I think it’s worth summarising what equity release is and the technicalities and how it works? It’s worth reminding ourselves that equity release is basically a loan – the amount you borrow will attract an interest rate, which is fixed at the time the agreement is finalised.
Get cash from your home equity
So, equity release is a way for homeowners who are aged 55 and over to unlock the value of your property and turn it into cash…. The idea is, you borrow some of your home’s value at a fixed or capped interest rate, thereby releasing some of the equity tied up in your home… To qualify to release equity from your home, the house needs to have a market value of at least £70,000, which these days, is pretty much all properties. If you meet the criteria and proceed to take out a lifetime mortgage, you can either take the money in one lump sum, or in smaller amounts over time, which is called drawdown, or maybe a combination of both. If you choose the drawdown option, interest will only be charged on the cash you’ve taken, and not on the money you’ve yet to draw down.
Lifetime Mortgage
The most common form of equity release is known as a Lifetime Mortgage, where the loan amount is usually repaid from the sale of your home when you die, or when you move permanently into residential care. If you choose not to make any repayments of interest or the capital amount, then the interest will compound normally monthly and so increase and so the amount you owe will increase over time. This is probably the most misunderstood aspect of equity release and is also the reason why these types of loan are popular with lenders… However, these days most lifetime mortgages, allow you to make limited repayments of capital and interest, meaning you can reduce the overall loan and avoid compounding the original amount. Typically, there’ll be a cap on the amount you can overpay, normally 10% of the loan value each year.
There are other types of lifetime mortgages such as Home Reversion Plans – for those aged 60+ and Retirement interest-only mortgages (RIOs) but these are less common and so will not be covered in any detail in these blog posts.
