Has the pandemic had a detrimental impact on your finances? Do you want to access some of the money tied up in your property? If so, it could be time to think about releasing some of the equity in your home. But what are the different types of equity release, and do you qualify?
In this complete guide to equity release in the UK, we’ll explain the different options available and list the pros and cons of each plan to help you decide if it’s the right choice for you.
What Is Equity Release?
Equity release is a way to unlock the value of your property without selling it. It allows you to access the money you have already invested in your house and get a cash lump sum to spend on whatever you like or receive several smaller instalments throughout your retirement years.
It is a popular choice for those who want to release cash tied up in their property without moving, downsizing, or selling their beloved family home, but it's not for everyone. Equity release comes at a cost; to fully understand how it works and how the different options could affect your finances, you should seek expert advice from an independent financial advisor before you sign on the dotted line.
Types Of Equity Release
There are two types of equity release, the first is lifetime mortgages, the second is home reversion plans. With a lifetime mortgage, you retain 100% ownership of your home and secure a loan against it. With a home reversion plan, you sell part of your home to a third party but retain the right to live there for the rest of your life.
Home reversion equity release is relatively straightforward, but there are several different mortgage plans available, including lump-sum, interest-only, and drawdown. To help you make a more informed decision, we'll cover these four main options.
Equity Release With Lump-Sum Lifetime Mortgage
As the name suggests, a lump-sum lifetime mortgage is a loan secured against your property that provides you with a tax-free cash lump sum. However, unlike traditional mortgages, there are no monthly payments required.
Interest will accumulate, either at a fixed or variable rate, and will only be repaid to the lender once you, or the last homeowner listed on the deeds, dies or enters permanent long-term care. Some plans allow you to pay off some of the interest, either monthly or annually, to help you leave a larger inheritance to your loved ones.
The amount you can borrow will depend on factors such as your age, the value of your home, and in some cases, your health. With a lump-sum lifetime mortgage, you should borrow from a lender registered with the Equity Release Council, who will provide you with a no negative equity guarantee. Without it, you could leave your beneficiaries with debt.
The Pros
- You get a cash lump sum to spend on whatever you like
- You do not need to make monthly repayments
- You retain 100% ownership of your home and can live there for the rest of your life
The Cons
- You will start accumulating interest on the total amount borrowed straight away
- If you do not repay any interest, you will owe much more than you borrowed
- Risk of negative equity if you do not use a lender registered with the Equity Release Council
Equity Release With Interest-Only Lifetime Mortgage
without worrying about how much you’ll leave for your children or beneficiaries. With this type of equity release, you take out a mortgage on your property and repay the interest in monthly instalments, so you’ll only ever owe what you borrowed.
When you pass away or move into a residential care home, proceeds from the sale of your house will repay the lender, and your beneficiaries will receive the rest. This type of equity release mortgage offers peace of mind, but it is only suitable for those who can comfortably repay the monthly interest instalments.
The Pros
- You still own your home
- You will only ever owe what you borrowed
- You’ll know exactly how much you are leaving to your beneficiaries
The Cons
- If you do not go with a fixed interest rate, your monthly repayments could increase
- If you stop making payments (this is possible), the amount you owe will increase
- Risk of negative equity if you do not use a lender registered with the Equity Release Council
Equity Release With Drawdown Lifetime Mortgage
Drawdown lifetime mortgages are a popular choice for equity release as they allow greater flexibility. With this option, you take out a mortgage on your home and withdraw money as and when you need it, rather than receiving a cash lump sum.
The benefit of borrowing money in this way is that you only pay interest on the amount you draw down, so the total loan accrues interest at a slower pace.
The Pros
- A flexible and cost-effective way of releasing equity
- You only pay interest on what you draw down – not the total loan amount
- You can access cash as and when you need it
The Cons
- Variable interest rates usually apply to new withdrawals
- You may have a limit on how much you can draw down each year
- You won’t know exactly how much you will leave to your beneficiaries
Can I Still Move Home After Equity Release?
Yes, you can! If your lender is a member of the Equity Release Council, you can move to any suitable alternative property, anywhere in the UK. If you have a lifetime mortgage, you can carry it over to your new home, and you may be able to consolidate it with an additional finance plan if you need extra cash to cover your move.
In the case of a home reversion plan, you will only own a percentage of your property, so this is something to consider when buying a new home - do you have enough equity to move? If you move to a house worth less than your current one, your lender may request that you settle some of your initial equity release sum as they will no longer have the financial security of your original property.
Equity Release With Home Reversion Plan
With a home reversion plan, you can release equity in your home by selling a percentage of it in exchange for a tax-free cash lump sum or regular monthly instalments to see you throughout your retirement years.
With this option, you no longer own 100% of your home, but you are entitled to live there, rent-free, for the rest of your life. When you die or move into full-time care, your house will be sold, and the lender will take their share of the proceeds. Anything leftover will go to your beneficiaries.
Home reversion plans are less popular than lifetime mortgages for many reasons. You’ll receive less than the current market value for the percentage of your house that you sell, and you won’t benefit from any future property price increases, as the lender will always own the per cent they purchased. This type of equity release is not for everyone, and you should only consider it after exploring all other options.
The Pros
- Quick access to money tied up in your property
- No monthly repayments to make, and you can stay in your house for the rest of your life
- It can help with inheritance tax planning
The Cons
- You will no longer own 100% of your family home
- You will not get current market value for any portion that you sell
- If you sell 60% of your home, you’ll still owe 60% even if house prices soar
Equity release is a great way to access cash invested in property, but there is much to consider before committing. Get advice from a trusted financial advisor before you sign any agreements, and make sure you read the small print to make sure you’ll never fall into negative equity.