What is Equity Release?

Your quick and easy to read guide on what is equity release, the type of plans available and how to go about choosing the best scheme.

What is equity?

In order to understand equity release you first need to be clear on what equity is.

The equity in your home is the difference between the value of your property and any outstanding loan you may have on it. Basically it is the money you own but as it is tied up in your house, don’t readily have access to.

For example:

  • A house worth £250,000 with no outstanding mortgage against it would have £250,000 worth of equity
  • A house worth £250,000 with an outstanding mortgage of £50,000 would have £200,000 worth of equity

So equity release gives you access to the money that was previously tied up in your home so you can use it in any way you want, be it home improvements, help with retirement income, money for the family or just to enjoy life.

How do you release the money tied up in your home?

You can release the money that is tied up in your home either with a lifetime mortgage or a home reversion scheme. There are a number of different types of equity release scheme but basically they fall into one of these two categories.

Lifetime Mortgage

With a lifetime mortgage you secure a loan against your property that gives you a tax free sum of money. The interest on the loan adds up but is only paid off once you have died or moved into permanent care and your property is sold.

what is equity releasePoints to be aware of:

  • You still own your property and don’t need to make any repayments until it is sold.
  • The interest builds up quickly as the interest you pay on a lifetime mortgage is calculated on the original loan plus the interest already added
  • Equity release will affect any inheritance you plan to leave for family
  • If you choose to pay the loan off early you may incur early repayment charges

There are however a number of different types of lifetime mortgage that address some of these points such as a:

Drawdown plans that let you release the money in stages so you only accrue interest on the money you have actually borrowed

Protected plans that let you protect a percentage of the property value so you can guarantee an inheritance

Repayment plans that let you pay off some of the interest so you will not owe as much in the long run

This is in addition to:

Lump sum lifetime mortgage plans that pay out a single tax free amount

Enhanced plans that are designed for people with specific illnesses and include greater loan values with better rates

Home Reversion Scheme

With a home reversion scheme you agree to sell a proportion or all of your property in return for a tax free cash sum. There are no repayments and no interest. Instead once you have died or moved into care and the property is sold, the equity release provider will receive their proceeds from the sale, based on the proportion of property they own.

Points to be aware of:

  • Although you no longer own part or all of your home, you get to live there rent free
  • You will still be responsible for maintenance on the whole property
  • The price paid by the scheme provider will be lower than the market value
  • If you wish to buy a percentage of the property back, you will need to pay market value
  • You will not benefit from an increase in house prices on the percentage of the property you have sold

How will equity release affect my family’s inheritance?

As mentioned, the loan and the interest accrued over the years are paid when the house is sold and so will subsequently impact any inheritance you intend to leave for family.

The size of the loan, plus the interest will depend on the initial loan and how many years you have had it. The impact this has on your estate and inheritance will also depend on whether house prices have increased and to what degree.

No of Years Property Value Total cash withdrawn plus interest Size of property inheritance
Start £250,000 £50,000 £150,000
10 yrs £366,518 £73,728 £292,790
15 yrs £443,786 £89,529 £354,257
20 yrs £537,342 £108,716 £428,626

The above examples are based on the 3.96% equity release interest rate currently offered by leading equity release provider Aviva and a house price increase of 3.90%, which is the figure quoted by the land registry for the last 10 years.

Using this scenario, if you had a house valued at £250,000 and released £50,000, in 15 years time the property could be worth £443,786 and the loan is estimated to have increased to £89,529. Therefore you would have a further £354,257 to leave to your estate.

See how much cash you could release with our equity release calculator

The amount of equity you can release is based on your age and the value of your property, so a good place to start is by using our free and easy to use equity release calculator.

In seconds you can see how much equity could be available to you, so you can get a better understanding of how the money can help.

Is equity release a good thing to do?

Whether you choose a lifetime mortgage or home reversion scheme, releasing equity from your home is an important decision so not one to take lightly. It will give you access to your hard earned cash so you can use it in any way you like to make life easier however it will affect your inheritance and possibly any benefits you may be receiving.

Therefore it is wise to consider all your options before making your choice, such as downsizing or moving to a cheaper area.

It is important to point out that equity release schemes are tightly regulated by the Financial Conduct Authority, so you are protected by their strict controls. In addition most companies are also registered with the Equity Release Council which is also there to protect consumers with safeguards including:

  • The no negative equity guarantee
  • Flexibility to move
  • Capped or fixed interest rates

So these days equity release schemes are very safe. You just need to weigh up your options, speak to a lifetime mortgage and home reversion scheme specialist and of course your family, so you can decide whether it is right for you.

     

how does releasing equity work

We know it's a big decision!

That's why we have teamed up with Age Partnership one of the UK's leading equity release specialists.

Find out how much cash you could release by clicking on the button below.

Equity Release Calculator

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