What is equity release?
Your equity is the total market value of your home, minus any mortgage you haven’t yet paid off. In short, it’s the sum you’d walk away with if you sold the home for cash.
But if you don’t want to sell your home, you may still be able to access a large portion of this money. If you have paid off your existing mortgage (and so own your home outright) you can consider an equity release scheme.
Equity release can provide you with a large sum of money to spend while enabling you to continue living in your home. It can be particularly useful for covering large expenses later in life, such as long-term care. However, there are downsides to accessing the value of your home in this way.
An equity release provider will provide you with either a lump sum or an income in exchange for part of the value of your home. This is achieved either using a type of mortgage, or by selling that portion of your home on the condition that you can continue to live there as long as you wish.
Read on to find out more about these different types of equity release.
What are the different types of equity release?
The two popular types of equity release are
- Lifetime mortgage
- Home reversion
This is the most popular type of equity release. You borrow a lump sum in the form of a mortgage, which is eventually repaid from the sale of your home either when you die or move into long-term care. The amount you can borrow is usually between 18 per cent and 50 per cent of the property’s total value – typically the older you are, the more you can release.
The amount you owe will grow with interest, but you can sometimes reduce this by paying off the interest as you go, so it doesn’t compound (this is known as an ‘interest paying mortgage’). If you choose not to pay off the interest as you go, you will have an ‘interest roll-up mortgage’. In this case you will end up repaying more overall, as the interest will compound over time.
Most providers now offer a ‘no-negative-equity guarantee’, which means the debt will never be more than the sale value of the property. However, this could still mean that all the property’s value is used up in paying off the mortgage.
You may qualify for an enhanced lifetime mortgage if you have a serious health condition or an unhealthy habit, like smoking. This can enable you to borrow more, or to pay lower interest.
With a home reversion scheme, you sell all or part of your property, but with a legal right to continue living in it until you die or move into long-term care. The money can be paid to you either as a lump sum or as a regular income, whichever you prefer.
Whether you sell all or only part of your home, you won’t receive full market value for it, so bear this in mind when making your decision. Some providers of home reversion schemes require you to be over 60. Generally, the older you are when you take out the scheme, the more money you’ll get. Your state of health is also taken into account – being in poor health usually means getting a larger share of the value of your home.
Are there any other forms of equity release?
It is possible to cut out the middle-man and set up your own equity release arrangement. A few enterprising individuals have tried their own version of the French viager system, by selling their home privately at a discount in exchange for lifelong tenancy rights. This may sometimes offer better value, but isn’t easy and requires in-depth legal and financial advice.