The equity that you hold in your home is its value minus any loans secured against it. Given that house prices have grown exponentially over the past decades, many over-55 homeowners may find themselves sitting on significant assets.
Equity release refers to the process of turning that equity into money that you can spend. With the most popular equity release product, a Lifetime Mortgage, you can obtain a tax-free cash lump sum by borrowing against the value of your home.
Unlike other financial solutions like downsizing to a smaller property, when releasing equity with a Lifetime Mortgage you can stay in the family home and remain its sole owner. You are not required to make any payments, although you can usually choose to do so if you wish.
Instead of required payments, interest rolls up and the full amount borrowed and this accrued interest is usually repaid when the home is sold, which is usually when the last homeowner dies or moves into long-term residential care.
You may have a wide variety of goals as you enter or begin to plan for retirement. Funding your long-held dreams can be costly, but accessing a tax-free cash lump sum with equity release can help you unlock the necessary financial freedom to be able to enjoy your retirement as you wish.
Some of the most popular reasons for taking out an equity release product include:
Clearing an existing mortgage
Gifting an early inheritance
Making home improvements
Increasing disposable income
Funding big purchases, such as holidays and new cars
To be eligible for equity release, you must:
Be aged 55 or over
Own or intend to own a property in the UK worth £70,000 or more
Intend to release at least £10,000
Having an existing mortgage secured against your home doesn’t prevent you from releasing equity. Providing you can clear your existing mortgage upon completion of your Lifetime Mortgage, either with the funds you release or with other savings you may have, you can still be eligible for equity release.
As there is no requirement to make any payments when you release equity with a Lifetime Mortgage, the true cost comes in the build up of interest over time. Some products will offer the option to make voluntary payments to reduce this cost, however.
If a 70-year-old homeowner borrowed £50,000 from a home valued at £300,000 with an interest rate (MER) fixed at 3.36% for life, were they to die or enter long-term care 17 years later without having made any payments then the total amount repayable would be £88,449. This includes repayment of the initial amount borrowed and £38,449 of rolled up interest. Interest rate is correct as of 10/08/2021. This example is for illustrative purposes only and interest rates can increase or decrease over time.
The Equity Release Council (ERC) is the voluntary trade body that oversees the equity release sector. They ensure that their members uphold certain values and standards of conduct through several product safeguards aimed to protect customer needs.
All financial products come with an element of risk, but lenders that are members of the Equity Release Council are dedicated to promoting safe practice. Therefore, their Lifetime Mortgage products will include:
A no-negative-equity guarantee, meaning you will never need to pay back more than the value of your home
The guaranteed right to remain in your home for life or until you enter permanent long-term care
The freedom to move home should you wish, providing that your new property continues to meet the lender’s security criteria on your loan
An interest rate that is either fixed for life, or where variable has a fixed upper limit for your lifetime
If you release equity from your estate today, you will reduce its value in the future. This could impact any inheritance plans that you have. If you’re entitled to any means-tested benefits, releasing equity as a tax-free sum could affect your entitlement to them.
A fully qualified adviser will be best placed to explain these risks to you, as well as explain the plans that are available to mitigate some of these impacts should you be concerned.
It is a requirement of the Financial Conduct Authority (FCA) that you receive advice from a fully qualified adviser before proceeding with equity release.
An adviser will be able to provide you with a personalised illustration showing how the interest will accrue over time, offer recommendations of products to suit your individual needs and then handle the application process on your behalf.
There are a lot of plans and features available if you are considering equity release, all of which have their own benefits and risks. An adviser can help you understand what your borrowing will look like over time and decide what the best course of action is in your individual circumstances.
Equity release will not be right for everybody. By seeking impartial advice, not only will you have a well-rounded perspective of all your different options, but you will also be told if it’s not right for you.
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