Understanding equity release

understanding equity releaseIf you have lived in your home for a number of years, you have probably enjoyed seeing its value rise. Many homeowners in London and the south of England who paid £50,000 for a home thirty years ago may be sitting in an asset worth £500,000 now.

But of course, although it may well be the best deal they ever made, they can’t simply sell their homes and enjoy the profits, for the simple reason that they still need it to live in.

We look at a way to continue to enjoy your home as well as its increase in value, with equity release.

Equity release explained

Equity release enables you to access cash tied up in your home. You can take the money as a lump sum, in several payments or both. The most common way to release equity from your main residence is with a secured loan, called a lifetime mortgage.  You arrange a mortgage and retain ownership.

You receive a lump sum and retain 100% ownership of your home. Unlike the mortgage you probably used to buy the house, there are no payments to make.

However, compound interest is added to the lifetime mortgage loan throughout your lifetime. The loan plus interest is paid back when your home is sold which will usually happen when you move into long-term care, or when you and your partner die.

You can release up to 50% of the value of your property with a lifetime mortgage, depending on your age.

An increasingly popular solution

Equity release is becoming increasingly popular for the over 55s. According to latest figures from equity release provider Responsible Equity Release, last month saw a 108% increase in the total amount of equity released compared to August 2016.

Homeowners across the country unlocked £79,650 on average from their homes in August, while those in London, with the highest house prices in the UK, released an average of £192,000.

Figures from the Equity Release Council, the trade body for the equity release sector, show that equity release lending topped £700m in the second quarter of 2017, and the growth shows no sign of slowing.

Why might you consider equity release?

Equity release can seem like a complex solution to a simple problem. That’s why you must have qualified and independent advice to help you. Most providers will insist you use a qualified financial adviser before they will transact with you. That’s to make sure you understand the lifetime nature of the transaction you making.

For many of our client’s approaching their retirement, they are planning on relaxing, travelling and spending a lot more time doing what they love most. Rising living costs, mean some worry about whether they will outlive their savings.  Some on the other hand want to release the value in your home for the next generation.

Equally, if you release equity from your home, you may not be able to rely on your property for money you need later in your retirement. For instance, if you need to pay for long-term care.

Equity release can be more expensive in comparison to an ordinary mortgage and your home may increase in value, so your decision shouldn’t be rushed. Especially as there could be early repayment charges if you change your mind.

Is there a downside to property release?

Letting you benefit from the phenomenal growth in the value of your home and still live in it might seem the financial equivalent of having your cake and eating it, but equity release does have a few downsides for homeowners.

Your estate will be worth less when you die, but with some schemes you can still ensure that your dependants will receive a percentage of the value of the property.

Equity release is a perfectly legitimate financial scheme, provided by major insurance companies.

Now, the majority of equity release plans come with a no-negative equity guarantee. This ensures that if the eventual mortgage debt exceeds the value of the home, the provider cannot chase anyone for the shortfall.

However, you should remember that receiving a cash lump sum will reduce the value of your estate and any inheritance you want to pass on. You should also bear in mind that your state benefits and tax position could also be affected.

Finding out more

You should ensure you are dealing with equity release providers who are members of the Equity Release Council. Members must provide customers with safeguards, including a guarantee that you can stay in your home for the rest of your life, or for as long as you choose. They must also provide a ‘no negative equity guarantee’, so you’ll never owe more than the value of your home.

You should also always get professional independent financial advice for complex subjects like equity release. For the advice you need call the specialist team at Continuum. 

Equity Release may require a lifetime mortgage or home reversion plan, to understand the features and risks, please ask for a personalised illustration.

The Financial Conduct Authority does not regulate tax and trust advice

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