What is Equity Release and How Does it Work?
Updated: May 17
When some people retire, they often start to worry about how they will pay for their monthly expenses. This is especially true if they are no longer able to work or have a limited pension income.
One way to ease the financial burden in retirement is through something called equity release. Equity release is a process where you can get money from your home without having to sell it.
There are several ways to do this, and each has its own benefits and drawbacks. In this article, we will explore what equity release is and how it works.
What is Equity Release?
Equity release is a mortgage product that allows homeowners over the age of 55 to borrow against the value of their homes. This leaves them with an 'income for life’ from the money that they have borrowed but means that they continue to own and live in their property.
The term 'equity release' is used to describe several different types of financial products that help people get money when they need it without having to sell their houses. There are several different types of financial products designed to achieve the same results, but they all work in different ways.
A common type of equity release is called a lifetime mortgage. This is where you get money without having to pay it back until your home is sold.
The Different Types of Equity Release Products:
There are different types of equity release products, but they can be grouped into two main categories:
Lifetime mortgages work by allowing people to borrow money using their homes as a guarantee of payment. In other words, the equity release provider will buy part or all of your house and you will pay them back through monthly instalments or by selling what remains of your home when you die.
Home Reversion Plans
A home reversion plan works in a similar way to a lifetime annuity product by providing monthly payments of income. However, these monthly payments come directly from part of the value of your house instead of being paid by an insurance company.
As with a lifetime annuity, when you die or go into care, your home will be sold and the equity release provider will receive the money that is left over after all your debts have been repaid.
How does it work?
The way these releases work is by transferring some of the ownership of a property to another party (the lender) who agrees to give you money now in return for a proportion of the property's future sale value, according to Equity Release Council.
The equity is calculated as a percentage of your home's value and you can only take on an equity release if the amount of money you need does not exceed this figure. You will need to tell a solicitor that you wish to sell a part of your property.
The solicitor will then prepare a legal agreement which you will sign with the lender. You'll need to get an annuity if you want regular income on top of the lump sum or vice versa.
There are two types of equity release schemes, lifetime mortgages and home reversion plans.
Lifetime mortgages are where you borrow money from a high street bank or other lender and the interest is added to your mortgage balance. You have to pay back the capital at a later date but still remain in your home until you choose to move out.
The second type of equity release plan is a home reversion plan where a company takes out mortgages against your property with several lenders, which gives them enough money to pay off your mortgage.
Once this has been achieved, it then takes ownership of half of your house and you can move out.
Once the company has re-homed you, they will rent your original home back to you at an affordable rate (typically under 100 pounds per month) or sell it to repay themselves for what they have spent.
The amount that you can borrow will depend on the value of your property, what you are using it for and how much money is left on your mortgage.
Different lenders will offer different rates depending on their own criteria, but this type of plan can provide a potential alternative to retirement living or nursing homes because it means that people no longer have to sell their homes or move out of the area.
How to get Money Through Equity Release?
Equity release is a borrowing option that lets you access the value of your home. It enables homeowners to withdraw money from their property and receive an income on its future sale. With equity release, you can receive:
- A lump sum pa: The amount of cash you get upon taking on the debt.
- An annuity: a fixed monthly payment for a set time period.
- A combination of both: a mix of a lump sum and fixed monthly payments over a number of years.
When should you consider Equity Release?
The equity release, you should consider taking out a home equity release products if:
- You want to access money but don't want to sell your property.
- You want the option of getting cash now and continuing to live in your house for as long as you like or until you pass away.
- You aim to generate an income on your home's future sale.
- You want more flexibility with your money, such as the option of re-borrowing or accessing your cash early without penalty charges.
Pros and cons of Equity Release:
- No monthly repayments are required - just a regular payment that goes towards paying off the interest and maintaining the loan.
- You stay in your own home, so there are no extra bills to pay.
- Equity release plans are designed to be flexible.
- Some equity release companies offer free lifetime warranties on the work carried out.
- The interest rates are typically much higher than a standard mortgage
- Equity release cannot be reversed once the money is released, so it's important to consider all of your options carefully.
What is Equity Release Summary
In short, equity release allows homeowners to take some of the value of their homes that they have bought over their lifetimes as a cash advance to spend on things they wish or need during retirement.
It is not the cheapest option of borrowing, but when you are in the latter stages of life, some people think it is better to spend it, than to try and take it with them.