you to make monthly repayments; instead, the loan, plus interest, is repaid in full at the end of the plan (usually on your death).
- A home reversion plan lets you remain in your home rent-free (or for a nominal rent), for the rest of your life, but involves signing all or part of the property over to the lender. After your death, the property is sold and the lender can recoup their investment.
Things to consider
Equity release can be a good way to live comfortably through your retirement, while remaining in your own home. But like any form of borrowing, it requires careful consideration.
- There are some risks associated with a lifetime mortgage, so it is essential that you discuss these with a qualified equity release specialist.
- With any type of equity release, because your income (or savings) will go up after releasing the equity in your home, you may no longer be eligible for some means-tested benefits.
- Equity release involves using part of the value of your home, so the amount of money you have to leave to loved ones may be significantly less, and you may not be able to pass on your property after you die.
- Depending on your circumstances, alternatives such as selling your property and downsizing to a smaller home could provide a better solution.