What is equity release and how does it work?

Equity release
Equity release mortgages have become extremely popular in that last few years, especially as a way for parents to raise money to help their children buy a first home. The equity release market is a fast growing one and advertisements are appearing on the TV with increasing frequency. So, if you are considering releasing some of the equity that is tied up in your property, then read these facts you will need to know about equity release mortgages.

1. What exactly is equity release?
Equity release is a way of unlocking the difference between the value of your property and any outstanding mortgage that you have on it. Available to homeowners aged 55 or over, equity release agreements usually require no monthly repayments and the funds released may be spent on anything you wish.

2. The different types of equity release mortgages
There are a number of different types of equity release schemes available, from different providers. A Home Reversion plan is one where you sell your property, but you retain the right to live in it for the rest of your life rent free. A drawdown lifetime mortgage is where you retain the ownership of your property but can draw down funds against the equity, as and when you need it and the loan plus the interest is paid out of the proceeds of the sale of the property.  A lifetime mortgage is the same as a drawdown lifetime mortgage except that you receive all the cash in one lump sum.

3. Why do people turn to equity release?
Historically, house prices have doubled every eight years since 1950 which has meant that older people have found themselves with a huge amount of money tied up in the bricks and mortar of their home but, sometimes, with insufficient income to pay for health care and other costs. Equity release is a way of releasing that value so that it can be spent now, but, without you having to lose your home or move.

4. What are the downsides to equity release?
There used to be some bad press about Equity release schemes, but, they are now well documented and well explained by the lenders. It is, of course, a form of lending with your home as security so the amount that is eventually paid will include fees and interest payable. With no repayments being necessary, you won’t be risking your home by taking out an equity release plan but, you will be reducing the amount that your family will be able to inherit.

You should also be aware that, in some cases, the cash lump sum that you receive could have an impact on state benefits that you are entitled to claim.

5. Where do you find a provider of equity release
Just as with standard mortgages, different providers charge different fees and interest rates, so the best thing to do is to consult a qualified professional adviser to help you decide which, is the best provider for you. Equity release schemes can be flexible so poor health shouldn’t be a hindrance to you and, some schemes will still allow you to move home too. Just be sure to detail your requirements and your circumstances in detail with your advisor to make sure that they can find the best provider for you.

For more information about equity release, visit the advice page at: The Money Advice Service

6. How much can you borrow with equity release and how much will it cost?
The amount you can borrow with an equity release scheme and how much you will have to pay back will depend on market conditions at the time, such as interest rates and house price inflation. The simplest way to get an idea of what is currently available with equity release schemes is to use on online equity release calculator. There is a link below that will take you to an equity release calculator that has been provide by the Telegraph, in association with Key Retirement.

As always, I would point out that I am not and nor do I hold myself out to be a financial adviser. Always seek professional, independent advice before signing up to an equity release agreement and only use reputable providers.