How Does Equity Release Work?
If you find you want or need some capital, and you are a home owner, then you can decide to release some of the existing equity in your home without needing to sell up or down size.
That is why many people choose a Second Charge Mortgage, in order to protect a low interest rate on their existing mortgage. But when it comes to later life lending that approach might not appeal.
There are always important things to consider when it comes to loans secured on your property, including equity release routes, as that means your property is at risk if you can’t meet the agreed repayments at a future date.
If you own your home and are older than 55, you can also consider Lifetime Mortgages or Home Reversion Plans.
Both provide a fixed percentage of your home’s value today, as you agree to sell that percentage of your home’s value to the lender.
For these products, there is no fixed “term” or date by which you’re expected to repay your loan. The advance is only repaid after you die, or if you have to enter long-term care.
You should remember that the money you receive from equity release might affect your entitlement to state benefits and your tax liability, including inheritance tax. There might also be early repayment charges, if you change your mind, which could be expensive.
When considering a Lifetime Mortgage, it’s useful to know:
- The minimum age at which you can take out a lifetime mortgage is usually 55.
- You can normally borrow up to 60% of the value of your property. How much depends on your age and the value of your property at the time of the agreement, but this can be as low as 30%.
- Interest rates are normally fixed throughout the life of the agreement, but if they are variable there must be an upper limit agreed. That cap is then fixed for the life of the loan (Equity Release Council standard).
- You have the right to remain in your property for life, or until you need to move into long-term care, provided the property remains your main residence.
- You have the right to move to another property in future, subject to the new property being acceptable to your product provider as sufficient security for your equity release loan.
When considering a Home Reversion Plan, you can:
- Sometimes release equity over several payments, rather than as a single lump sum
- The minimum age is often set at 60 or 65
- Have a “no negative equity guarantee”. This means that when your property is eventually sold, and agents’ and solicitors’ fees have been paid, even if the amount left is not sufficient to repay the outstanding loan owed to your provider, your estate’s beneficiaries will not be liable to pay any more.