Definition
Equity release is a financial product that allows homeowners, typically of retirement age, to access cash tied up in their property. It involves either taking a lump sum or regular payments drawn from the value of their home, whilst still retaining the right to live there. The payment is typically repaid when the homeowner passes away or moves into long-term care, often via the sale of the property.
Key Takeaways
- Equity Release refers to a range of products letting you access the equity (cash) tied up in your home if you are over the age of 55. You can take the money you release as a lump sum or, in several smaller amounts or as a combination of both.
- There are two equity release options: Lifetime Mortgage and Home Reversion. The Lifetime Mortgage means you take out a mortgage secured on your property while retaining ownership. Home Reversion means you sell part or all of your home to a home reversion provider in return for a lump sum or regular payments.
- Though equity release can be beneficial, it comes with potential drawbacks and risks such as a reduction in the value of your estate, changes in your tax position, and an alteration in your eligibility for state benefits. Therefore, it’s advisable to consider other options and seek professional advice before deciding on equity release.
Importance
Equity Release is a significant concept in finance, especially for older homeowners. This is due to the fact that it allows individuals, typically over the age of 55, to access the wealth tied up in their property without having to sell it or move out.
It essentially provides a means for these homeowners to supplement their retirement income or meet any unexpected financial needs. The key advantage of this financial instrument is the opportunity it offers to leverage the value of one’s property, potentially turning an illiquid asset into a source of income.
Therefore, an individual’s understanding of equity release can greatly impact their financial planning and overall economic stability in their later years. Furthermore, the popularity and importance of equity release have grown as property values have increased, and retirement incomes have not necessarily kept pace.
Explanation
Equity release is a financial solution primarily aimed at homeowners, particularly those above the age of 55, who want to access the wealth they have tied up in their property without having to move. The central purpose of equity release is to provide a significant, tax-free cash boost that can be used for any purpose – whether to supplement retirement income, to carry out much-needed home improvements, to meet an urgent financial need or even to take a one-off holiday of a lifetime.
It essentially allows homeowners to tap into the value of their home, without the need to sell it or move out, offering them increased financial freedom in their later years. Moreover, equity release is also often used as an effective estate planning tool.
Some schemes allow you to safeguard a portion of your home’s value to leave as an inheritance, and potentially manage your estate’s tax liability more effectively. Additionally, it can be used to fund long-term care at home, preventing the need to go into a residential care home.
It’s vital to remember that while it offers immediate financial aid, high interests and compound effects can considerably reduce the residual value of the estate over time, which is why it’s always important to seek independent advice before considering equity release.
Examples of Equity Release
Selling a Portion of Your Home: One real-world example of equity release is selling a portion of your home to a company in order to release capital. For example, if a retired individual owns a large home, yet struggles with day-to-day living costs, they might opt to sell a percentage of their home to a company for a cash lump sum, whilst maintaining the right to live there until they pass away or move into long-term care. The company then takes ownership of that portion of the home, and the money can be used as needed.
Reverse Mortgages: A reverse mortgage is a type of equity release used often by seniors. Homeowners borrow money against the equity of their home, and the loan doesn’t need to be repaid until the homeowner dies, sells the house, or the homeowner’s health deteriorates to the point they must move into a nursing home. For example, a 70-year-old man who fully owns his home but has limited pension income might consider a reverse mortgage to provide additional monthly income, or a lump sum for unexpected expenses or leisure activities.
Lifetime Mortgages: A lifetime mortgage is a loan secured on the borrower’s home which provides the homeowner with a tax-free lump sum or smaller, regular payments. Unlike a conventional mortgage, the borrower does not make repayments, but instead the interest is added to the loan and the total is then repaid from the proceeds of the sale of the house when the borrower dies or goes into care. An example of this could be a 65-year-old woman who owns a fully paid-off home and chooses a lifetime mortgage to supplement her retirement income, allowing her to maintain her standard of living.
Equity Release FAQs
What is Equity Release?
Equity release is a way for homeowners 55 and over to convert a portion of their home’s value into money. It can be a useful method for boosting income in retirement, typically through a lump-sum payment, regular smaller payments, or a combination of both.
What are the types of Equity Release?
There are two major types of Equity Release: Lifetime Mortgages and Home Reversion. A Lifetime Mortgage is a loan secured against your property, while Home Reversion involves selling a portion or your entire property.
Who qualifies for Equity Release?
Equity Release products are typically available to individuals aged 55 or over, who are homeowners with a property in the UK. However, specific qualification criteria can vary between different providers.
What are the risks with Equity Release?
Equity release can be a helpful solution, but it has potential risks. These include reducing the amount you can pass on as inheritance, affecting your tax position, and affecting your ability to get certain means-tested benefits.
Can I still own my home with Equity Release?
With most types of Equity Release plans, you still retain full ownership of your home. However, in a home reversion plan, the portion of your property you have sold belongs to the provider.
Related Entrepreneurship Terms
- Home Reversion Plans
- Lifetime Mortgage
- Compound Interest
- No Negative Equity Guarantee
- Drawdown Lifetime Mortgage
