Equity Release will reduce the value of your estate and can affect your eligibility for means-tested benefits.
Definition of Equity Release:
‘the use of financial arrangements that provide the owner of a property with funds derived from the value of the property while enabling them still to use it’
Equity release refers to a range of financial products that allow you to access the equity (cash) tied up in your home if you are over the age of 55. You can take the money you release as a lump sum or, in several smaller amounts, or as a combination of both. You use the funds however you wish.
There are two equity release options:
- Lifetime mortgage: you take out a mortgage secured on your property (residential property) and retain ownership. You may choose to ring-fence some of the value of your property as an inheritance for your family. You can choose to make repayments or let the interest roll-up. The loan amount and any accrued interest is paid back when you die or when you move into long-term care.
- Home reversion: you sell part or all of your home to a home reversion provider in return for a lump sum or regular payments. You have the right to continue living in the property until you die, rent free, but you have to agree to maintain and insure it. You can ring-fence a percentage of your property for later use, possibly for inheritance. The percentage you retain will always remain the same regardless of the change in property values, unless you decide to take further cash releases. At the end of the plan your property is sold and the sale proceeds are shared, according to the remaining proportions of ownership.
What you need to know:
Equity release can be more expensive than a traditional mortgage.
There is no “fixed term” by which you need to repay the loan, therefore accrued interest may escalate quickly.
Home reversion plans are likely to offer you much less than the market value of your property.
Releasing equity in your property now may leave you short of funds at a later date.
If you move home, you may need to repay some of your mortgage, particularly if you are intending to downsize.
Monies received through equity release may affect your state benefit entitlement.