In simple terms, equity is the value of an object and the term is commonly used when discussing property.
In regards to homes, equity refers to the value of the house today minus the amount that’s left to pay on the mortgage.
For example, if a home is worth a total value of £150,000 and you have £30,000 left to pay on the mortgage, then there is equity of £120,000. Similarly, if you’ve paid it all off, there is equity of £150,000.
What is Equity Release?
Releasing equity from your home means taking money out of the value of your home to use as a type of loan – essentially, you are borrowing money against the value of your house. You can do this in the form of a lump sum or monthly payments, like a type of income.
Even though you’ve taken out equity on your home, you can still carry on living there as normal.
The reason why people tend to do this is to add some more money to their retirement fund, perhaps if their pension pot is not sufficient. Equity release is most suitable for older, usually retired, people who need extra funds and don’t want to move home.
To take part in an equity release scheme, you must be eligible for it. You need to:
- Own a property that’s in good condition.
- Have nothing left to pay on your mortgage.
- Be over 55 – some equity release schemes may only be available for people at the age of 60 and over.
You don’t actually repay the loan like you normally would with monthly payments. Instead, the loan is repaid to the lender when you pass away or are put into long-term care and your house is sold.
Equity Release Scheme
There are two types of equity release schemes – lifetime mortgages and home reversion schemes. Schemes should generally have a ‘no negative equity guarantee’ to ensure you won’t have to pay more than your property’s sale value.
A Lifetime mortgage
This most common scheme essentially secures a loan on your home, but you don’t ever make any monthly repayments as it is repaid when your house is sold – along with any interest. The interest rate is always fixed, so it won’t increase at any point.
It is important to note that while the interest is fixed and doesn’t change over time, it still all adds up, so when it comes to your house being sold, the amount paid to your loved ones could end up being significantly lower than you intended, as the majority of it will have gone back to the lender.
Today, some lifetime mortgages provide you with the option of paying off part or all of the interest, while some will allow you to pay off the interest and capital.
To make sure your family are fully protected in the event of your death (financially), taking out a life insurance policy is a crucial consideration - contact us today at Unite Life to find out more, obligation-free.
Home reversion schemes
With this type of scheme, you sell your home (or part of it) to the home reversion company in exchange for a lump sum or monthly income. You can still live there until you pass away, however.
They cannot sell your property, or their share of it, until you die or go into long-term care.
If you don’t have a long life expectancy because you are a lot older or are unwell due to a critical illness, for example, then the payout you will receive could be higher.
If you want to leave equity in your will then the amount will not change, as you know how much you are releasing if you are part of a home reversion scheme.
The above-mentioned equity-release schemes may seem very complicated and there can sometimes be risks and hidden costs involved, so be sure you get professional advice. Speak to one of our qualified and experienced advisors today at Unite Life to find out more.
Professional Advice with Unite Life
If you would like to learn more about equity release and lifetime mortgages, we are on hand to help you at Unite Life.
We work with a trusted panel of suppliers, who have been checked to ensure that their services and terms are the best in the marketplace.
Any initial advice is free and if you wish to proceed with an equity release plan, further charges may apply. You will be told about everything along the way, so there’ll be no surprises.
Don’t hesitate to get in touch with us today and we’ll get you on the right path to securing your retirement funds and putting the right plan in place.