What is property equity release?
Firstly, we need to ask ourselves what is property equity? Equity is the share of your home that you own outright. You can calculate how much equity you have by deducting your remaining mortgage debt from the property’s value. For example, if the property is worth £200,000 and the outstanding amount you owe is £130,000, then your equity is £70,000.
Equity release is a way for the over 55’s to utilise their home to generate income, and is the easiest way without having to downsize. Although, it would be wise to consider the option of downsizing because the equity release route can incur costs and future financial constraints. How it would work:- an equity release mortgage would allow you to unlock the equity portion in your home in the form of a tax-free lump sum payment. You can take the money you release as a lump sum, in several smaller amounts or as a combination of both.
Another way of using your property equity is to borrow against some of it to raise cash – a process known as remortgaging.
Top tip: please make sure you carry out your ‘due diligence’ before you dive into equity release, here in this blog we will hope to give you a clearer understanding on this topic.
The UK equity release market is now fully regulated. Both lifetime mortgages and home reversion plans now fall under the remit of the Financial Conduct Authority (FCA).
To help customers decide whether equity release is right for them, a number of companies offer a free equity release calculator to show an estimate of the level of equity that could be released.
Consider downsizing as your first choice
Are you still wondering whether equity release is a good idea for you? You need to evaluate whether downsizing your property could be an option. By downsizing and relocating to a smaller property, any surplus proceeds will give you spare funds to enjoy life. Also, bear in mind your next home could be more suitable if you have mobility disabilities, such as, no stairs or have a low maintenance garden.
On many occasions at Quick Property Sale we have heard the excuse: “we’ll do it in a few years” then time flies and then it’s probably too late to move on!
Equity release options
There are two equity release solutions: a ‘lifetime mortgage’ or a ‘home reversion plan.’ Here we look at these two choices in more detail:
What is a lifetime mortgage?
The most common type of equity release available is called a ‘lifetime mortgage.’ It works by you continuing to own your home while borrowing money secured against it.
Lifetime mortgages are structured to run for your lifetime, without any monthly repayments. Then interest is charged on the amount you pull out and this is usually fixed for life while you live there.
As a guide, the more you borrow the more interest charge will be applied to your home, but these can be paid off either when you die or sell your home.
There are 3 types of lifetime mortgages available these are:
1. The roll-up mortgage: you receive a one-off, tax free lump sum from your property. You would not have to make any regular repayments and the interest is added to the loan.
2. The drawdown: you agree the total sum you can borrow with the mortgage equity release provider. You then take a lump sum out and can draw down future funds in stages.
3. The flexible lifetime mortgage: this is similar to a roll-up mortgage, except that you can make voluntary repayments and are able to repay up to 10% of the initial amount borrowed every year without any early repayment charges.
What is a home reversion plan?
A home reversion plan is basically selling a share (sell part or all of it) in your home to a company, usually at a reduced rate of the property market value. The price you get will depend on your health and your age, you can then usually get a regular income and/or a tax-free lump sum. The up-side to this is you can continue living in your own home rent-free for the rest of your life, without making any repayments. There is no loan to repay: when your home is eventually sold, the provider receives its share of the sale price.
Why would I release equity?
You can use money from equity release for anything from property improvements, travelling, to gifting an early inheritance to a relative or friend. So the positive benefits are quite obvious and numerous with having extra funds available at your disposal. The loan doesn’t need to be paid back until the last homeowner on the house deeds dies or revert to a long-term residence in a care home.
What are the disadvantages of equity release?
Here we now talk about the darker side of equity release and the draw backs – it’s far more expensive than if you were ordinarily selling the property to release equity.
As you are accessing some of the value in your home, there will be less in your estate when you die. This might affect what you can bequeath anyone as an inheritance. Releasing equity may affect your future care entitlement, which is usually means tested if you need support from your local authority.
The equity lender will require you to maintain the property in a good condition and for it to be insured, so you will need to be able to pay for this.
If you have second thoughts about a lifetime mortgage and wish to repay it, you will likely be penalised with large ERC (early repayment charges). These are usually calculated on the amount you borrow, plus administration costs and other added accrued interest. You are likely to have to pay legal fees, surveyor’s valuation and setting-up costs too and, with a home reversion plan, you will miss out on any rise in the value of the share you have sold, as you will only have received the originally agreed price for it.
Summary
We have now seen from this Quick Property Sale article that unlocking equity can be a serious financial commitment. You will need to think carefully about its implications, so please take advice from an independent financial adviser before you do it. Any adviser recommending equity release must be authorised by the Financial Conduct Authority. Many advisers and providers are also members of the Equity Release Council – membership is voluntary, but members follow its standards, such as the ‘no negative equity’ guarantee, for extra peace of mind.