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What is Equity Release?
Equity release allows you to access a lump sum of your property’s current value, as cash. There are two main types of equity release products, which we will look at in further detail below.
It’s important to consider other options available to you, prior to looking at equity release, which can be risky and expensive.
What are the Equity Release options
If you’re over 55, a lifetime mortgage allows you to borrow up to 60% of the value of your home, at a fixed interest rate. The interest continues to accrue over time. Much like standard mortgages, interest rates and fees will vary between lenders, so make sure you find the most competitive offer available to you.
Many lifetime mortgages don’t allow you to make repayments towards the loan during your lifetime. Some versions are available, which allow you to pay either part or all of the interest towards the loan. Some even allow you to pay back both the capital and the interest. It’s worth noting that if you choose to take the loan in smaller amounts, rather than one lump sum, you will only pay interest on what you have borrowed to date.
So long as your home remains your main residence, you have the right to live there until you die or go into long term care, where applicable. You’re also able to move to a new home, subject to acceptance of your new property by your lifetime mortgage lender.
There is some built-in reassurance in the form of the ‘no negative equity guarantee’ from the equity release council. This guarantees that despite the potential for your home to drop in value, you won’t be liable to pay any difference after its sale. Your relatives or designated estate will not be liable either, should they have to sell the property after your death.
Home reversion plans are another form of equity release. This type of plan allows you to sell a percentage of your home to a home reversion provider in exchange for a tax-free lump sum or a number of smaller payments. You will ordinarily need to be at least 60 to take out this type of plan.
You won’t need to pay rent on the part of your home owned by the lender, but It’s important to realise that they will pay you below (usually between 20% and 60% of) market value for their percentage. The lender’s percentage remains the same, despite any property value increases. This means that if your home increases considerably in value, they’ll be entitled to more back from the sale of your property than they lent you.
Much like a lifetime mortgage, you can choose to remain in your home until death or move home, so long as the lender approves your new property. It also offers the same ‘no negative equity guarantee.
Is Equity Release right for me?
Once you’ve considered whether your circumstances make equity release a viable option, for example, your age, income and future plans, it’s important to also consider the following important points:
- Given that people live longer and healthier lives than ever before, 55 is a relatively young age for eligibility for equity release. After all, the earlier you take out a lifetime mortgage, the more it will cost you overall. Taking equity too early can also mean that you don’t have the remaining equity in your home to pay for future expenses, such as long term care, if required.
- Both equity release options can be expensive ways to borrow money and are likely to be more expensive than a standard residential mortgage or remortgage. Whilst it’s possible to obtain interest rates below 3%, most lifetime mortgages are still charged interest at a rate of 5%.
- Equity release products have arrangement fees of up to £3,000. There are also typically early repayment charges if you change your mind, as well as routes out of most plans being complex.
- The amount of equity release you take can affect your entitlement to state benefits, such as pensions.
How can The Mortgage Brokerage help you with Equity Release?
Equity release products are complex and those offering advice on them require a specialist qualification. Any equity release enquiries will be passed to a 3rd party financial adviser from Quilter Financial Planning
On top of providing helpful advice, a Mortgage Broker is able to assess all equity release products on the market, to ensure that you’re matched with the one most suited to your circumstances.
Equity Release will reduce the value of your estate and can affect your eligibility for means tested benefits.