Equity Release Explained
A Guide for Residents on the Aging Process
What is equity release? Equity release is a financial product that allows you to unlock the value of your property by taking out a loan against it. It can be used as an alternative to selling your home when you are retired and wish to move into more affordable accommodation or if you have run out of other sources of income, such as pension savings. This type of finance may also be useful for those with mortgages on their properties who want additional funds without having to sell up.
There are two main types: lifetime mortgage and deferred payment plan. A lifetime mortgage enables homeowners aged 55 or over, who own their homes outright, to borrow money from a provider secured against the property they live in (and any other assets), without needing ongoing income. The loan may be repaid in full at any time, or a monthly repayment plan can be set up to repay the debt over an agreed term – usually between five and 15 years.
It is important that people considering this type of finance are aware there will normally be interest charged on the amount borrowed and charges made by lenders for arranging borrowing which needs to come off their overall borrowing limit. Typically borrowers need a minimum 25% equity in their home before they can consider taking out equity release loans (the part you own outright). Any money taken out as part of the scheme must also go towards services such as care fees if needed later down the line so it’s not always free spending money that could potentially run if you become ill or infirm.
Deferred payment plan equity release schemes are designed for homeowners aged 55 or over who own their home outright and have a small mortgage (typically £50,000-£200,000) on the property. These schemes allow you to borrow up to 80% of your home’s value at an interest rate set by the lender when it is taken out – typically between three per cent and five per cent above base rates. You then repay this amount from anywhere between 25 years up until your death or another event such as moving into long term care arrangements. The money can be used however you like but sometimes lenders will attach conditions around how they want any funds repaid giving them priority in certain circumstances before other creditors if the borrower should die for example.