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How does equity release work?
What is equity release and how does it work? Find out along with the information you need to decide if it will work for you.
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UK homeowners over the age of 55 are asking “How does equity release work?” With a new study suggesting that the cost of a comfortable retirement has risen to £43,000 per year, some in the over-55 age group may decide that accessing the wealth tied up in their property could be the best solution. If you are thinking of taking advantage of your property wealth, you won’t be alone, with £8.8bn having been released from UK properties over the past two years.
So what is equity release and what could equity release mean for you? This article explains all that and sets out to answer all the other important questions you may want to ask.
What is equity release?
Equity release is a means by which homeowners aged 55 and over can access the equity in their homes as tax-free cash while retaining ownership of their property. They are free to use the money they release in a wide variety of ways, whether it’s for a holiday, home improvements, a gift or an early inheritance, to name a few.
How does equity release work?
Equity release works similarly to a traditional mortgage, with the key difference being that making monthly payments is optional. Instead, the equity release loan plus interest is due for full repayment only after the last homeowner dies or enters long-term care. Repayment is normally achieved through the sale of your home. However, the executors of your estate can also use other means to repay the loan, if such options are available to them.
Making payments is a guaranteed right under product standards introduced by the Equity Release Council. There are different ways you can do so, whether that be clearing some or all the interest, making capital repayments (typically penalty-free up to 10% of the loan value per year), or choosing to make none and letting the interest roll-up.
The amount of tax-free cash you can release is dependent on two main factors: your age and the value of your home. In general, the older you are and the more your home is worth, the more equity will be available to you.
There are two types of equity release products, – a lifetime mortgage and a home reversion plan – and each works a little differently:
1. Lifetime mortgage
A lifetime mortgage, the most popular form of equity release, allows you to borrow against the value of your home while retaining 100 per cent home ownership for your lifetime.
You can either release equity from your home in a lump sum or take it out in stages up to a limit agreed at the outset with your equity release product provider.
There are no required monthly repayments but you will have the option to make payments. If you do not pay anything, the interest that is added is compounded, meaning it is calculated not only on the amount borrowed but also on any interest that has built up from the start of the loan.
2. Home reversion plan
The other type of equity release product is a home reversion plan, although these now account for a very small percentage of the market. With this type of scheme, you sell part or all of your property to a plan provider and they will pay you a tax-free lump sum in return.
This lump sum won’t be for the market value of your home because the provider is giving you the right to live there rent-free for the remainder of your life. When you die, your property will be sold and some or all of its value will go to the company that sold you the reversion plan, depending on the percentage they bought.
What is the process for releasing equity?
A simple way to begin the process of equity release is to fill in the calculator below. This will give you an estimate of how much you can release and whether you are eligible.
The process of taking equity out of your property then follows these steps:
- Speak to an equity release broker such as the Telegraph Media Group’s partner Responsible Equity Release. They will be able to provide an estimate of the amount you might be able to release and confirm whether you are eligible.
- Speak to an expert adviser about your different options. They can help you to choose the best solution for you and put you in touch with a lender if needed.
- Fill out any paperwork. If you accept an offer, you will need to visit a solicitor, and it is recommended that you choose one with experience in equity release conveyancing.
- When this has been done, your solicitor will transfer the funds into your nominated account. Completion times often vary based on the complexity of your case.
Pros and cons of equity release
Equity release may not be right for everyone: there are pros and cons and it is helpful to consider both when looking into the product.
FAQs
How does equity release get repaid?
With a lifetime mortgage, your loan and any interest owed will not become repayable until you either pass away or enter long-term care. You retain complete ownership of your home and have the right to remain there for the rest of your life.
If you have taken out an equity release product jointly, the loan only has to be repaid when the last deed-holder has passed away or entered long-term care. This will usually be achieved with the sale of the home.
In many cases, you are also able to repay your loan early. However, this may result in early repayment charges.
Who is eligible for equity release?
You must be aged 55 or over if you wish to apply for equity release. If both you and your partner are on the deeds of the home, then you must both be aged at least 55. Your home must also have a minimum value of £70,000.
You can release equity from your home if you haven’t yet paid off your mortgage, but you must repay your mortgage before you complete the transaction. Many people use the proceeds from the equity that they release towards this. You can then spend the rest on a wide variety of goals.
![Infographic: top 3 reasons that users of the Telegraph Media Group equity release service released equity in 2022: mortgage repayment, early inheritance and home improvements.](/https/www.telegraph.co.uk/content/dam/infographic-4-v-4.jpg?imwidth=350)
Can I stay in my home after releasing equity from it?
Yes, equity release enables you to stay in your home and to release the money you need.
Can I release equity from any property?
The property you are releasing equity from must be your permanent main residence in the UK, which you live in for more than six months of the year. Some equity release providers may be reluctant to accept your application if there is anything unusual about your property, for example if it is of non-standard construction. An adviser from Responsible Equity Release would be best suited to find out if your home is acceptable to lenders.
Find out how much equity you could release
If you are over 55 and interested in finding out more about equity release, get in touch with Responsible Equity Release, providers of the Telegraph Media Group Equity Release Service.
As mentioned, you can use the free calculator on this page to receive an instant estimate of the amount of equity that may be available to you. You will also receive a free guide to equity release with more information about how equity release works.
Read more:
- How long does equity release take?
- How to calculate buying out your spouse's share of the house
- Mortgages for over-60s
The Telegraph Media Group Equity Release Service is provided by Responsible Equity Release, a trading style of Responsible Life Limited. Responsible Life Limited is authorised and regulated by the Financial Conduct Authority and is entered on the Financial Services Register (https://register.fca.org.uk/) under reference 610205. Only if you choose to proceed and your case completes will Responsible Life Limited charge an advice fee, currently not exceeding £1,690.
Equity release is only available to homeowners that own a property within the United Kingdom.
If you would like more information on how equity release works, simply call 0800 029 1087 to request a guide or to arrange your free consultation. Lines are open 9am–8pm Monday to Friday and 9am–5pm on Saturday.
The above article was created for Telegraph Financial Solutions, a member of Telegraph Media Group. For more information on Telegraph Financial Solutions click here.
Information correct at date of publication.