House prices have risen exponentially in recent years and many homeowners are finding that equity release can play a vital role in financial planning. In fact, UK homeowners accessed a record £6.2bn with equity release in 2022, leading to many more asking: what is equity release and how does it work?
Equity release is the process of releasing cash from your home without having to downsize or move later on in life. There are a number of different equity release products available to homeowners aged 55+, including interest-only plans as well as conventional lifetime mortgages.
One of the main benefits of equity release funds is that they are tax-free and can be used to achieve many different goals or wishes. The most popular uses of equity release funds are repaying mortgages and unsecured debt, home improvements, supplementing income, purchasing properties, and helping family.
Like a conventional mortgage, equity release is a loan secured against the value of your home. However, the loan is designed to run for your lifetime and there are no required monthly repayments. The amount you borrow is instead owed when the last homeowner passes away or enters long-term care, as well as additional interest which accrues over time.
There are different types of equity release plans available to suit different needs. All will allow you to access the value of your home as cash following a regulated process of financial and independent legal advice.
The most common method for equity release is taking out a lifetime mortgage, which involves borrowing money secured against your property. The amount you are able to release depends mostly on your age and the value of your property and is repaid when the plan comes to an end and your home is sold, along with roll-up interest. As interest accrues over time there is no requirement to make monthly repayments, though you can often choose to make payments to reduce the amount you will owe in the future.
One of the major benefits of a lifetime mortgage is that you retain full ownership of your home. You can also tailor your lifetime mortgage to suit you with flexible options, by either releasing funds as one single lump sum or opting to release smaller amounts in stages over time.
With a home reversion plan, you can raise money to enjoy a more comfortable retirement by selling all or part of your home. You are usually eligible for a home reversion plan if you are 65 and over and own your home. As well as cash (either as a lump sum or income) you are guaranteed the right to stay in your home, rent-free, until you die or move into care. When this happens, your family or estate gets your remaining share of the proceeds from the sale of your home.
Lifetime mortgages and home reversion plans both give you tax-free cash to spend during your retirement and in both cases, you get to stay in your home until you die or go into permanent care. However, the big difference is that with a home reversion plan, you no longer own all of your home. With a lifetime mortgage, your home remains yours.
Although the equity release process certainly has its benefits (receiving a lump sum of tax-free cash to name just one example), there are of course some drawbacks that it is important to be aware of. Make sure you bear in mind that it will reduce the value of your estate and may affect your entitlement to means-tested benefits.
A Financial Adviser will always sit and explore the best option for you before you go ahead with anything. It’s vital that you explore the different equity release plans available in order to decide which is most suitable for you and your circumstances. You can discuss factors such as interest rates and the roll-up of interest, known as compound interest, as well as set-up fees and other charges that you may incur.
Our experienced team, led by managing director Peter Barton, has unrivalled knowledge of the industry after almost two decades of working at the forefront of it in a national law firm. Peter himself has 26 years of hands-on, practical experience and a wealth of knowledge that comes from working in the lifetime mortgage sector for so long. He also sits on the Standards Board of the Equity Release Council, the group responsible for customer safeguarding and product standards within the equity release sector.
The experience of the team ensures we can provide efficient, professional and impartial guidance to homeowners who have sought initial advice from an independent financial adviser and received an offer of an equity release product.
Our role is to ensure clients fully understand the equity release procedure, the legal implications of the documentation required during the process, and to explain the impact on their estate for their family and beneficiaries of their wills.
If you are interested in equity release, or are a financial adviser looking for specialist equity release solicitors to refer your clients to, we would be delighted to help you. You can receive a quick and easy quote via our website today.
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