You’re staring at your kitchen walls and décor and wondering how on earth you’ll come up with enough funds to give it that modern yet classic look you’ve always been dreaming about.
After more than twenty consultations and hours doing research, you realise that you’ve been sitting on a gold mine – your home is eligible for equity release, and you can unlock equity from it and get down with the renovations.
However, if you don’t know where to start, you’re probably still in worrying and confused since you have no idea what equity release is.
Lucky for you here’s a comprehensive guide on what equity release is, its benefits and pitfalls, and the things you need to consider when taking out a plan.
Be sure also to calculate how much equity you can release with the equity release calculator.
Understanding the workings of equity release
It’s a way to unlock the value of your estate and turn it into a cash lump sum. You can do this through several policies which allow you to access – or ‘release’ – the equity (cash) tied up in your residence, if you’re 55+.
As a rule, you can take the capital you unlock in one lump sum, in several smaller amounts (drawdowns) on which you’ll pay interest, or as a combination of both.
There are two primary forms of equity release schemes, namely:
#01. The lifetime mortgage
The lifetime mortgage plan allows you to borrow some of your home’s value at a fixed or capped interest rate, and you don’t make repayments.
However, with changes occurring left, right and centre, there’s the ‘drawdown’ option now, which allows you to pay back the interest so you can reduce the overall cost.
#02. The home reversion plan
Unlike the lifetime mortgage plan, the home reversion lender pays you a tax-free lump sum for a portion of your estate at below market value.
You can then live in your residence (rent-free) until you die. When the lender puts up the estate for sale, the proceeds are split based on the percentage they own and what you own. So if your estate’s value rises significantly, does the amount it gets.
The benefits of equity release
There are reasons why the equity release market is growing at a surprising rate. Some of these reasons include:
- You get tax-free cash and get to spend how you wish
- You have the right to reside in your home –you don’t have to downsize or go through the hassle of relocating
- You don’t have to make any monthly reimbursements unless you want to –you repay the loan when you pass on or go into residential care
- You can access the money when you require it – if you want, you can take out a lump sum or drawdowns over time, to provide a regular income, up to the limit set by your lender
- You’ll never owe more than the value of the estate – thanks to the FCA and ERC, and the invention of the ‘no negative equity guarantee,’ your family won’t be subjected to pay any extra amount on your death
The pitfalls of equity release
Like any other financial product, equity release schemes aren’t perfect. They have some cons like:
- You might not leave your home as an inheritance – when you pass on or move into long-term care, your lender will put up your home up for sale. If there’s an amount left after the sale proceeds, the extra cash goes to your estate to leave as an inheritance. While you can ring-fence some of the value of your estate to leave as a legacy, this will lower the amount of equity you can unlock
- Your benefits may be affected – unlocking the equity from your residence will increase your pension or savings and that in turn may have an effect on your entitlement to state benefits
- There may be charges to pay – equity release requires you to reimburse several costs like the solicitor’s fee, property valuation fees, among others.
Taking out an equity release plan is a life-changing decision, and it mightn’t be the best option for you. You need to consider all your choices carefully and consult a professional adviser.