An equity release means taking out a loan against the share of your home that you’ve already paid off, typically available to people aged 55 and over. So, for example, if you’ve paid off 50% of a £150,000 mortgage, you may be able to borrow up to £75,000.
Equity release can be a useful way to raise funds to help pay off other debts or fund retirement. Often, the interest rate on an equity release loan is lower than other loans, meaning you may be able to save money in the long term.
Remember though, that this loan is secured against your entire home. If you can’t repay the loan, you may lose your home, so think carefully before doing this.
How does equity release work?
There are two types of equity release; a lifetime mortgage and a home reversion scheme.
With a lifetime mortgage, you continue to own the property – but you don’t make any repayments. What happens instead is that the money you’ve borrowed, along with any interest that’s built up, is paid off when your property is sold upon death or when you sell the property to move into long term care.
Once the loan has been paid, any money left over will go to your estate.
A home reversion scheme is something that allows you to sell part or all of your home in exchange for a certain amount of money. You can get this in a lump sum or in smaller regular payments.
The price the company gives you is lower than market value because you still have the right to stay in your home. This means you can live there without having to make any repayments until you either die or move out.
When this happens, the house will be sold and the amount you sold your home for will go to the loan company. The money for your share will go to you or your estate.
Who qualifies for an equity release loan?
There are conditions that you have to meet before you are able to take out an equity release loan.
For a lifetime mortgage, you, or your partner if you are taking it out together, need to be at least 55 years old. For a home reversion plan you need to be at least 65.The house in question must be your main place of living, in good condition and of good value.
If you already have a mortgage or secured loan on your house, you may still be able to get an equity release loan. However, it will depend on how much the house is worth and how much you still owe on your existing mortgage or loan.
If you go down this route, you’ll have to pay off what’s left of your existing mortgages or secured loans at the same time as taking out the release loan.
Equity release is not always a good idea if you have children or other dependents living with you. In order to keep living with you, they might need to sign a document stating that they understand they don’t have the right to stay there if you are to die or move out.
Is equity release tax free?
In short yes, the money released from your home is tax-free. However, if you invest it or put it into a savings account you will still have to pay tax on any growth.
Whilst you don’t have to pay tax on the loan itself, it’s important to remember that the interest you’ll be charged is more than likely going to be higher than the interest earned on the loan.
What percentage can you get on equity release?
Generally, companies will charge around 5% on the amount of money you release and will normally let you borrow up to 50% of your property value. However according to equity release loan company Key Retirement, the average loan is around 35%.
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