Everyone, not just UK citizens and residents, dreams of owning their own home. But once you own your home, your investment is tied up in the property. What happens if you suddenly need an influx of surplus funds? Then you can opt for equity release. Here is an article to clarify the meaning and uses of equity release.
Definition of Equity Release
Equity release is simply the process of freeing up surplus funds which would have remained part of the dormant value of your property. You can initiate equity release and still live in the home involved in equity release.
Reasons to Pursue Equity Release
One common reason to initiate equity release is to allow retirees to enjoy their retirement more fully. They are able to do so by releasing money against the value of their home, and this money can be used to meet whatever needs they may have. There are retirees who suddenly find that their savings, investments and monthly pension are just not enough to cover higher expenses like medical bills and special care. A retiree or retirement-age couple may consider equity release then as a way to get additional funds without actually selling their property.
The monthly cash payments afforded by equity release are quite helpful for someone on a fixed-income or for someone who does not expect to leave a hefty inheritance to his beneficiaries. Even people who are not of retirement age may opt for equity release if they need surplus funds that badly, such as for the purchase of a new vehicle, for home improvements, or to pay for a wedding. Some people resort to equity release in order to significantly reduce the amount of inheritance tax they'll eventually have to pay. The funds produced from equity release might even be handed over by the property owner to his heirs so that they can use it towards the purchase of their own homes.
How does equity release work?
Basically, a person who pursues equity release from his home is actually getting a new loan based on the value of his property. The loan will come in the form of cash (generally given on a monthly basis). There are times when the lender will supply the surplus funds as a lump sum, but this is not advisable because you may find the value of your home to depreciate quickly as a result. The advantage of equity release is you may still choose to live in the home you put up for equity release.
The lender will profit from his equity release loan to you if you later sell your property (perhaps to move in with relatives to reduce living expenses), or if your property is sold after you pass away.
Disadvantages of Equity Release
The main disadvantage of pursuing equity release is that the value of your home may go down to the point that you'll leave practically nothing for your heirs or beneficiaries to inherit. Another disadvantage is that, since your equity release plan may stipulate selling your house to regain the amount of the loan, your relatives may have nowhere to live afterwards.
Other Names for Equity Release
Whether you call them home income plans, home reversion plans, or lifetime mortgages, all these are forms of equity release. They all act on the principle that the lender will supply a loan to the borrower which will later be paid through the sale of the borrower's home.
Criteria for Qualifying for Equity Release
A person who wants to pursue equity release may be required by the lender to satisfy certain basic criteria first.
- You may have to be at least 60 years of age at the time of application.
- If you currently have an existing mortgage, you must intend to pay for that mortgage with part of the proceeds from your equity release plan.
- Your property should be in your name and in relatively good condition.
Equity release is attractive for many reasons, but it also has pitfalls if you are not cautious. Be sure to do your research and to seek advice on the topic of equity release before you go for it.
If you'd like help finding the best equity release lender, take a minute to fill out our short equity release form, and we will put you in touch with an equity release lender who will work with you to find the best equity release deal for your particular financial goals and circumstances.