What is Equity Release and How Does it Work?
Equity release is a way for homeowners over the age of 55 to release some of the value they have built up in their home and spend it how they wish. That cash can be received a variety of ways given the multiple equity release schemes available. Some homeowners choose plans that give them the cash all in one lump sum while others choose to receive the cash in multiple payments.
There are usually no required repayments, but some plans do allow you to make voluntary repayments if you wish. You are able to stay living in your home without having to pay any rent. The equity release plan you have chosen is eventually repaid to your lender when your home is sold. That usually occurs when you pass away or move into long term care.
The cash received through an equity release plan is tax-free and there are no restrictions on how it is spent. Many homeowners choose to spend the money living a more comfortable retirement and are able to take more holidays while others use it to financially help their children or grandchildren or make improvements to their home.
Benefits of Equity Release
There are a number of benefits to taking advantage of an equity release plan.
First, you get to experience more financial freedom. You can take the holiday you’ve always wanted or buy the fancy car you never could afford before. You could also just live more comfortably in general, knowing that you now have more cash on hand. There are no limitations as to how you can spend the cash you receive. It is simply yours to do with as you want.
Secondly, you don’t have to move to a smaller living arrangement, which is what many retirees are forced to do. You can stay living in your home for the rest of your life and you do not have to pay any rent to stay there. This means you don’t have to downsize, find another place to live, or move all of your belongings. You can stay living in the home with which you are familiar until you either pass away or move into long term care.
In addition, all equity release schemes come with what is called a no-negative equity guarantee. This means that what you owe is not tied to the fluctuation in home prices. So, if your home is sold and does not profit enough to repay the full debt you still owe, your estate is not responsible for making up the difference. This means that your loved ones will not be left with your debt. They will not inherit any proceeds if this were to happen, but they will not be held responsible for any outstanding debt either.
Types of Equity Release
Another benefit of equity release is that there are different options and plans available. The two primary types of equity release are lifetime mortgages and home reversions. There are also several different types of lifetime mortgage plans available.
A lifetime mortgage is the most popular type of equity release. It is a loan secured against your home where you maintain 100% ownership of your property. There are several different versions of lifetime mortgage available, but most do not require you to make any repayments.
Some plans allow you to make ad-hoc payments if you choose while others allow you to make repayments on a regular basis. These options can allow you to control your overall loan balance.
The standard core lifetime mortgage product will provide a simple lump sum in cash and require no repayments from you. You simply repay the full loan balance when the home is finally sold.
Other plans allow you to withdraw your equity in smaller payments from a cash reserve facility. These plans can help you to save on interest, as with lifetime mortgages you only ever pay interest on money you have already received and not on money put away in the cash reserve facility.
Use our free lifetime mortgage calculator to determine your maximum release!
A home reversion functions quite differently from a lifetime mortgage but offers its own set of benefits. With a home reversion, you do not take out a loan. Instead, you actually sell off a percentage of your home to the lender.
A home reversion allows you to protect some of your home for inheritance purposes. This is because when the home is finally sold, the proceeds are divided according to the ownership percentages of the property. For example, if you sold 30% of your property to the lender, the lender would then receive 30% of the sale’s proceeds while your estate would receive the other 70%.
While these plans can often seem challenging to understand, we are here to help you determine the best one for your particular needs.
Use our free home reversion calculator to determine your maximum release!