The value of your home, minus any outstanding mortgage, can be described as your ‘equity’ and is yours to do whatever you would like with. Equity release is the process of turning a proportion of this equity into a tax-free lump-sum of cash or a regular additional income.
The majority of equity release plans are:
- Regulated by the Financial Services Authority (FSA);
- Have much greater flexibility than in the past;
- With a lifetime mortgage you can maintain 100% home ownership;
- There are guarantees to ensure you never pass on any debt or ‘negative equity’ in your estate.
What types of equity release are available and how does it work?
Lifetime Mortgage:
- Typically allows you to release a lump sum of cash or a regular additional income from the value of your property.
- There are no regular repayments as the loan and interest accrued is repaid from the proceeds of the property once it is sold, generally when you pass away or move into long-term care.
Drawdown Lifetime Mortgage:
- Enables you to access the released funds over time as when you need them as opposed to releasing a lump sum.
- Because interest is only payable on the cash that you have taken, these plans can often prove to be more cost-effective.
- Additionally you can benefit from a cash reserve which can be drawn upon in the future.
Home Reversion Plan:
- Allows you to exchange ownership of some or all of your property for a lump sum of cash, along with the right to remain in property, rent free, until you pass away or move into long-term care.
Interest-Only Mortgage:
- You get a lump sum and pay monthly interest on the loan, which can be fixed or variable.
- The amount you originally borrow is repaid when your home is eventually sold, you pass away or move into long-term care.
Home Income Plan:
- The money you release from your home is used to by a regular fixed income for life (an annuity) This income is used to pay the interest on the mortgage and the rest is yours.
- The amount you originally borrow is repaid when your home is eventually sold, you pass away or move into long-term care.
Who can benefit from Equity Release?
- You must own your own property
- The youngest homeowner should be aged 55 or over
- You must be able to clear any other secured lending, such as a mortgage, with the proceeds of your equity release plan
There are tens of thousands of people who are enjoying the benefits and freedom that equity release offers however not everyone is suitable, which is why it is important to speak to an Independent Specialist Advisor.
Popular reasons for releasing equity:
- Paying off your mortgage
- Home improvements
- Improving your lifestyle
- Funds for a rainy day
- Holidays
- Helping your family
In short there are absolutely no restrictions on what you can do with any equity that is released. Why should there be? It’s your money after all. And because it is your money and you are just ‘releasing’ it there is no tax to pay on the proceeds (depending on how you wish to use the funds).
What are the drawbacks?
Some things that you should consider prior to taking out any equity release plans are:
- You should think about whether you have other means of raising the funds that you require, such as downsizing to a smaller property or taking in a lodger;
- Equity release will reduce the size of your estate;
- Releasing equity can have an impact on your entitlement to means-tested state benefits; and
- Equityreleasforum.org suggests that all those considering an equity release plan seek independent, whole-of-market advice from an equity release advisor who specialises in this market.
