What Is Equity Release & How Does It Work?

Equity Release

Ideal for homeowners of 55 years and older, equity release offers a way to release the money tied up in your property. This option is ideal for those who have paid up their mortgage, with a property that is in good condition. It suits retired owners who are looking for a way to supplement their pension or add a source of income.

To help you better understand equity release and learn how it works, we have prepared a basic introduction to this process that answers the most commonly asked questions.

An Introduction to Equity Release

Equity release can seem confusing at a glance – especially if you have no idea where to even begin. One of the simplest ways is to get expert help from a conveyancer who can guide you through the process. It also helps to understand what it is and how it works. Some of the most important things to know about this process include the following.

What is it?

Simply put, this process gives you the option to access your paid-off property’s profit. This means that the property will start to pay for you, rather than you paying for the property. Applying to owners of 55 and older, you can either release the money as one large sum, choose to release money in a few smaller amounts or even choose a combination of a lump sum and smaller payments.

How does it work?

There are two primary ways to access your property’s equity: lifetime mortgage and home reversion. It is important to understand the pros and cons of each way before making your decision. This is where a conveyancer will help you make the best decision for your specific needs.

  • With lifetime mortgage, you will take out a mortgage that is secured on your property, without losing your ownership of the property. Some of the property’s value can be used as an inheritance. Repayments can be done and interest can be accrued. When you pass away or when you are moved into a care facility, the loan and its interest will be paid back.  
  • With home revision, part or all of your property is sold to a home reversion provider, giving you a lump sum or regular sums in return. You can remain in your property without paying rent. You will, however, be responsible for the maintenance and insurance. A percentage of the property can be used for inheritance. This percentage will not change, even if property value changes, unless further releases are done. Once you pass away or move to a care facility, the property will be sold, with the proceeds shared depending on the remaining ownership proportions.

What are the benefits?

Whichever way you choose, the benefits of releasing your equity include a regular source of income or a lump sum that can be used for inheritance. This money is generally tax-free and there is no negative equity guarantee either. If you choose to reduce your property size, you could reduce inheritance tax.

What are the risks?

There are a few risks worth noting. Depending on your age, if you take larger payments, you may not have very much money left as an inheritance when you pass away. You may lose pension credit and other means-tested benefits. If you wish to downsize at a later point, it will be a lot harder. You may have to deal with early repayment charges if you are not able to repay the loan early.

How do you get started?

The simplest and most effective way to get started is to speak to an experienced conveyancer. You will be able to discuss your specific situation, current equity, goals, and requirements to decide which option is best. You will also be able to ask any additional questions you may have.

An online conveyancer such as Home Legal Direct will give you the expertise you need to get started. Contact us today to find out how we can assist with equity release.