If you are retired and are looking to release money from your home, you may no longer qualify for a conventional mortgage so equity release would be an option to consider.
Equity release is, in a nutshell, a way to unlock the value of your property and turn it into a cash lump sum. You can do this via a number of policies which let you access – or ‘release’ – the equity (cash) tied up in your home, if you’re 55+. You don’t need to have fully paid off your mortgage to do this.
The most common form is a mortgage that isn’t paid off until you die. 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 generally means there will be less for them to inherit. Then again, it is your money, so prioritise your own standard of living. Equity release products fall into two main camps:
1. Lifetime mortgage
This is the most popular and for those aged 55+.
Here you borrow some of your home’s value at a fixed or capped interest rate (see below for more). With old-style lump-sum lifetime mortgages you don’t make repayments, so the interest compounds rapidly as the amount you owe is increasing all the time – in contrast to a normal mortgage.
Some ‘drawdown’ versions 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.
A lifetime mortgage is different from a standard mortgage – if this is what you’re looking for, check our Cheap Mortgages guide for tips.
2. Home reversion plan
You need to be aged 65+.
Here a provider pays you a tax-free lump sum for a portion of your home at below market value. You can then live in the property (rent-free) until you die. When it’s sold, the proceeds are split based on the percentage you own and the lender owns. So if your property value rises significantly, so does the amount it gets.
For example, if you sell a 40% share in a £200,000 property in return for a lump sum of £40,000, this cash you receive is at a huge discount to the £80,000 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 £300,000, the provider would then be entitled to £120,000 – 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.
Equity Release includes Lifetime Mortgages and Home Reversion Schemes. We can advise and arrange Lifetime Mortgages and will refer to an approved specialist for Home Reversion schemes.