A guide to equity release
Do you want to find out more about how equity release works and how it can help you? Here at Guarantor Loans, we have put together a guide explaining everything that you need to know when it comes to equity release.
What is equity release?
Equity release refers to unlock a certain amount of money that is tied up in a property that you own. It may be used as a way of providing a stable and regular income to you as a homeowner, or equity release can be in the form of a lump sum payment as a way of setting yourself up for retirement and being able to maintain the lifestyle you lived whilst working.
Generally speaking, it is possible to release an estimated 60% of the value of your property, without also needing to make repayments and still being able to live in the property itself.
How does equity release work?
To clarify, equity means the percentage amount of the house that you own outright as a homeowner. Over the course of time, and particularly as you go get closer to reaching retirement age, the amount of equity you have in a property will likely grow. When the time comes you can then release this equity which can be done through either a home reversion or a lifetime mortgage which can then be used in your retirement.
Who qualifies for equity release?
When it comes to being able to get equity release, you will need to meet certain criteria in order to qualify. These usually include the following details:
- Equity release is usually available to those over the age of 55 for a lifetime mortgage and rising to 60 if you are considering the home reversion scheme. In summary, the older that you are, the more equity you will be able to release
- You will need to own a UK based property
- Your home will need to over a certain value, the exact amount will depend on the equity release company you go with
- If you already have an existing secured loan or a mortgage, any equity that is release will need to be used to pay any remaining amount left with immediate effect. After this has been done, you will be able to use the money as you please
The difference between lifetime mortgages and home reversion
In this section, we will explain in further detail how these two main types of equity release work
With this type of equity release, a lifetime mortgage is secured against your property which then allows you to release a lump sum from the equity in it. With this kind of mortgage, you can still benefit if the house increases in price, and you remain the owner of your home.
Home reversion plans
Home reversion plans refer to selling all (or part of) your property to a home reversion plan provider to then receive a money lump sum. This tends to be a higher amount than you raise with a lifetime mortgage, however, it does mean that part of your home will belong to someone else. Nevertheless, you can stay living in the property where you have taken out a home reversion plan for the rest of your life entirely rent-free.
It is important to remember that if your house in the future does increase in value, you will only gain benefit from the increase in relation to the amount of the property that you still own. However, a plus point of home reversion schemes is that they aren’t loans, so you will not have to pay interest.
Advantages and disadvantages of lifetime mortgages
Equity release isn’t for everyone, as it is entirely dependent upon your personal circumstances. In order to help you weigh up whether it can help you, we take a further look at the advantages and disadvantages of lifetime mortgages.
Advantages of equity release schemes
- Being able to take out a lump sum in order to use it as income
- You are still able to remain in the property
- You can borrow the money as and when you need it
Disadvantages of equity release schemes
- If house prices end up falling, you will owe a higher proportion of your property’s value
- If you take out a lifetime mortgage it will erode inheritance that you have
- The younger you are the less you can borrow
Advantages and disadvantages of home reversion schemes
Lets now look at the other popular type of equity release, home reversion schemes.
Advantages of home reversion plans
- Home reversion plans tend to offer more money than you could receive with a lifetime mortgage
- You can still keep a percentage of the home to give away as an inheritance in the future
- You do not have financial obligations or debt that involved
Disadvantages of home reversion plans
- One of the major drawbacks of home reversion plans relates to the fact that you no longer own all the property, which means that you do not have control over it
- If your property ends up increasing in value, you will not be able to make any profits from the properties valuation
- In similarity with lifetimes mortgages, your age, as well as your health, will determine the discounts that you are able to get.
As you can see, if you are trying to prepare for retirement and you do not have other additional forms of income, equity release can be a fantastic way to make sure that you can maintain the lifestyle you have lived in your working years. Nevertheless, always check with the individual lender to ensure that you are happy with the terms and conditions of any equity release contract you take out, as this is a lifelong agreement that you are making.