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How does equity release work?

If you are 55 or older, you can ask an equity release lender to advance cash against your home. That cash is yours to do with as you like, and there’s usually nothing to pay back during your lifetime.

The lender gets its money back from your estate (or when you go into long-term care and your home is sold).

What are equity release mortgages?

There are two main types of equity release – lifetime mortgages and home reversion plans. You can normally borrow up to 60% of the value of your property, although this can depend on factors such as the value of your home and how old you are.

Lifetime mortgages

This involves a lender advancing you money against your home, as it does with a traditional mortgage, but nothing needs to be paid back until you die or you move into care.

Some lifetime mortgages allow you to make repayments in the meantime if you want to, or just cover the interest as it builds up, but the balance of the loan and interest is paid back from your estate in the future.

If you go down the lifetime mortgage route, you can rest easy knowing there is a guarantee you won’t go into negative equity – the lender will never demand more back than your home is worth when it comes to be sold. So even if you live for a very long time and the interest on your equity release mortgage increases substantially, your loved ones will never need to make up any future shortfall if the eventual sale of the house doesn’t cover the cost of repaying the loan.

Home reversion plans

This involves you selling your home (or part of it) to a lender in return for either a lump sum or regular payments. You can continue living there for the rest of your life and the lender gets nothing back until then.

A home reversion plan provider is unlikely to give you anything like what the real market value is for your home. So if your house is worth £200,000 and you sell a 50% share to the lender, you won’t receive £100,000 – it might be significantly less.

When you die or move into care, the property is sold and the lender gets its money. If you had sold only part of your home to the lender, the proceeds of the sale are shared out proportionally. For example, a homeowner sells 50% of a property to an equity-release lender before spending the last 20 years of their life in the house. By then, the house is worth £300,000, so each 50% share is now worth £150,000. When it is sold, the lender receives £150,000 and the homeowner’s estate gets the other £150,000.

Can I use equity release if I am under 55?

No – equity release is for people aged 55 or older. Some lenders – particularly when it comes to home reversion loans – will deal only with people who are 60/65 or older.

Is equity release a good idea?

Here are a few things you should remember about equity release, as well as some additional fees:

Arrangement fees can cost up to £3,000. If you are taking this out of the money that you are being advanced by the lender, you will pay interest on this for the duration of the loan.

You will be leaving a smaller inheritance to your beneficiaries. It’s a good idea to talk about this to your loved ones so that they know what to expect in the future.

Consider a drawdown plan, which means you can access chunks of cash when you need it rather than taking it all in one go. This can significantly reduce the interest your estate will have to pay on your equity release loan.

Take advice. Following past mis-selling scandals, the regulations are a lot tighter around equity release nowadays, and the loans are properly regulated. A lender is not allowed to give you an equity release loan until you have taken proper advice to make sure it’s right for you. Make sure your lender is a member of the Equity Release Council, and make sure the adviser you use is properly qualified when it comes to equity release.

You will probably have to pay an early repayment charge if you pay the money back before you die or before you go into care. Make sure you know in advance what this is likely to cost you.

Equity release interest rates

Interest rates on equity release loans can be more expensive than on traditional mortgages. And although the rates are cheaper than on other loans or credit cards, the compound nature of the interest means it can snowball over the life of the loan – which can be 30 or 40 years.

But the interest rate must either be fixed or be capped.

Make sure you understand how the interest can build up and how much the bill might be for your estate in the future.

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