How Does Equity Release Work?
How Does Equity Release Work?
A good retirement plan should ensure you can live comfortably until the end of your life. However, if unforeseen events take a toll on your finances, or you need to make an unplanned–for purchase, you could find that your pension pot is no longer big enough. That’s where equity release comes in. Designed to provide additional financial flexibility to those in later life, equity release plans allow you to access the cash you have tied up in property without saying goodbye to your home.
Hansford Bell are a team of Chartered Financial Planners based in Tavistock, Devon. We’re experts in later life lending and have helped people in all sorts of situations plan and boost their retirement finances. We’re committed to building honest, transparent relationships with all our clients, and helping them make the most of their money.
In this blog, we explain everything you need to know about equity release so you can decide if it’s the right option for you.
What is Equity Release?
Equity release is becoming increasingly common for people who are property rich but with fewer liquid assets. It allows you to access the cash (or equity) that is tied up in your home without having to sell up and move out. Essentially, it’s a long term loan that doesn’t have to be repaid during your lifetime, but through the sale of your home once you have passed away. The equity can be taken as a lump sum or in regular payments to supplement your income. And, better yet, it’s available tax free.
It’s important to note, however, that equity release will lower the value of your estate and so will have implications for your loved ones’ inheritance. There are also interest rates to consider. Interest rates on equity release loans averaged around 4% in April 2021, but if the loan value overtakes your house value, any excess is written off.
How Much Equity Can I Release from My Home?
The amount of money you can access through equity release depends upon your age, the value of the property in question, and the equity release product you choose. Generally, the amount you can borrow is somewhere between 20% and 45% of the value of your home, so it will need to be professionally valued.
Who is Eligible for Equity Release?
Not everyone is able to take out an equity release plan. You need to be aged 55 and over, and if you live with a partner, the same applies to them. In this scenario you’ll also need to own the property jointly and have only a small or ideally non-existent mortgage.
It’s also essential that the property in question is your main place of residence meaning it is never unoccupied for more than 6 months at a time. The property should be based in the UK and worth over £75,000, otherwise it won’t be eligible.
Why Do People Choose Equity Release?
There are many reasons people might want to release equity, as it enables them to access finance without having to withdraw money from their pension or move home. Here are some of the most common.
- Clearing debts.
- Repaying interest only mortgage for those who don’t have a lump sum.
- New Home.
- Home improvements.
- Boost retirement income.
- Reduce value of estate to mitigate tax responsibility.
- Major purchases e.g., new car.
- Helping children with house deposits.
- Care fees.
- Education fees.
- Travel.
Lifetime Mortgage vs. Home Reversion Plan
Lifetime mortgages and home reversion plans are both types of equity release.
A lifetime mortgage is generally the preferred option. Whilst a lifetime mortgage is a loan secured against your home, it can’t be repossessed during your lifetime, and you continue to be the owner.
A home reversion plan (for over 60s only) involves receiving a tax free lump sum in exchange for a portion of your property. The amount you receive will be below market value, and you won’t technically own that portion of the property anymore. You will, however, be able to continue living there rent free as a tenant.
Is Equity Release Safe?
Though equity release has implications for your estate, a lifetime mortgage is generally considered safer than a normal one. That’s because there are no monthly payments to keep on top of, and no chance of your home being repossessed. With a normal mortgage, the lender has a right to repossess the property in the event of non-payment. Where equity release is concerned, this can only happen in a few exceptional circumstances such as you leave the property unoccupied for 6 months or more, you supply false information, or you don’t comply with the terms of the loan.
Can I Lose My Home with Equity Release?
Once again, you WILL NOT lose your home or have to move out as a result of equity release. Members of the Equity Release Council are obliged to guarantee your home will always belong to you during your lifetime, giving you peace of mind. In the event of your death, or if you move into permanent care, the loan will need to be repaid through the sale of your property. So, whilst you are going to inevitably erode the value of your estate, you will not lose anything during your lifetime. That’s why it makes a perfectly safe, practical option for lots of people.
Benefits of Equity Release
There are many benefits to taking out an equity release plan, which is why it is a popular finance option in later life. Though the decision needs to be carefully considered, many people choose to go ahead because of the financial flexibility it provides. Here are some of the top benefits.
Tax Free Cash
Equity release allows you to access tax free cash either as a lump sum, regular payments, or a combination of the two. This money is then available for you to use however and whenever you need it.
Keep Your House
Equity release is often a better option than other forms of finances because it presents no risk to your home in your lifetime. You’ll be able to keep living in your house until you pass away or move into long term care.
No Repayments
A key feature of equity release is that is doesn’t have to be paid back during your lifetime, though some people do choose to make repayments to keep the size of the loan down. That means you won’t have to worry about your monthly outgoings spiralling out of control. Instead, the loan will be paid off when you pass away or permanently move into residential care and your home is sold.
No Negative Equity
If you choose a lifetime mortgage with a member of the Equity Release Council, you’ll safeguard yourself against negative equity. That means if loan grows to the point where it exceeds the value of your property, this excess will be written off. Consequently, you won’t have to worry about passing debt onto your family.
Can Help Mitigate Tax
As equity release is tax free, it can help you minimise the amount of inheritance tax your estate is liable for. That’s because it can be given to your family as a cash gift without it being counted as part of your estate.
Find out more: Inheritance Tax FAQ
Later Life Lending Advice from South West Financial Planners.
Equity release can be the right decision for all sorts of reasons, but it shouldn’t be made lightly.
If you’d like to release some of the cash tied up in your property, give us a call. We’ll walk you through the whole process, making sure everything is 100% clear and transparent, so you don’t have to worry.
Note: This blog is for general information only and does not constitute advice.
