What is Equity Release and how does it work

What is Equity Release and how does it work

Equity Release what is it?

Equity release refers to a range of products that let you access the equity (cash) tied up in your home if you are over the age of 55. You can take the money you release as a lump sum or, in several smaller amounts or as a combination of both. The “catch” is that the income-provider must be repaid at a later stage, usually when you die. Thus equity release is particularly useful for elderly persons who do not intend or are not able to leave a large estate for their heirs when they die.

There are typically two equity release options:

Lifetime Mortgage

You take out a mortgage secured on your property provided it is your main residence, while retaining ownership. You can choose to ring-fence some of the value of your property as an inheritance for your family. You can choose to make repayments or let the interest roll-up. The loan amount and any accrued interest is paid back when you die or when you move into long-term care.

  • If you’ve taken out an interest roll-up plan, there will be less for you to pass onto your family as an inheritance.
  • Debt can grow quickly if the interest is rolled up.
  • You will have to pay arrangement fees, which can reach approx. £1,500-£3,000 in total.
  • If you decide you want to downsize later on you may not have enough equity in your home to do this.
  • The money you receive from equity release may affect your entitlement to state benefits

Home Reversion Plans

You sell part or all of your home to a home reversion provider in return for a lump sum or regular payments. You have the right to continue living in the property until you die, rent free, but you have to agree to maintain and insure it. You can ring-fence a percentage of your property for later use, possibly for inheritance. The percentage you retain will always remain the same regardless of the change in property values.

  • You will have to pay arrangement fees, which can reach approx. £1,500-£3,000 in total.
  • If you release equity from your home, you may not be able to rely on your property for money you need later in your retirement. For instance, if you need to pay for long-term care.
  • If you decide you want to downsize later on you may not have enough equity in your home to do this.
  • The money you receive from equity release may affect your entitlement to state benefits
  • These schemes can be complicated and expensive to unravel if you change your mind.
  • Home reversion plans will usually not give you anything near to the true market value of your home when compared to selling your property on the open market

Always seek independent financial advice and legal advice before committing to an equity release scheme. There are many risks in both lifetime mortgages and home reversion plans. This article is for information purposes only and should not be considered as advice.