How Does Equity Release Work?

by from money.co.uk, Published: 4 January 2013

If you want to borrow money but canít afford to take out a loan, releasing some of the cash value from your property using an equity release scheme might be an option worth investigating. We explain how it works.

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Equity release is becoming a popular way for older homeowners to borrow money without having to sell their home or make costly repayments on a new mortgage.

They can sound like a win-win option but they aren't the right choice for everyone so it's something you need to go into with your eyes open.

We explain the ins and outs of equity release so you can understand whether it's the right choice for you.

How much can you borrow?

Aimed at homeowners approaching or enjoying retirement, equity release deals are designed to free up some of the money “locked in” to your property without you needing to resort to putting your home on the market.

Depending on your age and circumstances you can typically release a lump sum worth up to 50% of the value of your home.

Your options for equity release

There are two different equity release schemes available in the UK: Lifetime Mortgages and Home Reversion Schemes.

Each scheme works differently and will have a large influence on the total cost of releasing equity from your home:

Lifetime Mortgages

With a Lifetime mortgage you borrow a lump sum using your home as collateral.

They're known as 'lifetime mortgages' because you don't need to make monthly repayments unless you want to and agree to repay the loan plus any interest added when your home is sold.

Home Reversion plans

With a Home Reversion scheme you sell a percentage stake in your home (usually below market value) in exchange for a cash lump sum.

Then when your home is sold the equity release company would get an agreed percentage of the sale.

You can find out more about both Lifetime Mortgages and Home Reversion schemes by reading our guide: What is Equity Release?

What’s the cost?

Ultimately the cost of your equity release scheme will depend on the scheme you choose, how long you live, the housing market when your property is sold and/or the rate of interest applied to your borrowing.

This makes picking the right plan quite tricky as there are lots of factors to consider and the total cost isn’t set until your home is sold.

It's worth noting that you won't be liable for any costs outright, but the amount you or your dependents receive when your property is sold will be affected.

If you'd like to discuss your equity release options with a qualified advisor, enter your details in our Equity Release form.

Do you keep ownership of your home?

This will depend on the type of equity release scheme you choose.

Using a Lifetime Mortgage to borrow a cash lump sum you will always own 100% of your property. You will simply repay the loan using the money you get from selling your home after you move into care or pass away.

However, if you opt for a Home Reversion scheme you will no longer own 100% of your home, instead you will have sold a % stake of your property to the equity release provider. While they would be unable to force the sale of your home while you're living there, they would technically be a joint owner of your property.

Lump sum or monthly income?

Most equity release schemes will give you a tax-free cash lump sum to spend as you please. However, if you want to boost your income throughtout your retirement, or are unsure exactly how much cash you need there are alternatives.

For example, some schemes allow you to drawdown a set figure and to reserve access to an additional amount which you can withdraw at any point.

If you want to use your equity to generate an income you may be able to do this directly through the release scheme or alternatively you could use your cash lump sum to purchase an annuity.

Get financial advice

It’s fair to say that equity release schemes can be confusing and getting the best deal isn’t always straightforward.

There are lots of factors to consider, including how much your property could be worth in the future, inheritance tax implications and whether releasing a cash lump sum could affect any benefit payments.

So, before you make any decision, it’s imperative to seek independent financial advice from a qualified advisor.

A qualified advisor, with experience in the equity release sector should be able to sit down with you, evaluate your personal circumstances and recommend the best type of equity release deal on the market.

To speak to a qualified advisor about equity release simply enter your details in our Equity Release form.

What are the alternatives?

If you’re considering an equity release scheme there are a number of other ways to raise funds you might want to consider.

Secured loans, further advance mortgages and interest free credit cards are just some of the options you might want to look at depending on how much money you need to raise.

Read our guide: What’s the Cheapest Way to Borrow Money?  for ideas on how to get the cash you need without opting for an equity release scheme.

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