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Equity release enables you to unlock tax-free cash from the value of your property to use towards retirement plans or for loved ones. But what are the pros and cons to consider?
Equity release is a method of unlocking tax-free cash from your property. Available to you when you’re 55 or older, equity release is essentially a loan that is repaid via the sale of your property when you pass away or go into long-term care.
This tax-free cash can be used towards retirement plans, such as travel and home improvements, as well as helping out loved ones like grandchildren.
There are two types of equity release; lifetime mortgages and home reversion plans.
The information on this page should not be considered as financial advice. If you are unsure what’s right for you, please make sure you speak to a financial adviser.
Lifetime mortgages are the more common form of equity release. Lifetime mortgages allow you to take tax-free cash from your home as either a lump sum or drawdown money as and when you need it. You only pay interest on the cash you choose to take out.
A home reversion plan is when you sell a share of your home’s ownership to an equity release provider for less than the market value. Please note, at LV= we don’t currently offer advice on home reversion plans.
Generally, the minimum equity release requirements are that you’re 55 or over, your home is in the UK and worth at least £70,000. It may not pass for eligibility if the build of the property is non-standard (e.g. steel frame) or if there any issues with the lease (if it’s a leasehold property).
Unlocking cash from your home through a lifetime mortgage is an alternative option to downsizing to a smaller property. Rather than having to go through the stress and financial burden of moving to reduce living costs, you can stay put in your existing home for life, whilst reaping the benefits of tax-free cash leveraged from the property. This won’t be the case if you take out a home reversion plan however.
Equity release isn’t always selected for aspirational reasons such as holidays or nice-to-haves, equity release if sometimes an option that people look to when they have limited savings but have money locked in property assets.
For instance, if you experience a medical event that means you now need to make big adaptations to your home, equity release is an option that allows you to collect together these unexpected but necessary funds in addition to any grants you may be eligible for.
There is nothing for you to repay if you don’t wish to. You do not have to repay money taken from equity release until you pass away or go into long-term care, by which point your home will be used to pay off your loan. To reduce compound interest, some people choose to pay monthly interest payments, but this is ultimately your decision.
By releasing cash from your property to gift to loved ones earlier on, you may be able to reduce the inheritance tax they need to pay once you have passed away. This can be a complex path to navigate and there are a number of rules to abide by, so make sure you have done your research or seek advice from a specialist before proceeding.
Providers of equity release who are members of the Equity Release Council will offer a no-negative equity guarantee. This means that you or your loves ones won’t owe more than what your home is worth.
The money you take from equity release can be used however you wish, including but not restricted to:
There may be certain restrictions in place depending on your provider to protect yourself and your lender however, so it’s best to check.
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You can also order a free Equity Release brochure.
The main thing to consider when taking equity release is that there will be less money for your beneficiaries when you pass away. This will clearly depend on your personal circumstances and may not be an issue for some, but it is certainly something to think about as the value of your estate will ultimately be less.
If you take out equity release, your current and future benefits entitlement may change – for instance, pension credit, savings credit and council tax reduction. Your lump sum may push you above the eligibility thresholds for benefits.
Though interest rates will of course vary by lender and product, lifetime mortgage interest rates are generally higher than traditional mortgage interest rates.
Due to compound interest and lifetime mortgages not needing to be repaid until you pass away, the amount owed can grow very quickly. However, this can be reduced by monthly interest repayments.
As you can imagine, a property valuation will be required to understand how much equity can be released from your home – this is one of a few costs to consider when thinking about equity release, as some providers will also request payment for setup.
Depending on how much equity release you took out initially, you may be able to release more equity at a later date, with the same provider. However most equity release providers will not allow further secured loans to be added from other providers.
As lenders will have predicted their return based on your lifetime, they will often try to offset any losses by applying early repayment charges should you try to pay off your loan. These charges will vary by provider, so make sure to check the details when you take out equity release or talk this through with your financial adviser.
If you’re in the process of weighing up equity release, it’s probably worth considering the alternative options as well.
Instead of releasing equity from your home, you could, subject to proper financial advice:
If you are interested in a lifetime mortgage for equity release, the best first step is to speak to a financial adviser or an equity release advice provider. These advisers must be FCA regulated and ideally should be a member of the Equity Release Council.
Equity release is not a quick decision to make by any means, not to mention deciding whether a lump sum or flexible drawdown is best for you.
A good first step is to understand how much equity you could unlock from your home using an equity release calculator. Once you have done this, speaking to a financial adviser will allow you understand whether it’s the right decision for you to make. Why not request a callback from LV= today?