As we get older, it can often be useful to have access to some extra cash to help fund our retirement, pay for care costs or allow us to splash out on home improvements or other plans. With many of us having a large amount of capital tied up in our homes, being able to access that capital can be an attractive option for funding those plans.
Equity release allows you unlock some of your home’s value, giving you immediate access to the cash you need, usually without the need to make monthly repayments, as you would with a second mortgage or other types of borrowing.
There are two main types of equity release you can consider – lifetime mortgages and home reversion plans. Both have their advantages and some restrictions you will need to consider.
The most common form of equity release, this is essentially like a standard mortgage in many ways, with you borrowing the money you need against the value of your home. The loan will then be repaid when your home is sold, such as when you pass away or move into a care home.
The key difference from a standard mortgage is that you will not normally need to make monthly repayments, with the interest being ‘rolled up’ and repaid along with the capital when your home is sold. However, some lifetime mortgages do allow you to make monthly repayments, which can help to prevent the level of debt growing due to the interest. Where the interest is rolled up this can result in a significan t increase over time in the amount borrowed.
You can normally receive the money from your lender as a lump sum or take a smaller amount initially, with the option to ‘drawdown’ more capital later, up to an agreed limit. You can also normally ring-fence some of the property’s value as an inheritance for your children or other beneficiaries.
Things to bear in mind with a lifetime mortgage are that you will normally need to be over 55 and have paid off any existing mortgage and other secured borrowing on your home first. It’s also worth looking for a ‘no negative equity’ guarantee, meaning that if your home were to decrease in value, there is no risk of the value of your loan exceeding the value of your property when it is eventually sold.
Home reversion plans
This involves an equity release provider buying either a defined share or all of your home, giving you either a lump sum or a regular income, while you retain the right to stay in your home rent-free until you pass away or move into long-term care.
Advantages of home reversion plans are that there are no monthly repayments or interest to worry about and the percentage of the property that belongs to the equity release provider will not increase over time.
You will usually receive around 30-60% of your home’s market value (or relevant share of its market value), with the percentage generally being higher the older you are when you take out the home reversion plan.
It is worth bearing in mind that entering into a home reversion plan can have significant tax implications, as well as potentially affecting your eligibility for means-tested benefits. You will also still be required to maintain the property and cover any other normal costs e.g. service charges and ground rent if the property is a leasehold.
Speak to our equity release solicitors today
Before entering any kind of equity release deal, it is important to take specialist financial and legal advice, to make sure you fully understand all of the implications of the deal you are agreeing to.
Our equity release solicitors can advise on the terms of a lifetime mortgage or home reversion plan and handle all of the legal details and processes involving, including the transfer or funds and updating the title deeds with the Land Registry. This way, you can access the capital you need smoothly and with complete confidence that your long-term interests are protected.
Please note: We are not financial advisors and cannot advise on the suitability of a particular equity release product for your needs. You should therefore also ensure that you seek financial advice from an Independent Financial Advisor with access to the whole mortgage market to confirm that the product you choose is the best available option.