Equity release – a way to unlock the value of your property and turn it into cash – is usually something which people aged over 55, who have a mortgage, tend to do.
There are a couple of ways of doing this and here at St Helens Law, we can provide you with the best legal service regarding the different schemes – ensuring you have a plan that best suits your requirements.
What is equity release?
Referring to a range of products that allows you to access the cash (equity) tied up in your property, equity release is payable as a lump sum, several smaller amounts or as a combination of both.
The most common form of equity release is a mortgage that isn’t fully paid off until death, so if you don’t have any beneficiaries in your will to leave your property to, then it’s a good route to raise cash – although can be expensive.
There are two different equity release options for you to choose from:
- Lifetime mortgage
For those aged 55+, this option is the most popular form of equity release, where you borrow some of your property’s value at a fixed or capped interest rate – average interest rates on lifetime mortgages are currently between 3% – 4%.
Equity through this type of mortgage allows you to take the money all at once in a lump sum or you could take it in smaller increments – as and when you need it. Known as drawdown, you would only be charged interest on the money you’ve actually taken, not the money yet to be taken.
Either way, if repayments aren’t made then the interest will build up quickly, so the money you owe is increasing all the time. Nowadays, most lifetime mortgages facilitate you making repayments – on the capital or the interest – so you can reduce the overall cost.
There is usually no fixed term or date when you are expected to repay your loan. Additionally, the interest on the lifetime mortgage will not change during the life of the contract, unless you secure a variable rate.
- Home reversion plans
Ideal for those over the age of 60, a home reversion plan involves a provider paying a tax-free lump sum for a portion of your home at below market value.
This means you would be able to live in the property – rent-free – until the time of your death. Once sold, proceeds would then be split based on the percentage you own and the lender owns.
A home reversion plan is better if property prices stay flatter, as, if the value of your home rises, then so does the amount the lender receives at the end.
A home reversion plan will not give you the true market value of your home when compared to selling on the open market, because you are being allowed to live in the property for the rest of your natural life. This would not be an option if you sold your property on the open market.
- Options for under 55s
With a lifetime mortgage available for those over the age of 55 and a home reversion plan for those over the age of 60, what do you do if you are in urgent need of capital but you are under the age of 55?
The best thing to do is speak to a mortgage broker or financial advisor about the possibility of re-mortgaging and to gain some further advice.
Pros and cons of equity release
When committing to going down the equity release route, it’s important that you are aware of both the pros and cons:
- Cash lump sum or smaller, flexible payments whilst retaining full ownership of your home
- Taking a No Negative Equity guarantee ensures you never owe more than your property is worth
- You can stay at your home for life
- Repayments don’t need to be paid until the end of your natural life or when you enter long-term care but there are options to make repayments earlier
- Retain full ownership of your home, benefitting from future increases in the value of your property
- Can reduce any inheritance tax liability
- The interest can add up quite quickly
- Comes with additional tender and legal fees
- If you repay the loan early, there may be an early repayment charge
- Money released can affect entitlement to any means-tested state benefits
If you are considering equity release, then you need to speak to us here at St Helens Law. Our Residential Property Team are waiting for your call on 01744 742360.
Alternatively, email us at email@example.com and we will be happy to help!