How does equity release work?


by Emily Gilbert |

Equity release is an attractive concept for many of us - a chance to release cash from your home without needing to move. But how exactly does it work? And what are the risks?

What is equity release?

Equity release is a type of mortgage — often referred to as a lifetime mortgage — that allows homeowners to access some of the wealth they have locked up in their property.

What do people use equity release for?

“The most common reason people use equity release is to pay off their traditional mortgage when they approach retirement. They may not be able to extend their loans due to age and income, or the monthly payments may be uncomfortably high," explains later life money expert Steve Wilkie, Executive Chairman of lifetime mortgage broker Responsible Life.

"Around one in five homeowners take equity release primarily to make home improvements. Another popular reason is to give an early inheritance to family and loved ones, and this often takes the form of a house deposit. Living inheritances like this mean you can enjoy the positive effect of your legacy while you’re still around to see it."

Some homeowners also use equity release to fund holidays, medical treatment and care.

What are the different types of equity release?

There are two main types of equity release:

Lifetime mortgage: The most common type, this is where you borrow money secured against your home. The mortgage is typically repaid from the sale of your home when you move into residential care or die.

Home reversion plan: With this, you sell all or part of your property at less than its market value in return for a tax-free lump sum, a regular income, or both. However, you will still stay on in your home as a tenant and will pay no rent.

Is equity release safe?

Yes, because you can’t take out equity release without appointing a solicitor and using a specially trained adviser who will look after you every step of the way. "There’s also no way of getting into negative equity," adds Steve.

What are the pros and cons of equity release?

Pros

 • You still own 100 per cent of your home, you are guaranteed to be able to live in it until you die or go into long-term care

 • You can’t get into negative equity.

 • Rates have come down significantly over the past decade so, for those keen to leave an inheritance to loved ones, house price growth can partly offset the effect of interest, meaning you may be able to leave more than you think.

 • Some products have a feature that allows you to ringfence inheritance too, giving you added peace of mind.”

Cons

 • You are unlikely to receive the full market value of your home compared to if you sold it on the open market.

• Your debt is increased by interest

• You may experience early exit fees

• You'll need to pay set-up fees

• Your benefits such as pension credit, savings credit or even council tax benefit may be affected

How much does equity release cost?

“It costs around £2,000 to arrange equity release, and a typical interest rate is around 4 per cent, currently," says Steve.

What steps should I take if I’m interested in an equity release?

You should read up more online, speak to friends and family who have already done it, and arrange a call with a trusted specialist adviser from a company such as Responsible Life.

Disclaimer: Equity release will reduce the value of your estate and may affect your entitlement to means-tested benefits.

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