How Does Equity Release Work

Are you Over 55, wanting a comfortable retirement or maybe cash is becoming a little tight.?

The most advertised solution is equity release. At present equity release rates are the lowest  they’ve been for a number of years, However this solution is still an expensive and risky way to raise cash.

Wanting to know if equity release is a smart strategy? It definitely is not something to be taken on lightly, so before you decide, first assess if downsizing your home could be an alternative. If you can sell your home and move on to a smaller one and live off the surplus money you have saved, great. You might also find a smaller home more appropriate as you age – fewer stairs.

If downsizing is appropriate for you, don’t hesitate and give it some serious thought.

So if downsizing is right for you, consider doing it sooner.

But bear in mind if it’s a home where you’ve resided for number of years and most likely have family and friends in the area, don’t undervalue the personal and social affect of moving away if you can only afford to downsize out of the area. On top of this, the financial costs can be high, with estate agent fees and removal costs to factor in – so you’ll still need money to finance this option initially.

An Equity release mortgage is, in a few words, a way to unlock the value of your home and turn it into a lump sum. You can do this through a number of plans which let you access the equity tied up in your home, if you’re 55+. You don’t need to have fully paid off your mortgage to do this.

As a guideline, you can take the cash you release in one lump sum, in several smaller amounts on which you’ll pay interest, or as a combination of both.

How does equity release work?

The most typical form is a mortgage which isn’t settled off until your death. So if you have no one to leave your assets to, it’s a decent, though expensive, route to raise cash.

If you do have people to pass assets to, equity release usually means there will be less for them to inherit. Then again, it is your money, so prioritise your own standard of living. There are 2 types Equity release products.

1. A Lifetime Mortgage

This is the most popular and for those aged 55 plus

You will borrow a certain amount of your home’s value at a fixed or capped interest rate . With the traditional style lump-sum lifetime mortgages you don’t need to make any monthly payments, and the interest rolls up rapidly as the amount you owe is increasing all the time – in comparison to a standard mortgage.

Some ‘drawdown’ variations do allow you to pay back the interest (some even allow you to pay back some of the capital as well) so you can reduce the overall cost. With this type, you can take money out of your property a bit at a time up to an agreed amount – with interest charged on the amount you take, rather than the whole amount available.

2. Home reversion plan
You need to be aged 65+.

With this type the lender pays a tax-free lump sum for a portion of your property at below the current value. You can continue to live in the home rent free until you die. When it’s sold, the profits are separated dependent on the percentage you own and the lender owns. So if your property value rises greatly, so does the amount it gets.

For example, if you sell a 40% share in a £100,000 property in return for a lump sum of £20,000, this cash you receive is at a huge discount to the £40,000 this share is actually worth (at current market prices) – mainly because the provider will have to wait many years to get its money back. Years later, when you die, if your home is eventually sold for £200,000 , the provider would then be entitled to £80,000 – 40% of the proceeds.

Therefore with lifetime mortgages you know the exact rate, while as a generalisation home reversion plans are better if property prices stay flatter, worse if they rise substantially.

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