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What is Equity Release?

Equity release is a type of mortgage where you exchange some of the value of your home in return for a lump-sum payment or recurring income. Essentially, it’s a practice where you’ll borrow a percentage of your house’s value, usually around 20%-50%, which will get paid back to the lender once your home gets sold.

It’s a type of financial product more suited to older persons who may not be eligible or have the means to repay regular mortgages. So how exactly does an equity release work?

Generally, if you’re over the age of 55 and a homeowner, you’ll be eligible to apply for an equity release. Providers will offer this long-term loan that will allow access to cash against an agreed percentage value for your home.

Why do persons opt for an equity release? Find some leading reasons below:

  • Renovate your current home
  • Gain another stream of retirement income
  • Access cash quicker to help with bills or family expenses.
  • Payoff an existing mortgage
  • Estate planning
  • Fund leisure or retirement activities

Those searching for an equity release will often research and compare quotes from providers, secure their preferred product, and repay using your home. Interest rates will apply for repayments after you pass away or enter long-term care.

What Types of Equity Release Products Are There?

You’ll find that providers offer two categories that constitute a form of equity release.

Lifetime Mortgages

Lifetime mortgages are an equity release plan tailored to over 55s to borrow cash against your home’s value. However, you won’t make repayments in monthly instalments like traditional mortgages.

The borrowed amount gets paid off as soon as your home gets sold, which as an older person, usually occurs after you pass away or move into assisted living facilities. This type of equity release means that you’ll have fast access to cash without worrying about keeping up with repayments.

However, that means that the interest on the lifetime mortgages can quickly rise the amount that needs repaying. After death, there may not be any leftover cash to pass to your loved ones. There is an option in these plans to pay the interest monthly if an inheritance is a concern.

Reversion Schemes

Unlike lifetime mortgages, reversion schemes are a type of equity release plan with the homeowner selling a part or the entirety of their home but securing their long-term right to live in the property. Generally, you’ll continue to reside in your property under a lease without paying rent. However, some plans will charge a modest amount lower than market value for living rights.

The return of choosing a reversions scheme is that you’ll receive a regular income or a one-off lump sum payment. Some providers will offer a combination of the two options.

To get an idea of a reversion scheme, let’s say you agree to sell 70% of your home to a provider and receive 20% of its value. When the property gets sold, you’ll receive the remaining value percentage of the property you still own.

Typically, there’s a minimum age of 65 to opt for a reversion scheme.

What are the Benefits and Risks of Equity Release?

Naturally, financial products come with pros and cons depending on your circumstances, and nothing is different about an equity release. It’s essential to weigh the advantages and disadvantages of taking out an equity release mortgage before deciding.

So what are the benefits and risks of equity release?

Benefits

Advantages of equity release include:

  • Get a significant amount of money that you need quicker than you usually would
  • Receive money to supplement your retirement income
  • Get cash in exchange for your existing assets.
  • You’ll get a tax free lump sum.
  • You’ll never owe more than the value of your home
  • Some providers will have flexible options for repayments

Risks

And the dangers of an equity release product are:

  • Your house will be sold after death or enter long-term care, meaning loved ones cannot inherit the property.
  • It’s challenging to terminate equity release plans.
  • Interest will continue to roll up on the amount borrowed.
  • You won’t be able to take out any other secured loans against your home.
  • These plans aren’t suitable for those with dependents.
  • The application process can be timely and costly

Discover More Resources About Equity Release

We compare plans from the leading equity release providers

Are you looking to learn more about equity release to support your decision for a plan? You can find more articles with everything you need to know about equity release plans.

  • How Much Does Equity Release Cost
  • Equity Release Interest Rates
  • How Does Equity Release Work When You Die?
  • Best Equity Release Companies
  • How Long Does Equity Release Take
  • Is Equity Release a Good Idea?

You can find our comprehensive suite of articles here or continue to investigate quotes for equity release plans.

Frequently Asked Questions on Equity Release

Do you need some critical information now about equity release plans? Find a few of the most frequently asked questions below.

What’s the Timeframe of Equity Release?

It usually takes six to eight weeks for equity to get released from your home. However, it can vary by plan provider – where some may take up to twelve weeks.

How Do Interest and Repayments Work?

Most equity release plans don’t include the need to make repayments until you pass away or move into long term care. However, some providers will allow you to pay off the interest in increments.

Not every plan works the same, so be sure to look at the details when researching equity release quotes.

Do I Get My Money in a Lump Sum?

Depending on your agreement with the equity release plan provider, you’ll be able to get your money as a lump sum or regular income.

Can I Get an Equity Release Plan If I’m Under 55?

Those under 55 are generally not eligible for equity release plans. However, there are alternatives such as downsizing, secured loans, and remortgaging to access needed finances.