What Is an Equity Release?
Loans are complicated things in any sense. And, if you are a homeowner, you may be considering taking out a larger loan than most in the form of an equity release. But what does it mean to release equity from your property? What do you really stand to gain, and what do you also stand to lose?
In this guide, we will take you over the essential points about equity release in the UK – including who it is available to, what you can expect from interest rates, and whether or not it is an option you should consider.
What Exactly Is Equity Release?
Equity release is an easy way for homeowners to get cash for the value of their home. The money is tax-free, however, it will need paying back eventually – as you’d expect!
Usually, the money derived from equity release gets paid back after the sale of the property has taken place. Essentially, you’re borrowing money on what will be the eventual property value, returning your released stake when your house generates enough money to cover the gap.
This works a little like invoice financing (if you run a business). You’ll eventually get the money to pay for your loan, and it’s secured in place.
Alternatively, if you pass away or become unable to handle your financial affairs, the responsibility to repay your equity loan falls to your next of kin or executor of your estate. They will then need to repay the equity release, either by refinancing the property (if they wish to keep it), their own money, or by selling the property.
Keep in mind, too, that interest rates will affect how much you can release and what you’ll pay back. In 2022, for example, the lowest equity release rate reported was 6.52%. The highest interest rate was at 9.45% – bearing in mind that both fix in place for life.
How Does Equity Release Work?
While equity release is tax-free, it is also only available for homeowners aged 55 and over at the time of writing. This may change in time to come, so always keep track of rates and rules set by the government.
The amount of cash that you receive through equity release depends entirely on the value of your home, and on how old you are.
Once the amount has been decided, you can choose to either take the money as one lump sum, or to receive it in smaller instalments.
While you can spend the money how you choose, it is important to note that you have to pay back your mortgage in full as part of the equity release. This is the case whether you have a repayment mortgage, or an interest-only mortgage.
Most people choose equity release as a means of paying off loans, helping those around them with financial issues, or, at a certain age, as a means of getting a lump sum to enjoy retirement, travel, etc.
Think carefully about whether or not you have the means to fulfil an equity release agreement, and where possible, reach out to a financial advisor who can offer more insight.
What Are the Pros and Cons of Equity Release?
As you can imagine, there are both pros and cons to equity release. At a certain age, equity release can be a good idea. If you are approaching retirement age, then having access to that kind of money can be a great way of enjoying your time out of work, or investing in your family’s future.
Bear in mind, of course, that the loan must be paid off after your death, or if you no longer have access to decision-making. This is something you’ll need to make your estate aware of ahead of agreeing to any kind of equity release.
The loan will be repaid by the sale of your house. Thankfully, the interest cannot make the loan go over the value of your home. So, once it is sold, the loan will be paid off.
However, that does mean that your next of kin will either need to sell your home, or repay it by their own means, if they wish to keep the home.
It also means that, the longer you hold this type of loan, the more interest will add to it. Therefore, by the time the sale of the house comes around, the entire value of the home may have to go into paying back the loan.
As such, equity release may be riskier for younger homeowners – meaning it’s always good to look at other financing options if you’re keen to raise capital.
Again, it is always best to seek financial advice to ensure that you get the best deal possible if equity release is the best option for you.
A financial advisor can take a closer look at your situation and may be able to help you find more suitable routes towards generating credit. For example, it may be easier to take out an asset-secured loan, or a long-term borrowing arrangement with a bank or private lender.
A Conclusion on Equity Release –
Generally speaking, equity release is not the easiest of financing choices to consider. While many of us tend to think of it as a viable option, it is important to remember that it entails holding onto a high-interest loan, and one which will eventually involve the sale of your property. You’re effectively tied to paying back your loan – plus interest – once your property eventually sells.
However, there are plenty of cases where equity release can be viable in helping you raise a large lump sum. If you’re close to retirement, for example, you may wish to release equity to pay for other investments, or to provide for your family. Just remember that when you pass away, your estate will need to foot the bill with the home you leave behind – with interest added on top.
Regardless of your situation and status, never rush into equity release! It’s a great way to generate funds, but there may be less expensive routes available to you right now. Ask for advice and take your time.