For many people who have paid off a significant amount of their mortgage or are debt-free entirely, their home is often the most valuable asset they have.
This is increasingly the case given the average house price in the UK has nearly doubled since records began in 2005, meaning that people who bought a house and have paid off a significant chunk of the mortgage have a lot of potential to take advantage of that surplus value.
There are many ways to do this, from selling and downsizing in order to acquire additional money or by taking advantage of a range of equity release schemes on the advice of financial experts.
Releasing the equity in a home has a lot of risks and is not the right solution for everyone, but can be an ideal way to acquire money for retirement or to give to loved ones to help them get onto the property ladder in lieu of waiting for an inheritance.
How Does Equity Release Work?
To understand what an equity release scheme is, it is also important to understand the concept of equity with regard to property.
At a basic, general level, equity is the value of an asset after any debts or liabilities have been subtracted from it, which in the case of a house means how much it can be sold for minus any mortgage or loans secured against it.
A basic example of this is that if someone took out a mortgage to buy a home for £200,000 and paid off £100,000 of that mortgage whilst the home increased in value to £250,000, that would mean that once that remaining £100,000 of debt is subtracted that there is £150,000 of equity available.
The simplest way to release that equity is to sell the home, which would give you £150,000 once the mortgage has been paid off, discounting fees and interest. But this means moving house, and during a strong housing market that can offset the benefits a homeowner will get from selling.
An alternative, therefore, is releasing the equity, which is a form of financial product that allows a homeowner to tap into that equity.
This typically takes the form of a lifetime mortgage, where money is borrowed against the home whilst the homeowner continues to own it and live in it.
Once they die or move into long-term care, the house is then sold and any proceeds are used to pay the loan back. If there is any money left over, that money will go to the beneficiaries of your estate.
An alternate option is a home reversion scheme, where a homeowner sells their home to a specific provider with the provision that they have the right to live in it until they die or move into long-term care.
Typically, one should never sign up for an equity release scheme without a no-negative equity guarantee.
This means that if the value of the house falls and it cannot be sold for enough to pay off the mortgage, then the difference does not need to be paid back, something that was previously a huge problem before the Equity Release Council due to the interest roll-up.
When Is Equity Release Right For You?
An equity release is a huge decision, and as with any other major financial decision, it should not be taken without careful consideration and the advice of experts.
Whilst not as risky an option as it used to be thanks to no-negative-equity guarantees being far more common, it is important to reach the terms of your agreement very carefully, as letting the property fall into disrepair or letting out rooms could potentially be a breach of conditions.
As well as this, an inherent consequence of equity release is that you can no longer leave your home to your loved ones, so make sure that they are involved in the process. This will stop them from being surprised by the final part of the process during an already difficult time.
It is also important to understand that releasing equity can affect your pension, universal credit and other benefit entitlements, so before you sign up for a scheme, make sure to ask a specialist advisor about the impact on your entitlements and whether it is still the right choice for you.
However, if your savings, pension and other revenue sources will not be enough to sustain your need, downsizing is not an option and either you have no beneficiaries or you are okay with them having a reduced inheritance, equity release can help you use money tied up in your home now.
