Your home equity could enable you to borrow larger amounts at a competitive rate. By using equity release loans, older homeowners could even borrow against their home equity and not have to make any monthly repayments. We explain how this works below.
What is equity release?
Equity release is a method of borrowing for senior homeowners where their home equity is used as security. Therefore, equity release can be considered a type of secured loan. It is often used to make home improvements, pay private medical costs, help family members buy their own property or clear existing debts.
Equity release is often confused with or grouped in with releasing equity. But the former is exclusively available to senior homeowners, while releasing equity is available to people of all ages, providing they have accumulated enough home equity to borrow against. They differ in the way the loan is repaid.
Who can get an equity release product?
To be eligible to apply for an equity release loan, you must usually:
- Be at least 55 years old. If applying as a couple, both of you must be at least 55 years old. There may also be an upper age limit restriction.
- Have no outstanding debts secured against your property, including a residential mortgage
- Your property must meet a minimum valuation set by the lender
How does equity release work?
Equity release allows senior homeowners to borrow against some of their home equity, up to a maximum of around 85% depending on the lender. To be applicable for an equity release product you usually have to own your home outright, so you could in fact borrow up to 85% of your home’s current market value.
Instead of repaying this money through monthly repayment like most loans, the senior homeowner only has to repay the money (and interest depending on the equity release product) through the sale of the property when they:
- Pass away, in which the money will be repaid from the deceased’s estate
- Move into long-term care
If the equity release product is taken out by two people, it will not be repaid until the last surviving person dies or moves into care. The downside of equity release products is that they are typically expensive to repay in the end.
Types of equity release loan
There are two types of equity release in the UK, namely a lifetime mortgage or home reversion plan.
A lifetime mortgage applies rolling interest to the loan amount, which can often be voluntarily repaid each month. If no repayments are made, the debt simply grows bigger over time and will be taken from the eventual home sale. The downside is that the debt can grow significantly larger and can easily double in many cases.
A home reversion plan doesn’t charge any interest. But from the outset, the homeowner agrees to repay a percentage of their home’s sale proceeds when it’s eventually sold. For example, a 25% equity loan could cost 70% of the home’s value in the future, which may be more than 70% of its current equity if the home value increases.
Professional equity release advice services
Speak with our friendly team for more information on releasing equity and equity release. We can provide a personal assessment to help you decide if equity release is the right option for you.