Equity release is an option for homeowners who are tired of their cash being tied into their property, and eager to access some of the value that has accumulated over the years to supplement their lifestyle.
Of course you need to take your time, weigh your options and read the small print before embracing equity release, so let’s look at a few of the most important facts relating to this type of loan so you are well informed enough to make the right decision.
The definition of equity release
So what exactly is equity release? In brief, it’s essentially a loan that you take out against the value of your property, with the idea being that you only have to repay it once the property is sold.
A good example of this is a lifetime mortgage, which only gets repaid after you die, or when you are eventually moved into a care home and thus no longer have a need for a main residence.
People tend to use equity release when they hit retirement, and they find that their fixed income is not sizable enough to provide them with the kind of lifestyle that they want to lead during their golden years.
A minimum age requirement applies
Equity release eligibility is contingent on you being over the age of 55 when you apply. If you are younger than this, loans that fall into this category will not be an option.
The good news is that there is generally no upper age cap, and in fact you will be able to borrow more if you are significantly older, because of course the lender will have a statistically higher chance of recouping their outlay sooner rather than later.
No tax is levied against equity release
The lump sum you receive when you secure an equity release product is not subject to any tax, so you can enjoy the full amount immediately.
The downside is that you will be charged interest on your loan, and that this will be compounded year on year. So depending on how long it is until the loan is repaid, it may represent a significant slice of your estate.
On the positive side, you are legally protected from going into negative equity with this sort of loan, which will prevent the beneficiaries of your estate being lumbered with any debt after you are gone.
Inheritance is impacted
We’ve touched on the inheritance aspect of equity release, and so while there won’t be debt passed on to younger generations, it is still worth thinking about how this type of loan will influence the value of your assets after death.
Of course in many cases the customers who leverage equity release are doing so specifically because they want to be able to give children and other family members a helping hand without having to downsize right away. The property market is a fickle thing, and equity release lets you wrestle back some control.
You can use equity release with a mortgage remaining
You might assume that in order to use equity release, you have to be the outright owner of your property. However, even if you have a small mortgage that you are still obliged to pay down each month, lenders may consider you for equity release.
The mortgage will need to be paid off within the equity release deal, so this will impact how much you can borrow. However, it’s nice to know that this could free you from monthly payments and give you the financial freedom that you crave in retirement.