Equity Release allows you to access the equity (cash) tied up in your home. There are two equity release options: lifetime mortgages and home reversion plans.
Lifetime Mortgages
A lifetime mortgage is when you borrow money secured against your home, provided it’s your main residence. This allows you to access tax-free cash without having to move out of the property, so you retain 100% ownership.
There are two main types of lifetime mortgage:
- Lump sum- where you take a tax-free cash lump sum from the value of your home
- Drawdown- where you take an initial tax-free lump sum from the value of your home and the remaining equity available is taken at a later date
To take out a lifetime mortgage you must be over age 55. Your home must be worth at least £70,000 and you must want to release at least £10,000 of its equity. You must have cleared, or be able to clear, your existing mortgage upon completion of your lifetime mortgage.
You are not required to make repayments for a lifetime mortgage. However, you may choose to do so on a voluntary basis as compound interest is added to the loan amount, meaning it can accumulate over time.
The amount that you borrow, and its interest, is not paid back in your lifetime. The loan and its interest will be paid off by selling the property when the last borrower dies or moves into long-term care.
Home Reversion Plan
With a home reversion plan, you can sell between 25% and 100% of your home in return for a cash lump sum, a regular income, or a combination of the two.
In this form of equity release, you can continue to live in the house until you die and must agree to maintain and insure the property. It is usually available to those age 65 and over.
You will usually get between 20% and 60% of the market value of your home (or portion of the home you sold). This means that you are selling all of, or part of, your home way below market value, missing out on future price increases and decreasing the inheritance you can leave behind. The older you are, the higher percentage of the home’s market value you tend to get.
The percentage of ownership you retain in the property remains the same regardless of whether the property rises or falls in value, unless of course you choose to take further cash releases (forfeiting further ownership of the home).
Repayments are not required and interest is not charged, as a home reversion plan is not a loan, it is a form of sale.
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