By Sarah Macklin 
If you’re thinking about releasing money from your home, equity release could be just the thing for you. But as with any financial decision, it’s important to do your research thoroughly and understand what the process entails. Equity release can be risky, so do speak to a professional financial advisor before making any decisions.
The guide below can provide some basic information around how equity release works, and how to do it.
How does equity release work?
Equity is the cash you’d walk away with if you sold your home. Essentially, it’s the amount you’d be paid if you take the value of your home and subtract the remaining mortgage amount. If you’ve owned your home for a long time or nearly paid off your mortgage, it could be a substantial amount of money.
Equity release, therefore, involves letting out some of the equity in your home and turning it into either a tax-free lump sum or a number of smaller payments that can be paid to you over time.
How to release equity
There are two main ways you can release equity from your property – lifetime mortgage and home reversion.
Lifetime mortgage
A lifetime mortgage allows you to take money out against your home, even when you haven’t finished paying off your mortgage. You must be older than 55 to qualify for this type of mortgage, but it allows you to release a large cash sum that you can use as you wish.
The mortgage isn’t paid off until your sell your home, you pass away or you move into a care home, which is why it’s a popular method of equity release for many people. When any of these things happen, the interest can be paid off to the bank in one lump sum.
You must be careful when choosing this method of equity release, however, as the interest rates can be very high. The interest can creep up over time and sometimes, the amount you owe in interest is more than the sale value of the house. In this case, you may not be able to afford to pay back the interest to the bank.
Example:
The property has a sale value of £200,000. When you reach the age of 55, you decide that you wish to release some equity from the property at a value of £10,000, and the interest rate on this amount is 7%. With an interest rate this high, the interest you owe could double in about 10 years. So, when you reach 65, you could owe £20,000 and at 75, £40,000 etc.
Should your interest reach £40,000, when you come to sell your property for £200,000, £40k would go straight to the bank to pay off the interest and the remaining can be spread between your family or inheritors or used towards your next property.
Because the interest can go up so fast, it’s important that you really consider this method before releasing equity in this way.
Home reversion
Home reversion is only available to those over 65 and is very different to a lifetime mortgage. Rather than taking the equity from your home, you’re essentially selling part or all of your home to a home reversion provider. The provider then co-owns your home and allows you to continue living there rent/mortgage free. However, you won’t receive the full market value for your home. The provider could give you anywhere between 20 and 60% of its value as one lump sum or as smaller regular payments.
While you still live in the property, the bills and other services, like home insurance, will still need to be paid by you, so do keep this in mind.
When the property is sold after you’ve passed away, the proceeds are split between you/your next of kin and the provider or lender, again resulting in a reduced inheritance for any family members.
It’s worth noting that both the lifetime mortgage and home reversion can affect the benefits you receive, if you receive any. The benefits could be reduced or stopped entirely, including:
● Income support
● Universal credit
● Pension credit
● Jobseeker’s allowance
● Council tax support
Can you release equity if you have a mortgage?
Yes, you can release equity even if you’re still paying off your mortgage on the property you wish to take money out of.
Final Thoughts
While both equity release options sound great, you can end up owing a high amount of interest or selling your home for a significantly reduced price, and therefore leaving a reduced inheritance to family members.
This is why it’s so important to speak to a financial adviser and get all the information you can before agreeing to equity release. There are various lifetime mortgages and multiple reversion providers to choose from, and so an advisor may also be able to help you choose the best one and ensure you use an accredited provider.
