Are you well into the second half of your life and looking to increase the cash in your pocket?
If you’re looking to increase your cash flow without the need to uproot, Equity Release could be a secure and viable option. It allows you to tap into the value of your home that you’ve already paid off the mortgage on, providing a sense of financial security.
This approach has several drawbacks, though, which we have outlined in detail below in this article. You should speak to a qualified advisor who can provide guidance specific to your situation.
What is Equity Release?
The term ‘Equity Release’ refers to unlocking the equity in your house. When you buy a property and pay off a mortgage, most of your wealth is tied up in the house and only becomes accessible to you when you decide to sell.
Equity release offers you the flexibility to unlock some of your home’s equity without the need to move. You can choose to take the money you release as a lump sum, in smaller amounts, or a combination of both, empowering you to make the financial decisions that best suit your needs.
In general, releasing equity from your house takes around eight weeks, although it may be slightly longer or shorter, depending on the circumstances.
There are two main types of equity release, which we have outlined in the section below.
What are the different types of Equity Releases?
You have two main Equity Release options: ‘Lifetime Mortgage’ and ‘Home Reversion’.
Lifetime Mortgage
Lifetime Mortgage is the most common type of Equity Release. This option involves securing a loan against your house, which doesn’t need to be paid until you die or move into permanent residential care. Once these two things happen, this payment is typically made by selling the house.
With the ‘Lifetime Mortgage’ option, you decide whether to make repayments on this loan or let the interest accumulate throughout the remainder of your life.
Home Reversion
Your second Equity Release option is called ‘Home Reversion’ and involves selling part (or all) of your property while you continue to live there. The reversion company receives a percentage of the proceeds when your home is sold—usually after you die or move into permanent care.
With the Home Reversion’ option, you can choose between a lump sum payment and regular instalments. You must also commit to maintaining your property in decent order while living there.
When is someone eligible for Equity Release?
Equity Release is only available to people over 55. Furthermore, many ‘Home Reversion’ equity release plans require you to be at least 60.
If you are under 55, you may be eligible for Equity Release, but your partner is not. You should speak to an advisor for guidance on this.
Why is equity release eligibility limited?
Equity Release is only available to people over 55 because providers want to limit the risk of offering this product.
For example, since the loan associated with Equity Release is only repaid once you die or enter long-term care, it may take too long for them to get their money back if you are under 55.
Risks associated with equity release
Furthermore, since the loan gathers compound interest over the years, it is possible that it could eventually go above the sale value of your property. This would not be advantageous for the lender. This is why most lifetime mortgages have a ‘no negative equity guarantee’, meaning the loan repayment can’t exceed 100% of the home’s sale value.
The ‘Home Reversion’ companies set their age minimum at 60 for a similar reason: to earn their money back as soon as possible.
If you are under 55 but want to unlock some of the cash in your property, you may need to explore other options for borrowing money against the value of your home.
How do I set up Equity Release?
Before you jump into Equity Release, you should speak to a financial advisor who can assess your situation and provide guidance on whether it is a good option.
There may be other packages out there that you are unaware of, and the advisor can identify these for you and find the best one that will get you where you want to go.
For example, selling your house to a cash buyer is another way to unlock the capital in your property within 7 days. However, this requires you to move house, which you may not be willing to do.
Planning for the long term
A crucial part of the equity release conversation with your advisor is deciding where you want to be in 10, 20 and 30 years. If you wish to enjoy your retirement, keep working, pass your assets onto your children, or any other things that will all impact the best path forward.
The equity release process
Once you decide to proceed with the equity release, your advisor can help you complete your application and submit it to an equity release provider. From here, a local surveyor will usually conduct a valuation on your property, and you will then need to find a solicitor who can carry out the paperwork over the next couple of months.
When the legal checks are done, and a valuation is completed, your solicitor will set a completion date. At this point, you receive your money and get details on how and when repayment can/will be made.
Advantages of Equity Release
Equity Release can act as an additional income for you as you start to receive regular ongoing payments (if you choose) by taking out a plan. This can improve your quality of life over the next 5, 10 or 20 years.
Since you retain ownership of your house with Equity Release, you can benefit from any increase in its value. This is worth considering since the UK property market has an excellent track record of improving decade-on-decade.
You can avoid all the hassle of moving house by taking out Equity Release, as it provides a financial boost without uprooting.
Disadvantages of Equity Release
Taking out Equity Release it reduces your stake in your property and also decreases the amount that your loved ones will inherit once you pass away. If you have many family members, and are particularly committed to passing as much on to them as possible, this is an essential factor.
Furthermore, if you opt for a ‘Home Reversion’ plan, the reversion company owns all or a part-share of your home.
Equity release is typically more expensive than a typical mortgage because the interest rate tends to be higher.
If you release equity from your home, you might be unable to rely on your property for the money you could need later in your retirement. A typical example is if you need to pay for long-term care.
As a final point to consider, the money you receive from Equity Release may impact whether you are entitled to state benefits (or, more specifically, the amount you are entitled to).
