Equity release is a popular option for people over the age of 55 who need to unlock the value of their home equity yet do not wish to go through the hassle of having to move to a smaller property.
Equity release can be used for unexpected expenses such as residential care, where it can pay out a lump sum, or to supplement a mortgage with regular payments so you can enjoy a liittle extra money in retirement. The exact amount of these regular payments depends upon your personal circumstances.
Providers do not place restrictions around what you can or cannot spend the money on, but you must have paid off the majority of your mortgage for a provider to consider your application.
How does equity release work?
There are two options for releasing the value of your home.
The first is called a lifetime mortgage. This is a type of loan which is secured on the property and pays you a regular sum or one large payment for you to spend as you wish. You and your partner continue to live in your home, and can do so until you pass away.
The main risk with this option is that the interest can eat away at the remaining value in your home. When you or your partner dies, there may be little or no value left in the property for you to pass on in your will. However, most providers will promise never to allow you to get into negative equity, so you won’t leave any debts for your loved ones to have to deal with.
The second option for equity release is to release the value in your home by selling a chunk of it to a third party. Initially this looks like an attractive option because no interest payments will accrue, and you can live in the property until you pass away. However, if you choose this route, you should be aware that you will not receive the going rate for your property. This is how the provider makes their profit. However, you may prefer the peace of mind of knowing that your family will at least receive a fixed amount when you die. This option is normally only available to people in their 60s or older, and you will no longer ‘own’ your home as you once did: a certain proportion of it will belong to someone else.
If you have to move into a residential care home as you get older, any equity release product you have will normally terminate early and the lender will proceed with the sale of the property in the same way as they would if you had passed away.
Note that considerable penalties may apply if you change your mind about either product and wish to cancel your deal at a later date.
Who should choose equity release?
If you are attached to the family home, or you are particularly worried about downsizing for some reason, equity release could be the perfect option for you. If you are faced with a large cost very suddenly – for example, if you require care – equity release can be a useful way to provide for the increased cost of living without having to move into a home.
Some people choose to use equity release to carry out urgent home improvements. If you are considering this yourself, make sure you have exhausted any grants and emergency funds that may be available before you enter into a new mortgage agreement.
If you are willing to consider moving to a smaller home, you may find peace of mind in downsizing. Someone people like to know that they are not running up any large interest bills and can predict exactly where their descendants will stand financially when they die. You do not necessarily have to buy a new property; if your home is particularly valuable you could consider investing part of the sale income and renting a house or flat elsewhere.
Finally, when you enter into an equity release agreement, make sure you have enough cash in the bank to pay for the arrangement fees which can be quite expensive. If your property is not worth much, you might find that there are other products which would be more cost effective.
Further advice
It is always worth speaking to a professional mortgage adviser before taking out any equity release plans or speaking to any companies who have offered to purchase your home, especially if they are offering you a reduced price compared to the market value. As with any mortgage product, mistakes can be costly.
If you are looking at equity release to pay off debt, contact the Consumer Credit Counselling Service first. They have in-house equity release specialists and their advice is free of charge.