What is equity release and how can it benefit me?

For many people, your house is one of the most valuable assets that you own and has probably benefited from rising property prices in recent years. According to figures from the Office for National Statistics, the average home rose in value by 10.6% in the year to August 2021.

If you want to access some of this property wealth, you may be able to benefit from equity release. Read on to find out everything you need to know about it and how it can help you.

Lifetime mortgages and home reversion plans are the two main types of equity release

To put it simply, equity release allows you to access the value of your property while you continue to live in it.

Typically, you are eligible if you’re over the age of 55 and own your own home. There are two main types of equity release that you can take advantage of:

1. Lifetime mortgage

This is the most popular type of equity release and involves you taking out a loan secured against your home, but without making regular repayments. Instead, interest will accrue on the borrowed amount.

When you pass away or move into long-term care, the value of the initial amount and the added interest is then deducted from the value of your estate. Please note that with a lifetime mortgage, you will still own 100% of the value of your home.

2. Home reversion

With this product, you sell all or part of your property to a provider and receive a lump sum of cash in return. For example, they may offer you £100,000 for a 40% share of your house.

While there is no accumulating interest to pay, like there is with a lifetime mortgage, you are forfeiting sole ownership of your home. When your home is sold after you pass away or move into care, the provider will take back their share and anything left will go to your estate.

It’s important to note that they will receive the same portion, whether your home has increased or decreased in value.

Equity release can be useful for helping loved ones onto the property ladder

In recent years, house prices have risen significantly, and equity release can be a great way to access the wealth that your home has accumulated. It is certainly a popular financial product, as according to figures published in FTAdviser, total lending for it reached £3.46 billion in the first three quarters of 2021 alone.

One important way that you could use some of the wealth is to help your loved ones take their first step onto the property ladder.

As we discussed in a previous article, rising house prices can mean that it’s often difficult for young people to save up enough for a deposit. Using equity release can be a useful way to quickly secure the cash that a loved one may need to secure a mortgage.

Another alternative is to use it to supplement your pension income to fund your desired lifestyle in retirement. If you want to be able to relax and enjoy yourself to the fullest, it’s important to have enough wealth to sustain you throughout.

Running out of money in retirement can be a worrying prospect for obvious reasons, but it’s also not a misplaced one. According to figures published by FTAdviser, around two-thirds of people retiring in 2021 are at risk of exactly this.

The extra wealth that you can access through equity release can be useful for ensuring that this prospect doesn’t happen, giving you one less thing to worry about.

Using equity release products could impact the amount of inheritance you can leave

While equity release can have a variety of benefits, there can also be some drawbacks to bear in mind.

For example, with a home reversion plan, it’s important to be aware that following your death, the provider could force the sale of your home very quickly. This would mean that your family may need to vacate the house at short notice, and this could cause them significant amounts of stress at an already emotionally difficult time.

Furthermore, since the borrowed amount is deducted from the value of your estate, this could limit the amount that you pass on to your loved ones after you die.

If you want to be able to make a properly informed decision about whether equity release could be right for you, you may benefit from seeking professional advice. Working with a financial planner can help you to weigh up the pros and cons of the decision, giving you greater confidence in your choice.

Get in touch

If you’re considering equity release and want to know more about whether it’s right for you, we can help. Email enquiries@prosserknowles.co.uk or click here to request a callback from one of our advisers.

Please note

Equity Release will reduce the value of your estate and can affect your eligibility for means-tested benefits.

This article is no substitute for financial advice and should not be treated as such. To determine the best course of action for your individual circumstances, please contact us.