If you’re over 55 and looking to access some of the cash tied up in your home, then an equity release mortgage might be for you.
According to figures from the Telegraph, the number of equity release financial products available are rising, with almost 39,000 UK homeowners taking them up in the first half of last year alone.
While this can be an attractive way to access funds without having to sell your property, it also comes with several risks, and so here CashLady explores equity release in more detail.
What is an equity release mortgage?
Equity release may be an option for you if you are over the age of 55 and want to unlock the cash tied up in your property.
Various policies allow you to do this and you aren’t required to have a fully paid-off mortgage first.
You can take the money that you release in one lump sum, in smaller amounts over time, or as a combination of the two.
Depending on the type of plan you go for, you normally do not need to make any repayments as the interest will be rolled up and added onto the loan.
If you wish, you may decide to make monthly interest repayments so the amount you owe doesn’t increase.
What happens to your home under equity release?
Equity release allows you to remain in your home for the rest of your life or until you go into long term care.
The type of plan that you go for has different outcomes for your property.
A lifetime mortgage
If you opt for a lifetime mortgage, one of the most popular types of equity release, then you retain ownership of your property while you live there.
The home is then sold to pay off your loan once you die or go into long term care.
You can choose to ring-fence some of the value of your property as an inheritance for your family.
Interest is charged on what you have borrowed, which can be repaid or added on to the total loan amount.
Home reversion plan
For property owners over 65, you can select a plan where you sell all or a portion of your property, in return for a tax-free lump sum, and then stay in your home as a tenant, paying no rent.
In this case, you no longer remain the owner of your property.
If you are considering any form of equity release, then you are strongly advised to seek professional financial advice before signing up to a policy.
The advantages of equity release
- Receive a tax-free lump sum and/or smaller, regular payments to supplement your income while continuing to live in your home until you die or move into residential care
- Benefit from any rise in the value of your property depending on your plan
- Move into a suitable alternative property in the future, as equity release is often transferable
- Continue to live in and retain ownership of your home if you chose a lifetime mortgage
The disadvantages of equity release
- Reduced value of your estate (everything that you own) and the amount that will go to your beneficiaries in your will
- The reversion company owns all or a part-share of your home with a home reversion plan
- Receiving a lump sum or taking extra cash to supplement your income may reduce your entitlement to means-tested benefits, now or in the future
- If you receive care at home funded fully or partially by the local council, they may start charging you or ask you to pay more for your care
Alternatives to equity release
Money Saving Expert advises that equity release isn’t something to be taken on lightly, so first, evaluate whether downsizing your property could be a better option.
Selling up and moving to a smaller home, would potentially allow you to release funds and live off the excess cash that you make on the sale.
A new, smaller property could also be more suitable as you age.