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Home equity release explained

Home equity release explained
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The term equity release refers to financial products that let people, usually over a certain age, free up some of the cash invested in their property.

If you need to top up your pension or would rather use the money tied up in your home for other things, releasing some of the equity can be a good way to free up some cash. Depending on the policy, you can receive the money in instalments or as a lump sum.

Types of equity release schemes

There are two main types of equity release schemes: lifetime mortgages and home reversion schemes.

Lifetime mortgages

A lifetime mortgage allows you to borrow a proportion of your home’s value. It is a long-term loan that is secured on your property and is paid off when you die, or sell your home. As you don’t make any repayments during your lifetime, the amount owed soon adds up with interest. You should only pay interest on the amount you’ve withdrawn, it’s better to take out money in instalments where possible to avoid paying interest on money you don’t need.

Unlike regular mortgages, where you pay interest on a decreasing amount, a lifetime mortgage sees interest being added to an increasing debt so it can work out expensive. However, regulations ensure you won’t have to pay back more than your home’s worth. Lifetime mortgages are usually offered to those over the age of 55 or 60, but bear in mind that the earlier you take out a lifetime mortgage, the more you’ll end up owing in the end.

 

Home equity release explained

Home reversion schemes

A home reversion scheme involves you selling a percentage of your property to the provider. You will still be responsible for maintaining and insuring your home, despite the fact you’ll now only own a percentage of it. You still have the right to live there for as long as you like, but when you die or the property is sold, the provider is entitled to their percentage of its worth. For example, if you sold 25% of your property, the provider is entitled to 25% of the price it is later sold for. When selling part of your property to a provider you won’t receive the full market value. Most companies will offer between 20% and 60% of its worth. The older you are when you take out the scheme, the higher percentage you’re likely to receive. Home reversion schemes are usually only available to people aged 65 or older.

Cons

Equity release can be a great way to free up some money without the hassle of moving house. However, it is expensive in the long run. Interest on lifetime mortgages can build up very quickly; also home reversion schemes are unlikely to offer you the full market value. You will also have to pay arrangement fees, which can be quite high, obviously there will be less money in the pot to leave to your descendants when you die. It’s also a good idea to be careful how much you borrow on these schemes, ensuring you have enough money to cover your retirement and the potential costs of going into a nursing home at some point in the future.

Alternatives

If you need to find some extra cash but aren’t convinced that equity release would be the right choice for you, there are other options that you can consider. For smaller amounts where your income will cover the repayments, an unsecured personal loan may be the right way to go. Lenders will take into account the amount being borrowed as well as your expected income when making a decision. If you are sure you want to make some money from your home, downsizing might be the perfect solution. This means selling your home and using the money to buy a less expensive property to live in. The money you have leftover, after you’ve paid agent fees, stamp duty and removal costs, will be yours to do whatever you like with.

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About Maria Brett

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About Maria Brett

Maria is a freelance writer with over 10 years' experience producing content for a variety of publications and websites. When not working or looking after her two gorgeous sons, she can usually be found playing flugelhorn in a brass band, helping out at her local hospital radio station, shouting at the television while watching Formula 1, at the cinema or plonked on the couch with a cold glass of wine.

Website: Maria Brett

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