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But, what’s equity release exactly?
Equity release refers to your property’s items/parts that let you access your money tied up in your house. However, you can only gain access once you’re 55 years or older. You can get the capital value of objects in your home as a lump sum or an income based on the house’s value. You’ll just need to repay that money you accessed at a later stage.
There are two kinds:
The first type of equity release1 is a lifetime mortgage. This type lets you take out a mortgage on your home if it’s your primary residence. However, you will remain the owner. You’ll have the option to ringfence part of your property for your family to inherit.
You can also make repayments or let the interest increase. Better yet, if there’s any loan amount or any accrued interest, it’ll be paid back when you pass away or need long-term medical care.
The second type is a home reversion, which means you sell some of your property or your whole property. You can sell it to someone like a home reversion provider, and they’ll pay you a lump sum for it, but they can also pay you in 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 let go of some of the money tied up to their property. In this way, there’s no need for a retired person to seek a new home after retirement.
The number of funds 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 according to other specifications and providers. You’ll need to look at all of them to see which one works best for you.
Here are some perks of taking out an lifetime mortgage equity release plan:
- You don’t need pay off your mortgage to take one out. If you have enough equity locked up in your property, the Lifetime Mortgage pay-out can be used pay the outstanding loan on your first mortgage.
- You still have full ownership of your property.
- You don’t have to give proof of affordability. It’s not conditional on your salary.
- 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 loan amount.
- If it’s a possibility for you, you can repay the interest monthly, and prevent your loan increase to increase.
However, it’s not the same with all equity release plans and with all equity release providers. It’s important for you to consult a professional financial adviser to discuss it with you. You have to know everything about it before you take out a plan, just to be safe.
What Interest Rate Do I Need to Pay on Equity Release?
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 your provider.
Do I Need to Pay Tax on Equity Release?
As we’ve mentioned before, equity release is releasing tax-free cash from your property or house. 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 that to your total costs.
What does this mean for you?
Depending on how you work with the released equity money and how you invest it, you may be charged some tax. But releasing your funds won’t require you to pay tax.
Say you gift the equity release to someone in your family. You might have to pay Inheritance Tax. Therefore, consider other tax implications that may happen in the future before you do anything with your equity release cash.
Essential Things You Should Consider
Your expert equity release adviser should explain these things to you:
- Getting 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. Make sure you’ll get protections such as the no negative equity guarantee, meaning you’ll never owe more than what your home is valued at.
- 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 your provider puts a quote together for you. Find out more from your equity release provider to ensure your peace of mind.