Equity release plans provide you with a cash lump sum or regular income. The "catch" is that the money released will need to be repaid when you pass away or move into long term care. With a Lifetime Mortgage, you will owe the capital borrowed and the loan interest accrued.
Key Points. Disadvantages of equity release include high overall cost, potentially expensive early repayment charges, and losing eligibility for means-tested state benefits. Equity release can severely reduce the value of your home left to beneficiaries and may affect your entitlement to some benefits.
Downsizing. The most obvious alternative to equity release is to downsize – i.e. sell your current home and move into a smaller property (or at least one that is less expensive).
You'll normally get between 20% and 60% of the market value of your home (or of the part you sell). When considering a home reversion plan, you should check: Whether or not you can release equity in several payments or in one lump sum. The minimum age at which you can take out a home reversion plan.
Equity release is traditionally aimed at pension-age homeowners. Many equity release lenders insist upon all applicants being aged 60+, but Age Partnership have access to plans for everyone aged 55 and above.
If you have paid off most or all of your existing mortgage, you can consider an equity release scheme. Equity release can provide you with a large sum of money to spend while enabling you to continue living in your home. It can be particularly useful for covering large expenses later in life, such as long-term care.
The maximum amount you can borrow with equity release is usually up to 60% of the value of your home according to MoneyHelper. The exact amount depends on your age, the value of your property, and the other factors mentioned above.
Can I pay off equity release early? Yes – if you take out a lifetime mortgage you can pay back some or all of it early. But lifetime mortgages are long-term products, so that's usually not the best option. You'll probably have to pay an early repayment charge (ERC), which can be very high.
A lifetime mortgage is a type of equity release, a loan secured against your home that allows you to release tax-free cash without needing to move out. Lifetime mortgages are available to homeowners aged 55 or over. You can take the money as a lump sum or as series of lump sums.
The average equity release interest rate is currently 6.21%, with typical lifetime mortgage interest rates ranging from between 5.50% to 7%.
Pros: Large lump sum, no monthly repayments, continue living in your home, tax-free cash, and can be used for any purpose. Cons: Can be expensive to repay, affects inheritance, and may impact means-tested benefits. Equity release is not a con when using legal, regulated lenders and seeking independent financial advice.
Equity release works by borrowing cash against the value of your home. There are two ways to do this – a lifetime mortgage and a home reversion plan. Lifetime mortgages allow you to release some of your home value to a limit, while still being the homeowner. This cash is tax-free and able to be used as you please.
Involve family members or a trusted friend
If you don't involve family members then we'd suggest discussing your plans with a trusted friend. It's also good to inform the executors of your estate, as they may have to deal with the equity release provider when the house is sold.
Unlocking cash from your home will reduce the value of your estate and, by maintaining any unspent funds, you could affect your current and future eligibility for means-tested state benefits – such as Pension Credit, savings credit or even council tax benefit.
A home equity loan risks your home and erodes your net worth. Don't take out a home equity loan to consolidate debt without addressing the behavior that created the debt. Don't use home equity to fund a lifestyle your income doesn't support. Don't take out a home equity loan to pay for college or buy a car.
Is Debt Financing or Equity Financing Riskier? It depends. Debt financing can be riskier if you are not profitable as there will be loan pressure from your lenders. However, equity financing can be risky if your investors expect you to turn a healthy profit, which they often do.
Lifetime mortgages are currently the most popular form of equity release.
The short answer is yes, it is possible to take out an equity release plan to pay off your existing mortgage. In fact, releasing equity to pay off a mortgage is one of the most popular reasons why homeowners use equity release.
Equity release products are safe as they're regulated by the Financial Conduct Authority (FCA) and governed by the Equity Release Council (ERC). With lifetime mortgages, you always own your home and any increase in its value is yours. Plus, all equity release plans come with a no negative equity guarantee.
As previously mentioned, following death, your equity release plan is generally repaid from the sale proceeds of your property. This is carried out by the Executor of your estate. However, it is not a necessity that the property is sold. The equity release may also be repaid from any other financial means.
A type of equity release
There's no need to make monthly payments. The amount borrowed and the added interest isn't usually repaid until you die or move out of the home into long-term care. However, there may be cheaper ways to borrow money.
All equity release plans need to be repaid upon the death of the last borrower, or when the borrower enters long term care. But what if you wish to repay before this? You can repay equity release early at any time, but you may be charged a penalty for doing so, in the form of an Early Repayment Charge (ERC).
Key statistics for Q4 2021 and FY 2021
For the year as a whole, 76,154 customers took out new equity release plans, made use of drawdown reserves or agreed extensions to existing plans. This was a 4% increase year-on-year from 72,988, although it remains below the peak of 85,497 seen in 2019 [see graph 1].
The main difference between equity release vs remortgaging is that equity release has no monthly repayments while remortgaging does. This makes equity release a better choice than remortgaging when you want to unlock the most amount of money from your home.
You can use the sale proceeds of your property to pay your equity release back in full when you move to a new home. However, you may incur an early repayment charge. Moving house doesn't always mean you need to pay your plan back in full. Instead, you can port your existing plan to a new property.