If you’ve ever heard people talking about their money being ‘tied up in their house’ then you already know what equity is. Equity refers to the value of a property after deducting any mortgage /secured loans. ‘Equity release’ is the umbrella term used to denote the range of products which enable over-55s to access the cash value of their home.
As with regular mortgages, a degree of ‘shopping around’ is advised before you settle on an option. At IMC, our highly experienced and knowledgeable advisors can help you to understand the benefits and drawbacks of releasing cash from your property.
In the meantime, this guide aims to shed some light on the seemingly daunting subject.
What are the equity release options?
In the UK, there are two options open to you should you wish to draw money from your home.
1. Lifetime mortgage
2. Home reversion
Lifetime mortgage
If the property in question is your main residence, you can take out a mortgage on the value while still retaining ownership.
What are the fundamentals?
• It is possible to ‘ring-fence’ some of the value of the property, meaning it is not included in the mortgage and remains ripe for inheritance.
• In most cases, no repayments are made while you are still alive. Interest accrues or ‘rolls up’ and is paid with the principal after your death.
• However, some lenders now offer the option of paying off some or all of the interest. This helps to limit the financial burden on your family.
• The minimum age for a lifetime mortgage is 55.
• The maximum percentage you can borrow is usually 60% of the value of the property. But your age and any past or present medical conditions will be taken into consideration when setting this figure.
• It depends on the lender whether you will receive the money in a lump sum or in regular amounts.
• You have the right to remain in your property for the duration of your life or until you are admitted into long-term care.
• Crucially, lifetime mortgages operate a ‘no negative equity’ guarantee. Put simply, when your property has been sold, and agents and solicitors fees have been paid, if there is not enough money left to cover the loan, your estate will not be liable to pay any more than what was available from the house.
Home reversion
In this instance, you can sell some or all of your home to a reversion provider, to obtain the cash. A reversion provider will then sell or redevelop your home upon your death.
What are the fundamentals?
• You can choose to sell just ‘some’ of your home, which effectively ‘ring-fences’ the rest for those who are due to inherit your property.
• You have the right to continue living in the property (rent-free) until you die or are admitted into care but you will need to pay any costs of maintenance and insurance.
• The minimum age for home reversion tends to be 60.
• You’ll normally get between 20% and 60% of the market value of the portion of the property that you sell.
• Like the lifetime mortgage, this product has a no ‘negative equity’ guarantee.
Equity release in many instances can prove to be more expensive than an ordinary mortgage – especially because you will be charged a higher rate of interest.
If you have any concerns about equity release and how it could affect your finances, talk to a member of the IMC team today.