How much equity can I release?
What is equity release?
When you purchase a mortgaged property, equity is the name given to the difference between the value of your home and the total of the mortgage and loans secured against it.
Equity release is a method of releasing the equity tied up in your home without a mortgage or having to move. The money can be released in a lump sum, in smaller amounts, or a combination of both.
However, because a typical equity release plan will be based on lifetime mortgages and pension-age homeowners, you must usually be a minimum of 55 years old before you can apply to release equity from your home (some lenders only consider applicants over 60).
What are my equity release options?
There are two main ways to release equity from your home: a lifetime mortgage and a home reversion plan. Both are suitable for homeowners over the age of 55 but there are some differences you should be aware of:
Lifetime mortgage
A lifetime mortgage is the most popular method of equity release. It is similar to a standard mortgage in that it’s a loan secured against your home but the key difference is that the money doesn’t need to be repaid until you die or move into long-term care.
Because they come with a no negative equity guarantee, you will also never owe more than the total value of your home when you take out a lifetime mortgage.
Home reversion plan
A home reversion plan is a less popular method of equity release because it involves you selling a portion (or all) of your home in exchange for a tax-free lump sum or a series of regular payments whilst you continue to live there.
When you die or move into long-term care, your home will be sold with a share of the proceeds going to the reversion company.
However, because the reversion company won’t pay the market value, you are at risk of losing a significant portion of your estate if you die or have to enter long-term care soon after taking out a home reversion plan.
How much equity can I release from my home?
How much equity release you can get from your home through an equity release loan depends on a number of factors and there are guidelines in place to ensure you don’t release more than you should.
For example, people tend to release between a minimum of 20% and a maximum percentage of 60% of their property’s value up to a maximum amount of £100,000.
To get a better idea of the maximum equity release you are likely to receive from your home, an equity release calculator can provide you with an instant quote based on the information you provide.
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What factors impact how much equity I can release?
How much equity you can release depends on a number of factors, including:
Your property
When you apply to release equity from your home, your lender will usually arrange for your property to be valued. This is to reassure them that they are lending against something that will either maintain or increase in value as time goes on.
As well as the property value, any debt secured against the property (such as an outstanding mortgage) and the overall condition of your home, (such as the age of the building, materials used, and potential for future growth) will be analysed by equity release providers at this stage.
Some lenders have also been known to offer higher loans to homeowners living in houses compared to flats as well as single applications compared to joint applications but various factors will be considered before a decision is made.
Your health
As well as the condition of your property, your physical health will also be taken into account when you apply to release equity from your home.
The general rule is that the closer you are to 55, the less equity you may be able to release. This is because it will take longer for the lender to make a return on their investment.
For example, if a 55-year-old and an 80-year-old made separate applications to release equity on properties of the exact same value, the 80-year-old would be able to release more equity because the equity release provider is likely to receive the money sooner.
Is equity release right for me?
Like all financial products, equity release isn’t suitable for everyone and there may be a better option out there that better suits your current financial situation.
Before you apply to release equity from home your home, you must ensure you have done your research and fit the eligibility criteria for the type of equity release you wish to take out. Some points to consider before you make a decision include:
- Your current savings and retirement plans
- How happy you are living in your current property
- Your family’s inheritance
- Your current and future financial circumstances
Whilst equity release can be the perfect solution to free up some extra cash as you approach retirement, some alternatives to equity release include:
- Downsizing to a smaller home
- Renting out a room in your home
- Continue working past retirement age
- Taking out a retirement interest-only mortgage
- Relying on your existing savings
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Conclusion
Equity release can be a valuable financial tool for homeowners looking to access cash tied up in their property, but it is not a one-size-fits-all solution.
Before deciding to release equity, it is crucial to thoroughly research the options available and consider your individual circumstances, including your age, health, property value, and future financial plans.
Consulting with a financial advisor can also provide helpful guidance in determining whether equity release is the right choice for you.
Furthermore, it is essential to explore alternative options, such as downsizing, renting out a room, or relying on your existing savings, to ensure you make the most informed decision for your unique situation.
Frequently asked questions.
Need more info? Here are a few of our most frequently asked questions on this topic. If you don’t see the answer you’re looking for here, give us a ring – we’d love to help.
Interest rates for equity release products can be either fixed or variable. Fixed rates remain the same throughout the loan term, whereas variable rates can change over time. The specific interest rate offered will depend on the provider and your individual circumstances. It’s essential to compare rates from different providers to find the most suitable option for you.
Repayment options for equity release products vary. With a lifetime mortgage, you typically don’t need to make monthly repayments, as the interest is rolled up and added to the loan amount. The loan and interest are repaid when you die or move into long-term care. Some lifetime mortgages allow you to make ad-hoc repayments or pay the interest monthly, reducing the overall debt.
Releasing equity from your home can affect your eligibility for means-tested benefits, such as pension credit or council tax support. When you receive a lump sum or additional income from equity release, it may cause your total capital or income to exceed the thresholds for these benefits. Before proceeding with equity release, consult a financial advisor to understand how it could impact your benefits and pensions.
Equity release comes with several potential risks and downsides, including:
- Reducing your estate’s value: Equity release reduces the amount you can leave to your heirs, as the loan and interest must be repaid when your property is sold.
- Early repayment charges: Some equity release plans have penalties for early repayment, which can be costly if you decide to pay off the loan sooner than expected.
- Impact on benefits and pensions: As mentioned earlier, equity release can affect your eligibility for means-tested benefits and pensions
- Long-term financial implications: Equity release can be an expensive way to borrow money, especially if the interest accumulates over a long period. This could significantly impact your financial situation in the long run.
The process for applying for equity release typically involves the following steps:
a. Research and seek advice: Understand the different equity release options available, and consult an independent financial advisor to discuss your specific circumstances and needs.
b. Choose a provider: Compare offers from various providers and select the one that best meets your requirements.
c. Property valuation: The provider will arrange for your property to be valued by an independent surveyor. This valuation will determine the amount of equity you can release.
d. Application submission: Submit the required documents and complete the application form provided by the chosen equity release provider.
e. Offer and legal work: Once the provider approves your application, they will issue a formal offer. Your solicitor will review the terms and conditions, and both parties will sign the necessary legal documents.
f. Fund release: After all legal work is completed, the provider will release the funds, either as a lump sum or in instalments, depending on the agreed-upon terms.
The entire process can take anywhere from a few weeks to a few months, depending on the complexity of the application and the provider’s response times.
To find a reputable equity release provider, consider the following:
- Research: Look for providers who are members of the Equity Release Council, which ensures they adhere to a strict code of conduct and high industry standards.
- Reviews and testimonials: Read online reviews and seek recommendations from friends or family who have used equity release providers.
- Comparison websites: Use comparison websites to compare different providers and their offers, but remember to verify the information directly with the providers.
To get independent advice, consult a qualified financial advisor who specialises in equity release. Ensure the advisor is regulated by the Financial Conduct Authority (FCA) and has a comprehensive understanding of the equity release market. An independent advisor can help you assess your financial situation, understand the risks and benefits, and find the most suitable equity release product for your needs.