What is equity release?
If you’re over 55, equity release is a way to free up some tax-free cash from your home without having to sell or leave your property. It allows you to use the value tied up in your home to enjoy some financial freedom. The tax-free cash can be taken as a lump sum or a drawdown option.
The two main types of equity release are Lifetime Mortgage and Home Reversion.
Lifetime mortgages are usually available to those aged 55 or over and the cash raised from equity release is tax free. Under a lifetime mortgage, you still own your home and will continue to do so.
A lump sum lifetime mortgage allows you to borrow a set amount of money and use your property as security. You do not need to pay back the loan and can choose to let the interest ‘roll up’ over time. This means the interest is added to your original loan and your debt will increase over time. Some lifetime mortgages will now allow you to pay some or all of the interest. Other plans permit penalty free partial repayments up to usually 10% annually which can include both interest and capital. When you die or go into long term care the loan needs to be repaid including the interest. This is usually done through the sale of the property. Any proceeds left after repaying the lifetime mortgage provider is then passed onto your estate and distributed to your beneficiaries.
A drawdown lifetime mortgage allows you to have a reserve/drawdown amount, to use in stages as and when you want, subject to minimum amounts. Interest accrues on amounts as they are drawn down, this can heavily reduce the overall cost of borrowing.
A Home Reversion Plan involves selling all or part of your home. In return you get a lump sum along with a lifelong tenancy to remain in your home. There is no interest rate as the home reversion company would own (or part own) your property. You will be giving up full ownership of your property and any future increase in value of the percentage of your home covered by the home reversion plan. Home reversion plans are not very common these days as the benefits of lifetime mortgages outweigh any benefits these products provide.
Learn more from equity release advisers
With a range of equity release schemes on the market, it is important that you take advice from specialist equity release advisers who can help you decide which plan is right for you.
All advisers and providers for equity release schemes are regulated by the FCA (Financial Conduct Authority), they are a government watchdog that regulates the financial services industry. You can check your adviser’s details via the Financial Services Register at https://register.fca.org.uk
Receiving advice is a mandatory part of the process but a good adviser will have experience and knowledge of all the available schemes. They will also be able to consider whether a better alternative might be available for your funding. They will give advice on the costs and fees of entering into this type of transaction.
It may be the case that you are eligible for an enhanced lifetime mortgage scheme, which takes into account your health and lifestyle and may see you able to receive a lower rate of interest or release more cash from your home. Before proceeding, and when appropriate, your adviser will encourage you to discuss your intentions with your family and those close to you. This ensures there are no surprises at a later date.
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Paul Leonard Financial Associates is a member of the Equity Release Council. All the members have agreed to abide by the Council rules and have signed up to the Statement of Principles and will only recommend products that are safe, reliable and have built in guarantees.