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But, what is equity release exactly?
Equity release refers to the value tied up in your home. This value is known as equity and will allow you to access a loan. However, you can only gain this access once you’re 55 years or older. You can get this cash as a lump sum or in the form of regular installments. You’ll only have to repay that money at a later stage.
There are two kinds of equity release schemes:
The first type of equity release1 is a lifetime mortgage. This type can only be taken out if the property is your primary residence. However, you’ll remain the owner. You’ll have the option to ring-fence part of your property for your family to inherit.
And, here’s another choice you need to make:
You can also make repayments or let the interest build-up over time. Better yet, if there’s any loan amount or any accrued interest, it’ll be paid back when you pass away or move into a long-term medical care facility.
The second type is a home reversion scheme, which allows you loans the value of some of your property or your whole property. This can be arranged with a home reversion provider, and they’ll pay you a lump sum or regular payments. It’s your choice.
What’s an Equity Release Plan?
An equity release plan offers homeowners2 who are of retirement age (55 years and older in the UK) a chance to access some of the money tied up in their property. In this way, there’s no need for a retired person to look for a new home after retirement since you’ll be allowed to live in the home, rent-free.
So, here’s the deal:
The amount that a homeowner can release is determined based on the value of the home (before taking out a plan, a professional will be sent to your home to evaluate it.) There are so many different plans out there, each tailored to various needs and specifications. You’ll need to look at all of them to see which one works best for you.
Here are some perks of taking out a lifetime mortgage equity release plan:
- You don’t need pay off your mortgage to release equity. If you have enough equity locked up in your property, the lifetime mortgage pay-out can be used pay the outstanding mortgage.
- You still have full ownership of your property.
- You don’t need proof of affordability. Approval is not based on income.
- Your age and the property’s value determines the loan amount.
- The older you are, the more you can borrow. If you have a medical condition you may be able to get an enhanced payment.
- Interest is charged on the loan amount – which you can repay or add to the capital loan amount.
- If it’s a possibility for you, you can repay the interest monthly, and keep your overall balance low.
However, it’s not the same with all equity release plans and all equity release providers. It’s important for you to consult a professional financial adviser to discuss it with you. It’s imperative to know everything you can about equity release before you take out a plan.
Equity Release Interest Rates?
We’ve covered the usual costs of equity release. Be aware of how much interest you’ll have to pay on a lifetime mortgage, which is the equity release plan most people choose. Annual interest rates can be as little as 2.37% fixed for life, depending on the provider.
Do I Need to Pay Tax on Equity Release?
As we’ve mentioned before, equity release is generally tax-free. It’s classified as a loan, not a type of income. So, no matter which product you choose, it’s tax-free. So, you won’t have to add Tax costs to the list of equity release costs.
What does this mean for you?
Depending on what you do with the released equity money and how you invest it, you may be charged some tax. But releasing your funds alone won’t create an obligation to pay Tax.
Say you gift the equity release funds to someone in your family. You might have to pay Inheritance Tax. Therefore, consider all tax implications before you release equity from your home.
Essential Things You Should Consider
Your expert equity release adviser should explain these things to you:
- It’s mandatory to get advice before you release tax-free cash from your property – read everything there is to know before you make a decision. I.e. make sure it’s right for you.
- Lifetime mortgages are loans secured against your property. Your estate value will be less, and it may affect your property entitlement to certain means-tested benefits.
- Equity Release Council standards need to be met by all providers. Make sure you’ll get the necessary protections such as the no-negative-equity guarantee, meaning you’ll never owe more than what your home is worth.
- Consider all the costs involved before deciding on an equity release plan.
Over the last few years, the interest rates on equity release have been generally higher than standard mortgage interest rates. Now that equity release rates have dropped it’s a different calculation. Some are as low as 2.25%, and that could be the agreed value for the life of your financial obligation.
It all depends on the provider you choose. There’s the application fee, set-up costs, legal costs. This can be anything from £0 to £995. You can pay that using your equity release cash or add it to your loan total.
Generally, you’re allowed to borrow up to 60% of your property value, depending on which provider you have. The amount you can borrow typically increases as you age. Some providers might offer a more significant amount of money to you if you have medical conditions or illnesses. If you’re older with a medical condition, you could ask a provider to give you a bigger loan than say a 55-year-old in good health.
It’s not advisable to borrow everything you need in one shot. Why? Because the more you borrow, the more you’ll pay. So, borrow the smallest amount you need now. And ask your financial adviser and solicitor to talk you through the contract. That way, you’ll be assured that the plan is the best for your goals and circumstances.
Yes, it can be a brilliant financial decision – if you’re looking to get tax-free money without monthly repayments nagging on you. However, it might not be the best choice if you want to give your heirs a significant inheritance to your family. Equity release decreases your estate.
All the factors mentioned above will be considered when a provider puts together a quote for you. Find out more from your equity release provider to ensure they’re the right one for you.