What is equity release?
An equity release mortgage is designed to last for life. You are not required to make any monthly repayments, still have the freedom to move home and you can release equity if you have an existing mortgage on your property. You just need to repay the outstanding debt with the money you release.
How does equity release work?
There are two types of equity release to choose from: the more popular lifetime mortgage and the home reversion plan. Here’s a close look at how each plan works:
Lifetime mortgage – with this option, a loan is secured against your property which is repaid from the sale of your home when you die or move into permanent care. Unless you choose to, there are no monthly repayments to make and you continue to own 100 percent of your property value. This means you will benefit from any increase in property prices.
The interest charged on a lifetime mortgage is compounded, so you pay interest on the interest already accrued. This means the loan will grow at a faster rate compared to a standard mortgage. However, the Equity Release Council’s ‘no negative equity guarantee’ ensures that you will never owe more than the value of your home.
Home reversion plan – with this option you agree to sell all, or a percentage of your property. There is no interest charged however the lender will typically pay you less than the market value for your home.
You can remain living in your home rent free for life or until you move into permanent care, but you will no longer be the sole owner. This means you will only benefit from any increase in house prices on the percentage of property you own.
In 2023 the average UK equity release customer borrowed around £100,000 or 25% of their property value but the amount of equity you can release will depend on your own personal circumstances including your age and the value of your property.
An equity release mortgage will impact the value of your estate and could affect any benefits your currently receive, so it’s not the right choice for everyone. Before going ahead you should seek professional advice, consider the pros and cons and discuss the alternatives.
It is also important to talk to family to ensure they are happy with whatever you decide.