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An equity release mortgage means getting either a lump sum or regular income in exchange for some of the value of your home.
You’ll usually be able to borrow a certain percentage of the value of your home, say between 20% to 50%.
Equity release tends to be aimed at older homeowners and retired people who probably wouldn’t be eligible for a regular mortgage and have little or no income to make repayments.
The amount you’ve borrowed will be paid back when your home is sold. Interest will also be charged on the amount you’ve borrowed, which you can either pay off when the equity release mortgage ends, or in monthly instalments.
To keep enough value left for any children or beneficiaries to inherit, you might find you rely on property prices rising to pay off your equity release mortgage.
Yet equity release products aren’t without their drawbacks and shouldn’t be taken on without serious consideration and sound financial advice.
There are two types of equity release schemes:
With a lifetime mortgage, you borrow money secured against your home but you don’t make repayments.
Instead, the loan amount and the interest will be paid off when your home’s sold – typically after you die or go into long-term care.
The interest can mean the loan grows quickly, so there might be nothing left to leave to relatives as an inheritance.
If you do want to leave an inheritance, some lifetime mortgages have the option to repay just the interest each month, or to ring fence a proportion of the value of your home.
Lifetime mortgages are usually available to people aged 55 and over.
Reversion schemes mean selling all, or part of, your home to a company while retaining the right to live there.
Often you stay in your home rent-free under a lease, but some schemes do charge a lower-than-market-value rent.
You receive a lump sum or regular income in return, or a combination of the two.
For example, you might agree to sell 70% of your home in a home reversion scheme and receive 20% of the value.
When the property is sold, you or your estate only receive the value of the percentage of the property still owned, regardless of whether it’s gone up or down in value.
So if you put 50% of your home in a reversion scheme when it was worth £100,000 but then it sold for £150,000 after your death, your estate would receive £75,000 (50%). The rest would go to the reversion scheme.
The minimum age for home reversion schemes is typically 65. But the older you are, the higher the percentage you’ll get of the share of your home you sell.
You can release the value from your home without having to sell it
You’ll get tax-free money to spend on whatever you like
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Equity release is usually available to those over the age of 55 for lifetime mortgages and 65 for a reversion scheme.
You’ll need to own your own home in the UK. It must be in good condition and there might be a minimum value requirement.
Make sure the lender you’re considering is regulated by the Financial Conduct Authority (FCA) and a member of the Equity Release Council.
It’s worth speaking to an independent adviser to help you understand your options.
This depends on your personal circumstances. If you’re above the minimum age and you need some extra money, it could be right for you, but there are alternatives, like:
You need to consider that releasing equity is essentially still borrowing money against your home. This means part of the sale of your home will go towards paying off the loan which could impact any inheritance your beneficiaries get.
Make sure you choose a provider that’s approved by the equity release council as their products will have a ‘no negative equity guarantee’ – which means your estate won’t end up owing more on the loan than your home’s worth. You should also consider the costs that come with setting up an equity release mortgage.
Your entitlement to means-tested benefits could be reduced too.
Generally it can take around six to eight weeks to release the equity from your home, but this can be up to 12 weeks. It depends on the lender.
You don’t usually have to make repayments with equity release, but some lenders will allow you to pay off the interest.
You’ll receive the money either as a lump sum or as a regular income.
Remortgaging, downsizing, a secured loan, using your savings or taking on a tenant are just a few alternatives to an equity release mortgage if you’re under the minimum age.
This depends on current interest rates. But you also need to factor in other costs like the arrangement and solicitors’ fees, which could range from a few hundred to a few thousand pounds.
THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR HOME OR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE
PLEASE NOTE: THE FCA DOES NOT REGULATE MOST BUY TO LET MORTGAGES