Money Matters: Release Reality

Monday, 22 July 2024 08:00

By Adele Trathan

Adele Trathan takes a look at what you need to know about equity release

Equity release – the process of releasing equity you have built up in your property in order to free up spare cash for holidays, medical bills or even home improvements. It is a popular finance method in the UK; yet it does come with a list of considerations, good and bad.

THE BASICS

Equity release is available to most homeowners in the UK over the age of 55. It enables the homeowner to take out a lump sum or pay themselves an income over a period of a few years, or a combination of the two.

There are two specific types of equity release. A Lifetime Mortgage is generally the more popular option, and means you are effectively taking out a new mortgage whilst retaining residency in the property.

It is effectively a loan with the property as collateral, which means that loan amount – and any built-up interest – can be paid off as you see fit, by selling the property at a later date, or taken care of when the last borrower dies or moves into long-term care.

In contrast, a Home Reversion Plan means selling part or all of your home in return for a lump sum or regular payments. You remain in the property until you die but agree to maintain it.

The percentage retained will always remain the same, regardless of the change in property values. So, while both schemes enable you to release cash in your home, a Home Reversion Plan means physically selling a portion of it, while a Lifetime Mortgage is effectively a loan taken out against it.

EQUITY RELEASE – CONSIDERATIONS TO TAKE INTO ACCOUNT

Money

You are able to release the cash you have invested in your property. This can be extremely valuable and will mean money can be spent on treats or necessities at a time of life when many are in the mindset to enjoy themselves having worked hard.

Security

You will always have the security of knowing you have somewhere to live, and this won’t change. All you are doing is releasing the equity invested in the bricks and mortar.

Life-changing access to funds

It’s possible to cash out up to 60% of a property’s value through both schemes.

Interest

With a lifetime mortgage, interest is charged on the amount borrowed, meaning the debt increases over time.

Negative equity

The accumulation of interest may mean, at some point, that you end up in negative equity, whereby the amount you owe in terms of repayment of the debt is more than the value of the property itself.

Cut-price

With a Home Reversion Plan, the amount you receive for the share of the property sold will be significantly less than market price. It is this share that will be sold on by the purchaser – usually for a substantial profit – once you sever ties with your home.

Price increases

In a Home Reversion Plan, while you retain the share of some of your home, and the benefit of that becoming more valuable in a rising market, obviously that isn’t the case in the portion you have ‘cashed out’.

Inheritance

With both schemes, the monetising of the property means there is less, and sometimes nothing at all, to be passed on to loved ones when you die. You are effectively ‘cashing out’ the value of the property now, for whatever reason, rather than leaving it in place to be used by loved ones after you’ve departed.

Benefits

Withdrawing a lump sum from a property may lead to any means-tested state benefits being reduced, given that you have a cash sum in your hand.

Money Matters: Release Reality

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