How Does Release Equity Work?

As we head into retirement, the main question on our minds is “How do we maintain our standard of living?”. Hopefully, your retirement fund and pension scheme can cover all of your expenses, however, if you want more cash there is another option.

A lot of retired people will consider releasing their investments. This often includes a remortgage to release equity on their property.

Before you sign any papers, make sure you understand what this means in real terms.

What Is An Equity Release?

An equity release is the practice of selling your equity in your home. As your home has grown in value over the years, it will be worth more than you originally paid. This is the equity in question.

You can “sell” this equity to lenders, allowing you access to the earnings previously locked up in your home value.

When you release this equity, you are not selling your home. You can still live in the house, and you don’t even have to make repayments. Instead, when you pass away or move house, the borrowed amount you received from your lender has to be returned to them.

How Does An Equity Release Work?

The amount you can release from your property will be based on how much your home is worth and the current age of all the owners. For example, if your child owns the house with you, you will likely be rejected. The common accepted age is 55 or over.

Most people use equality releases to help their children, pay for their dream holidays, pay off loans, or invest in their lives.

The reason for your equity release isn’t important in the lender’s eyes. Instead, they will focus on your repayment plan.

These normally fall under two categories.

The Two Types Of Equity Releases

The two types of equity releases are Lifetime Mortgages and Home Reversion Schemes. 

The most commonly used are Lifetime Mortgages. This release type allows you to take a loan out against your home. This means you still own your home, but the value of it shows the lender that you can pay them back by selling the house if you need to.

You can pay back the lender whenever you want, but early repayments often come with charges. As the name suggests, the lender expects you to hold the loan for the rest of your life, and on death, the house will be sold paying back the loan.

Home Reversion Schemes are less popular. This release type sells all or part of your property to the lender. The price will be less than the market value of your home. As part of the scheme, you can stay in your home, however, you will need to pay rent as a tenant. 

Once the loan is paid back, you will own your home again. However, if you fall on hard times and cannot keep up with your repayments, the lender can evict you from your home.

The Pros Of Equity Releases

There are many reasons why people should release their equity. Especially if they have a financial goal in mind.

Firstly, no matter how much money you release from your property, the amount will always be tax-free.

To receive this lump sum, you don’t need to downsize your property or move to a cheaper area. Instead, you can stay in the home you have come to love.

Lastly, with a Lifetime Mortgage, you don’t need to pay back your loan until you move away or pass away. It will feel as though you have received more finances without paying for anything.

Of course, if you want to pay back the loan early, that is a possibility too. You have options.

The Cons of Equity Releases

Lifetime Mortgages have an unusual interest rate. Each day your interest will be calculated and a new charge will be added to the amount you owe. This means the loan will grow quickly.

Most will have a “no negative equity guarantee” which means the loan will not become larger than the price of your property. With this cap, you can rest assured that your family members will not need to pay for your loan, as the house will cover all of the costs. However, there may be nothing left for your family to inherit. 

Lastly, leaving the loan early will cost you an Early Repayment Charge.

Summary

The cons of an equity release are minimal. In reality, you will have access to the money currently locked in your home. You won’t need to pay for this lump sum up front, because when you pass away, the house is sold to repay the loan.