Equity release is a concept generally sold to over 55s who own their own home and are looking for some extra cash for retirement. With rates currently at an all time low it seems like an easy solution. However, as with most things’ equity release is more complicated than it seems and you need to carefully consider all your options and understand what you are entering into. If done right equity release can be an excellent option, however, if done wrong it can end up being very expensive and you could end up owing several times the amount you released.
What is equity release?
Equity release is a way of releasing equity (cash) from your property and turning it into a cash sum. You don’t need to have paid off your mortgage and you can get the payment in one lump sum or several smaller instalments.
How does it work?
There are two main types of equity release, the lifetime mortgage and the home reversion plan.
1. Lifetime Mortgage
The lifetime mortgage is particularly popular with the over 55s and is where you borrow a portion of your homes value for a fixed interest rate. With most lifetime mortgages you don’t make repayment so the interest builds up and the amount you owe only increases.
More recently home owners have been able to get a ‘drawdown’ version of this mortgage which allows them to pay back the interest, and sometimes even the capital. Under this type of lifetime mortgage, you will agree upon a maximum amount that you can take out and will be charged interest based on how much you take out.
2. Home Reversion Plan
This plan is only available to those over 65. Under this plan you agree with a lender to sell a percentage of your home for an amount below market value. You receive the agreed upon amount and are not charged interest. When you die the lender recovers the percentage of the value of the house you have sold, not the amount you received. This is in replace of charging interest. You are also allowed to continue living in your home rent free, regardless of how much of the property you sold.
Is equity release right for me?
It is always important when considering any major financial move to get professional help. People have been caught out by spiralling interest rates and end up owing several times the amount they released in equity. Think about other financial options before you resort to equity release, perhaps you can downsize or even consider a different kind of loan.
