Equity release is a means of retaining use of a house which has capital value, while also obtaining a lump sum or a steady stream of income, using the value of the house.
Many people find themselves needing access to a little more cash in retirement. Equity release is a way of extracting cash out of your property by effectively taking out a loan secured on your home. Equity release is only available to people over the age of 55 and it will be paid back when the property is sold. Equity release is seen as a way of supporting yourself later in life by unlocking tax-free cash from the value of your home. It must be remembered that this is an expensive option and a lifetime commitment.
There are two types of equity release – a home reversion scheme or a lifetime mortgage. A home reversion scheme is where an equity release company buys a fixed share of your property from you. However, as the company would not be able to redeem anything until the property is sold, the amount the company offers to you may be well below the actual value.
A lifetime mortgage is where a loan comes with a fixed rate and the debt is rolled into a lump sum which is to be repaid once the property is sold. A lifetime mortgage guarantees that you would not have negative equity which means you would not owe more than the value of your house.
Cost of Equity Release & Key Aspects
There is a cost associated with equity release. A lifetime mortgage can build up to costing more than the amount borrowed some years before. Home reversion schemes can also demand more than 70% of your home’s value in return for the 20% advance. The “catch” is that the income-provider must be repaid at a later stage, usually when the homeowner dies. Thus equity release is particularly useful for elderly persons who do not intend or are not able to leave a large estate for their heirs when they pass on.
The Which? Money Helpline has a team of qualified experts that can help to answer any questions on equity release.