With rising property values and living costs, equity release has become a popular way for people to improve their financial flexibility later in life.
Equity release allows homeowners aged 55 and over to access some of the value tied up in their property without having to sell it or move out.
It may sound all positive on paper, but equity releases do come with legal implications that you must be aware of.
Our Residential Property expert, Erin Cronin, explains how equity release works and how legal support can protect your interests.
What is equity release?
Equity release is a financial option that helps homeowners release tax-free cash from the equity in their home.
Equity is calculated as the value of your property minus any outstanding mortgage or loans secured against it.
To qualify for equity release, you will usually need to:
- Be aged 55 or over
- Own a property worth at least £70,000 which is in reasonable condition
- Have little or no existing mortgage (any outstanding borrowing is normally repaid from the released funds)
Equity release is often used to supplement retirement income, pay off debts, fund care costs, make home improvements or provide financial assistance to children or grandchildren.
What types of equity release are there?
There are two main types of equity release products available in the UK, lifetime mortgages and home reversion plans.
What is a lifetime mortgage?
A lifetime mortgage is the most common form of equity release and works similarly to a traditional mortgage.
However, instead of making monthly repayments, the interest is usually added to the loan over time. These can come in various forms, such as a lump sum, a drawdown facility or an interest-only/optional repayment.
You will retain ownership of your home and when you pass away or move into long-term care, the loan, plus interest, will be repaid.
Lifetime mortgages can offer:
- A no negative equity guarantee, meaning you will never owe more than your home is worth
- Fixed interest rates for life
- Options to make voluntary interest payments to reduce the overall costs
Most importantly, a lifetime mortgage allows you to continue to live in your home for the rest of your life.
What is a home reversion plan?
A home reversion plan involves selling all or part of your property to a provider in return for a tax-free lump sum or regular payments.
You will receive a lifetime lease, which allows you to remain in the property rent-free for the rest of your life.
When the property is eventually sold, the provider receives their agreed share of the sale proceeds.
Home reversion plans are less common today, but may still be appropriate in certain circumstances.
How much equity can you release from your property?
The amount of equity you can release from a property depends on:
- Your age (and your partner’s age, if applicable)
- The value of your property
- Your health and lifestyle
- The type of equity release product chosen
Homeowners can typically release between 20 per cent and 55 per cent of their property’s value, with the percentage increasing as you get older.
However, some health conditions, such as diabetes or heart disease, may allow you to release a higher amount.
Is equity release right for you?
Equity release is not the right choice for everyone and there are some considerations to bear in mind.
You must be aware that it can affect the amount of money left for beneficiaries; interest accumulates over time and early repayment charges may apply.
How can we help you apply for equity release?
If you think equity release could be right for you, you must seek legal support.
Our experienced property law team can help review your equity release and explain your options and legal rights in clear terms.
We want you to fully understand the implications so you can make an informed decision that protects your interests and your future.
To learn more about equity release, contact our residential team today.
