The Ins and Outs of Equity Release

Want to unlock the cash in your home? Work out whether it’s the right thing for you to do, and find out how to go about it…

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The Ins and Outs of Equity Release

If you’re aged 55 or over, congratulations.

You can probably remember student grants and Blue Peter when it was really, really good. You also might be eligible for equity release if you’re a homeowner with no mortgage, or just a small one.  If you fancy releasing some of the value of your home to access some tax-free cash, we’ve lined up everything you need to know, what to do next and the ramifications of it all. Hopefully we’ve answered all your questions, including who the best Blue Peter presenter ever was. It was Janet Ellis.

Once upon a time, it was your pension that was supposed to see you through your retirement years, but the rise in home ownership and property prices has meant that many people are now able to consider using their homes as a form of income. And it’s not just for pensioners - it may be that you need the money to meet a debt, to fund a purchase,  renovation or dream holiday. You may even want to help your kids (or grandkids) onto the property ladder and you’re sitting on wealth that’s tied up in your house.

While some will consider selling their home or downsizing if they have a pension gap to bridge, that’s not the only option on the table. Equity release can release the cash in your home. Not the cash in your attic. That’s another TV show entirely.

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What exactly is an equity release plan?

If you own your house outright, and it’s worth more than you paid for it, you’ve got some equity. Even if you have a small mortgage, there’s a more than decent chance that you have an amount of equity in your home as well. How do you get at that money if you don’t want to move or sell your home? With an equity release plan, that’s how. You’ll stay put in the home you’ve made your own, and you’ll get a tax-free lump sum or regular income, in return for some financial jiggery-pokery which we’ll get into any second now. There are two types of equity release for you to concern yourself with, lifetime mortgages and home reversion. Any questions? We have answers. 

Okay, run me through lifetime mortgages

This is a pretty easy one. A lifetime mortgage is you taking out a loan that is secured on your home. It’s repaid when you go into long-term care or shuffle off this mortal coil. You retain ownership of the home, and you might even be able to make sure some of the home’s value is ‘tucked away’ for your family to inherit.

You’ll pay interest on the loan, as you would with any mortgage, and when the last named borrower either passes away or moves into permanent care, the house is sold and the proceeds used to pay off the loan. If the sale value exceeds the loan, then that amount is retained by the beneficiaries, so it doesn’t mean your children won’t inherit from you. 

One of the benefits of a lifetime mortgage is that it gives you a degree of flexibility. You can borrow a lump sum should you feel you need it, or you can take a smaller initial amount, but with a drawdown facility that lets you access other sums when you require them. The mortgage provider might impose a minimum amount on these drawdown sums, but at least you’re only paying interest on what you need, not on one large loan that you may not need all of. 

What’s the deal with home reversion?

Home reversion works a little bit differently - hey, that’s why it gets its very own section - it involves you selling part or indeed all of your home to a scheme provider, while continuing to live in the home for as long as you want. Again, there are choices available in terms of the equity you release - you can opt for a lump sum or a regular income - or a combination of the two.

One of the main things you need to realise about a home reversion is that you won’t receive the full market value of your home - and you may indeed receive as little as 30%. This is because the new owner of the home is allowing you to live there, often rent free, and isn’t able to sell the house from under your feet. They can’t shift until you move into care or die. The older you are when you take out a home reversion, the more likely you are to get a higher percentage of the market value. 

Can I do what I want with the money?

Ultimately, the money you release is yours to do what you want with. You can use it to top up your income, help your family,  pay off debts, replace a pension shortfall or invest it in your property - although this makes less sense in a home reversion, where you’ll be potentially adding value to a  home you no longer own. Your lump sum may pay for a holiday you’ve long wanted to take, and a regular income can bolster your state pension once you reach retirement age. Bear in mind, however, that whether you go for equity release or home reversion, you’ll still be the person responsible for the maintenance of the house. 

What are the pros and cons of equity release?

The most obvious pro of equity release is that it lets you access the money you have tied up in your home now - and that might be a significant amount. Otherwise inaccessible money that you’ve sunk into your house is now available to you. 

But that inevitably comes with a few cons too, whether that’s with a lifetime mortgage or home reversion. The main one is that you won’t receive the full amount of your home’s current market valuation - an inevitable trade-off for being allowed to remain living in the home. There are also issues to consider around inheritance tax, interest, early repayment charges, impact on benefits, adding a new partner to the title deeds and more. 

Is it simple or is it incredibly complicated?

It’s a bit of both, but if you’re unsure about what’s best for your particular circumstances, then speak to someone in the know. Get some seriously knowledgeable advice from lifetime mortgage solicitors or independent equity release advisers, so you can weigh up the advantages and risks. A good lifetime mortgage adviser will work with you through what’s available on the whole of the market, and guide you in the right direction. As for their views on Blue Peter? We can only guess…

Malcolm had always dreamed of owning a yacht when he retired.

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