Your guide to equity release

equity

Choosing a new home can bring a real sense of freedom. But sometimes that freedom can come from using our property to free up some hard cash.

Not sure where to begin? Worry not: that’s why we’ve compiled this handy guide to equity release.

 

What is it?

Equity release is the process whereby a homeowner can receive money using the value of their property. Cash can be generated as a lump sum, in several smaller amounts or a combination of both.

It is normally only available to the over-55s when freeing up some cash, and it can be helpful for retirement plans: anyone for no work, less stress, more golf?

There are two options for releasing equity: a Lifetime Mortgage and a Home Reversion Plan.

 

Lifetime Mortgage

This is the most common and popular form of release. Homeowners borrow part of the value of their property, subject to interest. The loan amount is typically capped at around 60% of the market value of the home.

It’s advisable to use a company that’s a member for the Equity Release Council. They ensure negative equity will never occur, so your estate will never owe more than the total value of the property.

 

The pros

 

Meet your needs

Cash can be released in stages up to the agreed amount, with interest only charged on the released amount and not the total. It can be prudent to access the cash you need immediately, rather than going full steam ahead for the full lump sum.

 

Don’t pay now

Loan repayments are usually only made when the property is sold at some point in the future – either when the homeowner dies or moves into a care home setting.

 

. . . and the cons

 

The final costs

Interest rates can be as steep as Ben Nevis. Unless you make voluntary interest repayments, the interest compounds over time. This can mean an eye-watering repayment when the home is sold – sometimes double, triple or even quadruple the original loan.

 

Inheritance issues

Your beneficiaries may lose out as those high interest rates mean your kids’ or grandkids’ inheritance is affected. There are ways to negate this, however, such as ring-fencing a portion of your estate that will not be borrowed against – this will protect cash for your next-of-kin.

 

Home Reversion Plan

 

Designed for those aged over 60, this form of equity release gives homeowners a tax-free lump sum against their property (woo hoo!) at below market value (doh!).

In a giant nutshell, it’s all about selling of a portion of your property for less than it’s worth, while continuing to live there as a rent-free tenant.

 

The pros

 

Interest-free

The cash generated in a home reversion plan is not a loan so there’s no large interest to be paid. Result!

 

More control

Homeowners decide how much of their property to sell – so the remaining portion is protected for their beneficiaries. The lump sum generated is only repaid when the home is finally sold.

 

A better balance

Compared to lifetime mortgages, the cash generated is typically higher and the application fees are generally lower. Bonus win!

 

. . .  and the cons

 

Less value

The cash generated is usually only 20% to 60% of the true value of the property. Additionally, if the market soars and the value of your property increases, you won’t reap any of the benefits. Ouch!

 

Ownership

You lose ownership of your home – or at least a portion of it. For many that could be a deal breaker.

 

Fewer options

Home reversion plans are pretty rigid in the way they are formatted and don’t offer a great deal of flexibility.

 

Whatever scheme seems best for you, bear in mind you will have to pay arrangement fees, which can be as much as between £1500 to £3000.

Before making any bold equity release decisions, it’s essential to seek advice from independent financial experts.

Meantime, if you’re looking for property, there’s only one place to go . . . s1homes.




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