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Home equity release incorporates a number of products that allow you to release the money (or equity) that is tied up in your house. It’s available to those over 55 and there are a number of ways to release the finances i.e as a lump sum or in smaller amounts over a period of time.
How does equity release work?
If you want to release equity in your house there are two common options available.
Lifetime equity release mortgage
A lifetime mortgage option is the most common amongst those over 55. This option allows you to take out a mortgage on the house you live in while retaining ownership of the property. You can choose to make repayments if you like or let the interest gather and then the total amount will be paid back when you die or move into care.
Home reversion plan
This scenario sees you sell part of or all of your house to a provider and in return you receive a lump sum of money or regular payments. Your rights to live in the property remain until your death and you can live there rent free but maintenance and insurance costs must be paid by you.
Is equity release safe?
Equity release is regulated by the FCA (the Financial Conduct Authority) but we’d always advise that equity release isn’t something you should jump into. There are of course advantages and common pitfalls of equity release that one should be aware of before going any further.
A large number of providers and advisers adhere to a code of conduct decided by the Equity Release Council. These ensure that you’ll never pay more than the value of your property back and you are protected by a security of tenure. This means that the right to live in your property for life remains.
The pitfalls of equity release
While equity release is a significantly safer option than it once was there are still some common pitfalls and equity release disadvantages.
The most obvious and perhaps the biggest pitfall is that you might not be able to rely on the value of your property in later life should you need it. Perhaps you’re thinking of inheritance, downsizing, or funding care - equity release may mean your property wealth can’t help you further down the line.
One other thing worth closely considering is the interest on a lifetime mortgage. If you don’t decide to arrange payments the interest can compound significantly. One recommended way to avoid this is to take smaller lifetime mortgages every five years to keep any compound interest down.
How much does equity release cost?
The cost of equity release depends on the provider you choose to go with. Our most important piece of advice is that you seek advice from an independent equity release adviser beforehand. They’ll be able to help you better understand your options and help shape that final decision.
Typically you can expect lenders to charge approximately 6% on the amount of equity you release. They’ll usually allow you to borrow up to 50% of your houses value in either income or a lump sum.
When selecting a provider, be sure to look at their equity release interest rates closely. Most providers will have an equity release calculator on their site that’ll give you a guide as to how much you can borrow and how much you’ll have to pay back.
It’s worth noting that as well as the interest you’ll have to pay back arrangement fees. These tend to differ dependent on the type of equity release scheme you’ve arranged for. They can include legal fees, application fees, and surveyor costs.
Our equity release tips
Don’t borrow all in one go: The sooner you take the money the more expensive it’ll become due to the nature of compounding interest. Take out as little as you require and hold off as long as you can before doing it again.
Consider alternatives: While equity release can be a good move in certain circumstances it isn’t always the wisest way forward. One of the most popular alternatives is to utilise a cash house sale company like We Buy Any House. We are able to offer cash for your property quickly allowing you to free up necessary funds to speed up a move or for any other reason. There are other alternatives to equity release including:
Borrowing from family or friends
Downsizing into a smaller more affordable property
Utilising your existing savings
Claiming benefits that are available to you
Make sure you use a reputable company: To make sure that you’re safe guarded select a company that’s a member of the Equity Release Council. It’ll ensure that you never owe more than your property is worth.
Ask plenty of questions: You might think the best way forward is to just go with a company that provides the most competitive interest rates. This isn’t the case. You’ll also want to choose a plan that will be a good fit for your future needs. Here are a few questions you can ask: