Equity Release: What It Is, How It Works + More

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Equity release allows homeowners to release cash from the value of their homes. But how does equity release work? Our guide addresses what equity release is, how it works, who is eligible for it, and the alternatives.

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What Is Equity Release?

Equity release is a process that enables homeowners to access the value (available equity) of their property and turn it into cash. The cash can be released as a lump sum, in monthly payments over a certain period (‘drawdown’), or a combination of the two.

If you’ve paid off your mortgage, the available equity in your home stands at 100%, meaning that you own your home in its entirety. But you don’t need to pay off your mortgage to be eligible for equity release. You’ll just be reimbursed for the amount of equity you have paid off.

The equity release meaning is most evident when you receive tax-free cash, and you don’t need to pay back the money until after you leave your home—the opposite of a traditional mortgage.

DID YOU KNOW? After the death of a borrower, the unpaid debt from the equity release must be repaid. The estate’s executor sells the property, and the proceeds are used to repay the debt. Any remaining money is paid to the beneficiaries of the will.

How Does Equity Release Work?

There are two ways to conduct an equity release: lifetime mortgage or home reversion.

Lifetime Mortgage

Lifetime mortgages are the most common form of equity release secured against your home, giving you access to cash without making monthly repayments—unless you want to. The total amount of the loan—plus the accumulated interest rate—is repaid after your death or after you’ve moved out of your home.

With equity release, how does it work with a lifetime mortgage? Remember that any outstanding mortgage will be repaid first, and the remaining money will be yours to clear debts or enjoy a comfortable retirement.

Many lifetime mortgages ensure that the debt you owe will never be larger than the value of your property and cannot be passed on to your beneficiaries. If there is any equity left in your home, you can include it in your inheritance.

Home Reversion

If you want to go through with an equity release in the UK, the second option is home reversion. This option allows you to sell a portion of your home to a home reversion provider for a specific amount of money. You can continue living in the property as long as you agree to maintain it and keep it insured. But you don’t need to sell the whole property. You can keep part of it for later use or make it part of an inheritance. The portion of the property you retain won’t rise in value, regardless of the market changes in property values.

How to Choose

After becoming familiarised with the two ways of how to release equity in your home, you can choose one that best fits your situation. If you’re still unsure about which option is good for you, consider the following tips to help you decide.

  • Get advice: You should consult a financial adviser specialising in equity release products. They will check your eligibility and explain which equity release is suitable for you based on your financial situation.
  • Get a valuation: Consider offers from various lenders and appoint a qualified solicitor to represent you in the negotiations. After lenders finish their valuations of your home, they will send the results to your solicitor, who can tell you if you’re getting a fair offer.

Once all of the ins and outs of the equity release is explained, if you think you’ve got a fair valuation of your home and are satisfied with the terms, you just need to decide if you want to take out all the money at once or receive regular payments.

DID YOU KNOW? The Financial Conduct Authority (FCA) regulates equity release to ensure a fair financial market for consumers. The FCA provides consumer protection, but it also encourages competition so that people have more than one financial choice.

What Is the Catch With Equity Release?

Although equity release may sound too good to be true, it does come with a set of disadvantages. You need to be aware of the following downsides before opting for this loan.

High Interest Rates

Some home reversion schemes require 70% of your home’s equity in exchange for a 20% cash advance, while lifetime mortgages can cost twice as much after 15 years. Even though getting a mortgage has never been cheaper—with interest rates at an all-time low—equity release plans don’t follow the same pattern.

Affected Benefits

Although you may know how to release equity from your home, you might not know that you’re harming your benefits by releasing equity. Exchanging your property for cash can affect such benefits as pension credit, jobseeker’s allowance, income support, universal credit, and other benefits you’re entitled to. Consult an equity release adviser who can tell you how and to what extent your benefits will be affected by the equity release.

Property Value Reduction

If you’re not 100% sure about releasing equity from your home, you should consider taking out a remortgage on your property. Taking out an equity release will reduce the estate’s value because a high-interest rate is applied to your borrowed amount. An equity release lowers the amount you leave to your beneficiaries, sometimes resulting in negative equity.

DID YOU KNOW? The Equity Release Council (ERC) is a non-profit organisation representing various equity release professionals, including lenders, financial advisers, solicitors, etc. The ERC aims to give prospective customers all the necessary information on equity release.

Who’s Eligible to Release Equity?

Not everyone is eligible for equity release. To be granted an equity release, you must fulfil the following requirements.

  • Must be a UK resident: Foreigners with property in the UK aren’t entitled to equity release, and the property needs to be the borrower’s primary residence.
  • Must be 55+: What is equity release in the UK in regards to age qualification? It’s only applicable to those aged 55 and over. Lifetime mortgages are available to anyone over 55, while home reversion schemes apply to those over 65.
  • Property valued at least £70,000: Your property must be valued at a minimum of £70,000, and you need to borrow at least £10,000. Various other factors determine the maximum borrowing amount.
  • No dependents: Having dependents living in the same household may make the equity release more complicated—they would need to sign a waiver confirming that they’re not entitled to live in the property.
  • Good credit history: Releasing equity from your home is possible with a poor credit history, but having a good credit history does increase your chances of being approved.

You must have all of the above-listed requirements to be considered eligible for an equity release, but keep in mind that some lenders may impose additional requirements.

DID YOU KNOW? Many lenders take the health and lifestyle of the prospective borrower into account. Some lifestyle choices—such as smoking and alcohol consumption—may determine the amount of money you can receive.

Key Takeaways

Equity release allows homeowners to obtain cash for the available equity in their homes.
There are two ways of getting an equity release: lifetime mortgage or home reversion.
Equity release comes with high-interest rates, reduces property value, and affects benefits.
To release equity, you must be a UK resident over 55 years old and have a property valued at least £70,000.
Alternatives to equity releases include remortgaging, downsizing, personal loans, and credit cards.

How to Release Equity From Your House

If you’re a house owner, you’re in luck—house prices in the UK have risen significantly in recent years, so your house is probably worth much more now than when you bought it.

If you decide to take out an equity release on your house, you first need to reassess your mortgage situation. The current numbers show that most people need to repay between £285,000 and £385,000 for an average mortgage in the UK. But by the time you apply for an equity release, you’ve probably paid off a good portion of the debt.

To understand how equity release works in relation to mortgages, consider the following examples.

  • £350,000 house; mortgage paid off = £350,000 equity
  • £350,000 house; outstanding mortgage of £50,000 = £300,000 equity
  • £250,000 house; outstanding mortgage of £20,000, with secured loan of £10,000 = £230,000 equity

These examples should help you further understand release equity. Keep in mind, however, that the equity release definition emphasises that lenders will not grant you a loan equal to 100% of your equity. Interest rates need to be considered, and your age and circumstances play a significant role.

DID YOU KNOW? With the Bank of England’s base rate stabilising at historically low levels, many consider tracker mortgages—which track base rates—attractive.

Before Releasing Equity

Is there anything else to mull over with the question: What is equity release and how does it work? Before going through the process, consider the following questions:

  • What is the amount you want to release?
  • Will you be able to make monthly payments towards the loan balance?
  • Are you aware of the fees for setting up the loan?
  • Do you have inheritance protection?
  • Do you understand the impact on your property’s value?
  • What are your alternatives?

Equity Release Alternatives

The question of how does equity release work with UK lenders may lead you to seek out other preferences you think best fits your situation. You can consider the following alternatives.

  • Take out a mortgage or a secured loan against your property
  • Remortgage
  • Use your savings instead of borrowing
  • Downsize, i.e., move to a smaller home
  • Get a part-time job
  • Apply for state benefits or grants
  • Take out a personal loan or credit card

Instead of making a lifelong commitment to equity release and how it works with the possible risks and consequences, it’s good to consider all the alternatives before deciding what is ideal for your circumstances.

DID YOU KNOW? Due to bad credit scores, many worry about being approved for mortgages, loans, and credit cards. There are, however, specialised lenders in the UK who approve loans for those with bad credit histories and even grant mortgages to people with a CCJ.

Conclusion

How does releasing equity work, and who is eligible for it? Equity release unlocks the value of your property and turns it into cash. It’s an excellent opportunity for those with equity in their homes and who want to enjoy their senior years with the money this process can provide. But before you apply, consider your unique situation and consult a professional to see if it’s a good option for your situation.

FAQ

What is the downside to equity release?

The main downside to an equity release is that it’s not possible to get paid the total market value of your property since the lender needs to consider the interest rate and inflation.

Is equity release a good idea?

An equity release can be good for senior citizens who want a comfortable retirement. It can also be helpful for anyone struggling financially. But the question of how does equity release work and how it relates to you must be fully understood before applying for it.

Can I sell my house if I have equity release?

Yes, you can still sell your house if you have an equity release. You can simply repay the lifetime mortgage and start somewhere else with a clean slate.

ABOUT AUTHOR

Alex is an IT wizz gone SEO gone fire-juggler. We’re not even joking. When he isn’t researching why one personal loan is better than the other and which piece of hardware you should buy next, he’s rollerblading or selling homes (because he does that, too, the smarty-pants).

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