An equity release mortgage can allow you to squeeze some of the cash out of your home, but there are fees and risks associated with this type of finance. You might need this equity release to clear debts (including interest-only mortgages) or to give the money to your children, but before doing so you must get professional advice so that you are aware of all the expenses.
Homeowners opt for equity release for a number of reasons, including:
- Supplementing their pension
- Funding home improvements
- Funding a holiday
- Settling a residential mortgage
- Settling a loan
- Providing an inheritance to family
How does an equity release mortgage work?
With an equity release mortgage, you continue to own your home completely and you are given a loan based on your age and the current value of your property.
Equity release mortgages are aimed at older or retired homeowners with minimal income who would not be eligible for a standard residential mortgage.
You can pay the interest on an equity release mortgage in one of two ways:
- Pay interest monthly
- Roll the interest into the loan amount. This option means you do not need to make any monthly payments
Homeowners rely on property prices increasing to pay off an equity release mortgage, whilst aiming to ensure there is value left in the property for their beneficiaries.
What are the different types of equity release mortgage?
There are two main types of equity release mortgage plan. The first type of equity release allows you to retain full ownership of your property, with any debt offset against the value of the property.
The second type allows you to sell all or part of your home to a company, whilst retaining the right to live in the property. You may either live in your home rent-free under an agreed lease, or you may pay a rental fee that is lower than the current market value. This is known as an equity release reversion scheme.
What are the risks associated with equity release?
Whilst equity release can provide a regular income or lump sum to fund your retirement, there is a risk that you could owe more than your home is worth, ending up in negative equity. If you wish to downsize in later life, you may be restricted.
Some schemes offer a ‘no negative equity’ guarantee, whereby the amount if interest together with the amount borrowed will never exceed the value of the property.