Equity Release in the UK: What Is It & How Does It Work?

Agencies
·4-min read

Equity release is a type of loan on home equity available to UK residents aged 55 or older who have built up positive equity in their property. This financial vehicle allows homeowners to access a portion of the equity in their home to use as they wish, whether it's to pay off debts, pay for medical bills, for their daily expenses and even to go on holidays or trips. The amount of money a borrower is eligible for depends on a number of factors including the value of the home, the type of home, its location and the borrower’s age. Over the years, property prices in the UK have risen which means long-time home owners have access to a good amount of equity release London.

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Unlike other mortgages and loans, borrowers don't have to pay any mortgage payments. All they need to do is pay their council on time, keep the property well maintained, and pay for their home insurance. The loan matures when the borrower no longer resides in the property, after their death or when they decide to move or sell the property. Upon death, heirs have the choice of paying off the loan and keeping the house or using the sale of the property to pay off the loan.

How Equity Release works

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There are two main ways to release equity from your home:

Lifetime mortgages: This is the most popular form of equity release. With a lifetime mortgage, home owners borrow a tax-free cash sum or get regular payments, and keep ownership of their property. The loan is due when the borrower dies or moves into long term care, after which the property is sold and the proceeds used to pay back the loan. Interest is charged on the loan and nowadays, many providers offer flexible repayment plans where borrowers have the option of making monthly or even voluntary payments to control the interest.

Home reversion plan: Here, home owners sell all or part of the property and get a tax-free lump sum or regular payments. When they die or go into long term care, the property is sold and a share of the proceeds used to pay back the loan. All or part of the home will belong to the provider but the borrower is allowed to live rent-free on the property for the rest of their life.

Is Equity Release safe?

Equity release in the UK is considered a safe option as the market is well regulated. Consumer protection measures are supervised by the Financial Conduct Authority (FCA) and the Equity Release Council (ERC). They offer safeguard measures such as the no negative equity guarantee. Advisers and lenders must also get approval and are required to follow a strict code of conduct.

One of the main benefits of equity release is that the individual remains the owner of their home. They are also able to access its equity value and aren't required to make repayments while they live in the property. The only downside is that interest rates are slightly higher than traditional mortgage rates. Upon death, the estate must repay the total loan balance, including the accrued interest. However, if the co-owner's spouse is still alive, the loan extends until the second death.

How to get fast Equity Release

Fast equity release is possible after a qualified advisor such as Simple Fast Mortgage analyses a home owner’s unique circumstances and recommends a suitable equity release product. Before taking out equity release, there are important factors to consider. These include:

  • How much will be borrowed

  • Whether a drawdown, regular payments or a lumpsum is preferred

  • Interest rates

  • Future plans of moving home

  • Charges on early repayment

  • Advice costs and more.

It is crucial for home owners to get good financial and legal advice to help them understand which equity release product is right for their needs.
Alternatives to Equity Release

Equity release is not for everyone. Before identifying the right equity release product, an advisor may suggest alternatives to equity release. Some of the options here can include moving to a cheaper property, renting out a room, extending the mortgage term and taking out a personal loan. It is always a good idea for home owners to shop around and research their options before getting equity release on their property.