Equity release is just as it says – a vehicle for releasing the equity that you are likely to have acquired in your home over the years. In other words, it is a means for established homeowners to release some of the value tied up in the property in which they live.
Taking advantage of equity release is a serious decision that requires careful thought – since the consequences are with you the rest of your life and affect the value of any inheritance you wish to pass on to your children.
To see how much you could potentially unlock from your home’s equity, you can use an equity release calculator as a starting point. Once you have done this, you can then decide whether equity release might be the most suitable course of action for you.
Firstly, it might be helpful briefly to review how equity release works:
- you need to own significant equity in your home – where equity is the difference between the property’s current market value and any outstanding mortgage on it;
- you also need to be at least 55 years of age – although some providers may impose older age limits; and
- may then arrange the release of the equity in your home, either through the payment of a single lump sum of cash, or a series of smaller amounts, or a combination of both;
- the options are explored in further detail in a guide to equity release published by the Consumer Association’s Which? magazine;
- this is probably the most widespread and accessible form of arranging equity release;
- as the term suggests, it involves your taking out a lifetime mortgage secured on the property you own;
- for the term of that mortgage, you continue to own the property and may retain a proportion of the equity – to pass on as an inheritance to your children, for example;
- the government-backed Money Advice Service points out that there are many variations of the lifetime mortgage – depending on the provider you choose;
- with some schemes, for instance, you do not need to make any repayments on the mortgage – but upon your death or move into long-term care, the accumulated interest and outstanding capital balance need to be repaid;
- some schemes, on the other hand, require monthly instalment payments of the mortgage interest only, while others operate much as a standard repayment mortgage, with monthly instalments including both interest and capital repayments;
- an alternative form of equity release is in the shape of so-called home reversion;
- this means that you actually sell all or part of your home to a home reversion provider;
- the proportion of the market value of your home which you decide to sell, and receive as an immediate cash payment, may vary quite widely from one provider to another – as much as 50%, for instance, or as little as 20%;
- although part of the property is effectively sold, you nevertheless retain the right to continue to live in it until your death or until you move into alternative accommodation – which might need to be approved by the home reversion provider – or into permanent long-term care;
No negative equity guarantees
- both lifetime mortgage and home reversion arrangements typically include a “no negative equity guarantee”;
- these guarantees are designed to make sure that whenever your home is sold, and the costs of that sale have been deducted, there is no more for you (or your estate) to pay if the proceeds from the sale do not cover the outstanding balance of the loan.
Equity release may or may not be for you. It is likely to be a significant decision requiring careful consideration of the financial implications as well as independent financial advice.