As you approach retirement, you may find yourself with a paid-off home but limited income options. Your golden years should be a time to relax, travel and pursue your hobbies, not a time to worry about finances.

Depending on your eligibility, equity release can be a powerful financial tool to help you move closer to financial freedom. This has been the case for many in the UK. In 2023, over 26,000 Brits took out new equity release plans.

Equity Release

What exactly is it? Equity release is a way to access some of the cash tied up in your property without having to move out.

The value of your home, minus any outstanding mortgage, is known as your equity. Equity release schemes allow you to borrow money against this equity, receiving a lump sum or smaller instalments. You retain ownership of your home, but the loan (and accrued interest) is typically repaid when you pass on or move into long-term care.

How To Take Out an Equity Release

There are two main types of equity release products – Lifetime Mortgages and Home Reversion Plans.

  • Lifetime Mortgages

This is the most common option. You borrow a loan secured against your home, with interest accruing over time. You don’t have to make monthly repayments on the loan itself, but the interest is rolled up into the total amount owed. This means the debt grows over time, reducing the amount of equity left for your beneficiaries.

  • Home Reversion Plans

You sell all or a portion of your home’s equity to a lender for a lump sum or income stream in exchange for a reduced ownership stake in your property. When you die or move into care, the lender sells the property and recoups their investment plus any agreed-upon profit.

If you’re not sure how much money you could access through these plans, you can use an equity release calculator online to make an estimate.

What Are the Benefits of an Equity Release?

Both lifetime mortgages and home reversion plans come with their own unique pros and cons. This means the best option for you is dependent on your circumstances.

  • Improved Cash Flow: Access a tax-free lump sum or income stream to supplement your pension or pay for unexpected expenses.

  • Stay in Your Home: Unlike downsizing, you can continue living in your familiar surroundings.

  • Maintain Your Lifestyle: Enjoy your retirement without financial constraints.

The Cons of an Equity Release

  • Reduces Inheritance: The amount of equity your beneficiaries inherit will be reduced.

  • Debt Accumulation: Interest on a Lifetime Mortgage can snowball over time, leaving less equity for your heirs.

  • Loss of Control (Home Reversion Plans): With Home Reversion Plans, you give up some ownership of your property.

  • Market Fluctuation: If property values fall, you could end up owing more than your home is worth.

Who is Equity Release Right For?

Equity release isn’t a one-size-fits-all solution. It’s best suited for homeowners over 55 with a substantial amount of equity and no outstanding mortgage. It’s crucial to carefully consider your financial situation, future plans and the potential impact on your beneficiaries before making this decision.

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