What is Equity Release and how does it work?

Equity release has become a popular route for home owners to undertake in recent years to unlock value in their property.

What is Equity Release?

Equity release is a way to unlock the value of your property and turn it into cash. You can do this via a number of policies which let you access – or ‘release’ – the equity (cash) tied up in your home, if you’re 55+. You don’t need to have fully paid off your mortgage to do this.

As a rule, you can either take the money you release in one lump sum, in smaller amounts over time (known as drawdown), or as a combination of both. Yet make sure you do it in the right way as if you get it wrong, it can prove expensive.

The most common form of equity release is a mortgage that isn’t paid off until you die. So if you have no one to leave your assets to, it’s a decent, though expensive, route to raise cash.

If you do have people to pass assets to, equity release generally means there will be less for them to inherit. Then again, it is your money, so prioritise your own standard of living.

The products available to free up cash fall in to a couple of different camps:

Lifetime mortgages – for those aged 55+

This is the most popular form of equity release. Here you borrow some of your home’s value at a fixed or capped interest rate

You can either take the money all at once in a lump sum, or you can take it in smaller chunks as and when you need it – something known as drawdown. If you choose the drawdown option, interest will only be charged on the cash you’ve actually taken, and not on the money you’re yet to draw down.

With both forms of lifetime mortgage, if you don’t make any repayments then the interest will compound rapidly, as the amount you owe is increasing all the time. These days however, most lifetime mortgages do allow you to make repayments, be that repayment of the capital or just the interest, meaning you can reduce the overall cost. Typically there’ll be a cap on the amount you can overpay by, normally 10% of the loan value each year.

A lifetime mortgage is different from a standard mortgage.

Home reversion plans – for those aged 60+

Here a provider pays you a tax-free lump sum for a portion of your home at below market value. You can then live in the property (rent-free) until you die. When it’s sold, the proceeds are split based on the percentage you own and the lender owns. So if your property value rises significantly, so does the amount it gets.

So home reversion plans are better if property prices stay flatter, and worse if they rise substantially.

What are my options if I’m under 55?

Equity release is only available to those aged 55 and over. If you’re close to 55, you may feel like you’re in a position where you can wait until then. However, if you’re a homeowner who’s under 55 and in more pressing need, it’s worth speaking to a mortgage broker about the possibility of remortgaging, or contacting a financial adviser if your situation is particularly complicated.

Remortgaging is a good way of lowering what you pay towards your mortgage each month, and in some cases you might be able to raise further cash against your property. In recent years, several mortgage lenders have increased their upper age limits when it comes to who is able to apply for a mortgage – so if you’re an older homeowner but not interested in equity releasing, don’t automatically assume you wouldn’t be eligible for a mortgage.

If you would like more information or assistance with equity release, then please contact Rachel Butterfield or another member of our friendly Residential Property Team at Guest Walker who will be able to help – Telephone us on: 01904 624903 or email: Solicitors@guestwalker.co.uk

Rachel Butterfield