Equity release is when you release money from the current value of your home. You can either get a lump sum or monthly money. It is done by still having the use of your house, but using the value of your home to generate new income.
Many people are tempted to do this later in life, especially with the cost of housing increasing and retirement income diminishing at a rapid rate. It is even more appealing to those who do not have a lot of cash, but have their money tied up in their assets.
How it works
You will be taking part in an equity release scheme when you choose to release equity from your home. There are a number of different schemes on the market, so you will need to get the advice of a professional before you make your decision. With most of the equity release schemes you will end up borrowing money against the value of your home and it will need to be repaid when your home is sold one day. This normally happens when you die one day or are sent to a care home. These schemes allow you to get money from the value of your home and you then agree that a part of the proceeds from the sale of your home will go towards paying back the money.
What options are available?
Home reversion schemes
This type of scheme will require you to sell part of your home to a reversion company, who will then give you a lump sum or a monthly income in return. You will basically become a tenant if you choose to sell the entire value of your home, but you will be able to live in your home rent free for the rest of your life.
The home reversion company will get paid out when you die or when the house is sold. If you end up selling your entire property, you will only get between 30 and 60% of the value. Older people will get more than younger people and men will get more than women. This is only based on the life expectancy differences.
Doing this means that you will not have to worry about paying monthly payments and you will know exactly how much you will be leaving to your family one day, provided that you do not sell the full value of your home to a reversion company. You will get a bigger payout if you suffer from a life threatening illness or if you are a smoker, because your life expectancy will be shorter. These companies tend to be very selective when it comes to the homes that they choose to take on, so there is a chance that you may not qualify for this type of scheme. More information on equity release schemes can be found over at Moneysavingexpert too.
These work by taking a loan on the value of your property. You will not need to pay anything during the period of the loan, because the interest is worked into the loan amount and it is paid back to the lender when your home is sold. Older people will be able to lend more money. Many people go for this type of loan, because they do not have to pay anything back while they are alive and most of them come with fixed interest rates. Most of these schemes are available to people over the age of 60, but there are a few that will assist people from the age of 55. You need to remember that the interest rate is usually fixed and the payments can add up quickly, which will affect how much your family gets out at the end of the day.
Who would these schemes be suitable for?
You will normally have to be over the age of 60, not owe any money on your property and have a decent property in order to qualify for an equity release. It will suit people who are retired and need some extra cash to supplement their pension money. The money that you receive is usually tax free unless you decide to invest the money and then you will be taxed on any growth on your investment. This money can be used to pay for care bills or to take the sting out of inheritance tax.
What are the risks?
These types of plans can limit the amount of money that your family will get when you die. If you release equity on your home, you will not be able to leave it to your family one day. It is therefore important that you discuss your intentions with your loved ones before you make a decision. If you get means tested benefits, you could lose them if you choose to take an equity release. It is important that you check if you are still entitled to benefits if you release equity.
Most of these plans will require you to pay legal fees and valuation fees. You will normally have to pay for the surveying of your property and you will be responsible for maintaining your home, and will still be required to pay council taxes. The amount of money that you will get gets calculated on your life expectancy. Since no one can predict how long you will actually live, it is based on general statistics.