Equity Release Mortgages - An Introduction and Guideline

Equity Release is when homeowners release the money they have secured in their home. Arranged and approved by your solicitor, releasing home equity means that you maintain the right to live in your home rent free for the rest of your life. Your home is purchased through the value of your home so you can receive a lump sum of cash or regular monthly payments.

Reasons to Release Equity

Customers choose to release equity for a number of reasons. They may want to make home renovations, garden improvements, buy a new car, improve their lifestyle, or take regular vacations.

How Equity Release Works

Your plan provider will give you a lump sum or monthly payments which you can withdraw as needed. When you die, or sell your home, the money you have borrowed, and any interest owed, must be repaid. Because the interest has been allowed to roll up, and not gradually cleared, it can be expensive. Unless you’re very wealthy, it will likely reduce your estate, and lessen the inheritance you leave your family.

Advantages

Many older people are turning to equity release mortgages. Equity release plans allow you to release tax-free cash from your home to boost your finances in retirement. Home reversion and lifetime mortgages are the two major types of equity release plans. Both plans allow you to safely release equity from your home, spend the cash as you wish, make no monthly repayments, and stay in your home for life.

Disadvantages

All plans will reduce the value of your estate, so it is important to involve your family and discuss your ideas with them. Releasing cash from your home is a lifetime commitment and the loan is only expected to be repaid upon your death or entry into long term care. If you want to repay the loan early, early repayment charges may be applied. In almost all cases, your age is the fundamental method used in determining the percentage of your home’s value that can be released. A person of an older age can release a higher percentage of the value of their home, than a person of a younger age. The rationale is that they are not expected to live as long. There is no maximum age limit for equity release, but requests are not usually granted to anyone under the age of sixty.

Considerations

When choosing an equity release plan, make sure it has a negative equity guarantee. This means that if there is a situation that causes the value of your property to decrease, the debt will also decrease. By having a negative equity guarantee, this will ensure that after the sale of your property, any outstanding debt will not be passed on to your next of kin. If you can afford it, you may want to consider other forms of borrowing such as loans or traditional mortgages. When considering releasing equity, it is a good idea to consult a mortgage specialist.