Equity release is a financial product, offered widely by UK lenders that allows you to release some or all of the money that is tied up in your home.
Equity release is 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. You do not need to have fully paid off your mortgage to do so.
If you are considering entering into an equity release scheme, it’s best to consult a professional financial adviser before making any decisions. As well as many benefits, there are some risks to these products.
The minimum age for any equity release scheme is almost always 55 years, and in some cases can be higher, depending on the type of product you choose.
How do you release the equity?
Let us explain this with an example. If you bought a house valued at £200,000, and you paid an initial deposit of 10% which equates to £20,000, you therefore own £20,000 equity in the home. The remaining 90% of the home value is in the mortgage. Of course, the idea is that you will keep paying for your home and the more you pay, the more equity you gain in the house. If, in a few years your home is still valued at £200,000 and you have paid an additional £10,000 in mortgage repayments, your total equity will be £30,000.
But property increases in value over time, so let’s imagine your home has increased in value to £300,000 over the same time period. If you wanted to release some of the equity in your home you’d now be in a position to take up to £130,000 out of your home’s value as that is the value that doesn’t belong to the mortgage company.
There are two main types of equity release product that lenders offer.
The minimum age at which you can apply differs depending which product you go for.
Minimum age for each type of equity release product
1. Lifetime mortgage
This is the most popular form of equity release and the minimum age for application is 55+.
With these products, you can borrow some or all of your home’s value at a fixed or capped interest rate.
With Lifetime Mortgages you don’t make repayments at all whilst you remain living in the home, so the interest compounds rapidly as the amount you owe is increasing all the time – in contrast to a normal mortgage.
Some newer ‘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.
2. Home reversion plan
To take this option, you need to be aged 60+.
Here, a provider pays you a tax-free lump sum for a share of your home’s equity at below market value. You can then live in the property (rent-free) until you die or move out.
When the house is sold, the proceeds are split between you (or your estate if it forms part of probate after death) and the lender, based on the percentage you own and the percentage the lender owns. So, if your property value rises significantly so does the amount the loan provider gets.
Therefore with lifetime mortgages you know the exact rate, while as a generalisation, home reversion plans are better if property prices stay flatter and worse if they rise substantially.
The minimum age for any equity release scheme is almost always 55 years, and in some cases can be higher, depending on the type of product you choose. If you have further questions on whether equity release is right for you and your property then consult with an independent financial adviser for more advice and guidance.