Guide to Equity Release
Additional sources of income as you enter later life can be desirable or essential. One way to get some liquidity is to use your home’s value to release money that is locked up in brick and mortar, as you continue to live there.
This is a big financial decision to make. You should get unbiased financial advice before you decide if an equity release scheme is the right option for you.
Here we answer the questions people ask most often about equity release and discuss the advantages, disadvantages, and risks.
Equity release – what is it?
The equity of your home is its gross market value, less any mortgage that still remains. This calculation gives you the net amount that your residence would give you if you sold it for cash today.
However, suppose you do not want to sell your home or downsize to release capital. In that case, an equity release will allow you to access a significant portion of your home’s value. If your mortgage is paid off and you own the home outright, then you can apply for an equity release scheme.
An equity release scheme will allow you to access a significant amount of money and permit you to continue living in the property. It is a financial solution that many people choose in later life.
How equity release schemes work
When you opt for an equity release scheme, you will exchange a portion of your home’s value with an equity release provider. The equity release will give you a regular income, or it will provide you with a lump sum of money, as you prefer.
There are several mechanisms for achieving this, including selling a portion of your home to the equity release provider and the right to continue living there. The alternative option is a special kind of mortgage.
These products are called:
- A home reversion
- A lifetime mortgage
- An enhanced lifetime mortgage
What is a home reversion equity release scheme?
A home reversion equity release scheme will allow you to sell part of your home and retain a legal right to continue living there. This right of occupation extends until you die or move into long-term care. The equity is paid as a regular salary or as a lump sum.
The later in life you are, the more money you can typically access. You may need to be aged 60 or over to access this type of equity release scheme. Furthermore, the state of your health (being in poor health) can help you leverage a larger share of the value of your property.
What is a lifetime mortgage equity release scheme?
More popular than a home reversion, a lifetime mortgage equity release scheme allows you to borrow a lump sum of money through a unique form of a mortgage. The mortgage is only repaid once you move into long-term care or when you pass away.
Typically you can borrow between 18% and 50% of the total property value. The later in life you are, the more equity you can release.
The debt continues to grow with the addition of interest. However, you can pay the interest as you go, to avoid compound interest. This type of mortgage is called an interest-paying mortgage. If you do not wish to pay the interest as it accrues, you will be taking out an interest roll-up mortgage.
You can find equity release schemes that offer a no-negative equity guarantee to give you peace of mind and ensure your debt never exceeds the property’s value. If your debt equals your home’s value, then its entire amount will be used to pay off the mortgage when you die or move into long-term care.
Enhanced lifetime mortgage
If you have a serious health condition, and in some cases, if you are a heavy smoker, you may have access to an enhanced lifetime mortgage equity release scheme. With this type of scheme, you pay a lower rate of interest, or you can borrow more money instead.
The advantages of equity release
The most significant advantage of equity release is that you will receive money that you can spend right now. You will be able to capitalise on the rise of your house price that has occurred over time.
You can enjoy the money or a portion of the money you have earned over your lifetime, rather than leaving it all to your relatives or beneficiaries. You can also use the equity to relieve your family’s burden of funding your long term care.
The disadvantages of equity release
The most significant disadvantage of equity release is that you cannot release your home’s full market value. You are only accessing a portion of the value of your home (usually between 18% and 50%). However, if you sold your home to turn its full value into cash, you would still need to find somewhere to live.
Another disadvantage is that your relatives or beneficiaries will receive a smaller inheritance. You may also have fewer rights to benefits if your bank account is full of cash.
A third disadvantage is that you will owe more than you borrowed, due to compound interest. At five percent interest, for example, the amount you owe could double in fifteen years. The effect of compound interest is a major reason why people opt for an interest-paying mortgage.
However, suppose you do not wish or can’t pay the interest as you go. In that case, you can reduce the effects of compound interest by taking several smaller releases of equity, and only when you need/want them.
Under the terms of home reversion equity release schemes, your home might need to be vacated quickly, following your passing, which can burden your relatives.
Contact Friends Capital
Friends Capital are experts in equity release and can advise you on the best option based on your circumstances. Contact Friends Capital today for help.