The equity release market is expected to exceed £5 billion in 2020 as more homeowners become aware of this option to raise funds. There are many reasons homeowners may consider this option — for instance, to raise funds for home improvements or to clear debts. However, many people are still uncertain about how equity release works, so they cannot make an informed decision about whether it is right for them.
In this blog, our team of property experts at House Buyer Bureau will highlight some of the benefits this type of financing can provide. We’ll also take a look at some potential implications of equity release to help you decide if it’s the best choice for you.
How Does Equity Release Work?
Equity release allows homeowners to boost their finances by taking out a loan secured on their home. It’s only available to people aged over 55 and you must repay the loan when the property sells.
There are two types of equity release.
In a home reversion scheme, an equity release company buys a fixed share of your property from you. The company only makes money on its share when the property sells. You can choose how much of your property to sell. If you sell the whole property, the company will only get its hands on your home when you decide to sell or if you die. Until that time, you can continue to live in the property as you did before you sold it.
Lifetime mortgages tend to be a more popular choice. The loan has a fixed interest rate and there are no regular repayments to make. Your debt is “rolled up”, which means interest still accrues each month, but this is added to the final amount due when the time comes for you to repay the loan after you sell the property.
What Are the Benefits of Equity Release?
- Home reversion schemes allow a degree of flexibility and control as the homeowner can choose exactly how many “shares” to sell. Similarly, you can take out a lifetime mortgage for as little as £10,000 and apply for more as needed.
- Lifetime mortgages protect borrowers against “negative equity”. This occurs when a property’s value is less than the mortgage secured on it. Some lenders will allow the homeowner to pay off the interest on a lifetime mortgage gradually, leaving more value in the property when it sells or if you die.
- Equity release allows homeowners to access a lump sum of tax-free cash when they need it.
- Homeowners do not have to sell their house and move to raise the funds they need.
- Equity release allows homeowners to control their debt without losing ownership of their home.
Things to Consider
- Equity release companies offering home reversion schemes will offer a price well below the shares actual value. This is because they will not make any money until the property sells, or the resident/owner dies. Some schemes of this type will expect more than 70% of your home’s value for a 20% advance, making it an expensive way to borrow money!
- Unless a lender permits gradual repayment of the interest, a lifetime mortgage can result in very little value left in the home at the time of sale or if the homeowner dies. This could make purchasing a new home difficult and would mean there is little money to pass on to loved ones in the event of your death.
- Even if you only sell a small share of your property, the responsibility for maintaining the building lies with you. This obligation can be time-consuming and costly, especially as you grow older.
- If you enter either type of equity release scheme, you could forfeit your right to certain government benefits.
- If your property is leasehold and has less than 75 years to run or if the property’s value is less than £70,000, you will not be eligible for equity release.
- Some lenders charge eye-watering early repayment fees — 25% is not unheard of. This makes switching to a more affordable provider almost impossible.
- Interest rates can be high, resulting in a repayment amount that can be as much as double the amount borrowed.
Alternatives to Equity Release
Equity release will allow an eligible homeowner to raise cash relatively quickly. However, it’s an expensive way of borrowing money. Selling your home to a house buying service such as House Buyer Bureau provides quick access to a lump sum, without the requirement to pay back high-interest rates over the years to come. A cash offer is less than the market value of a property, but when compared to the cost involved in equity release schemes or selling your home on the open market, it’s a pretty good deal. There are no estate agency fees to pay, no months of covering the mortgage while you wait for a buyer and no debt to repay.