To know the amount of equity you can take out of your home, you must first consider the value of your property and how old you are.
It’s usually called equity release and is an excellent way to access the money tied up in the value of your home without selling the property.
With an equity release, you can access a few bucks for regular bills or something more substantial for retirement and care costs. But you must be careful because it comes with some risks.
Read on to learn more about releasing equity from your home and why you must seek advice before proceeding.
What Is Equity Release?
An equity release is a product that gives you access to the equity you’ve built up over the years by repaying your mortgage.
Your equity is the portion of the property you own outright. If you have a mortgaged property, the equity is the difference between the property’s value and the balance you have left to pay for the mortgage.
For example, if you have £100,000 left to repay on your mortgage, and the home’s current value is £250,000, your equity is £150,000 (£250,000 – £100,000).
The money is tied to your home, but with an equity release, you can borrow some of it without selling the property. It gives you access to liquid funds, but your equity is reduced.
What are Your Options When Releasing Equity?
There are two main types of schemes you can use to release equity. These include:
Lifetime Mortgages
Most providers require you to be 55 years or older to qualify for a lifetime mortgage. It’s the most common type of equity release, allowing you to borrow up to 60% of your property’s value.
A lifetime mortgage provider can offer the funds in a single lump sum or smaller amounts over time.
With lifetime mortgages, you retain home ownership and can make monthly interest payments or pay nothing. The amount you borrow plus any interest gets repaid when the property is sold after you permanently move into long-term care or die.
Home Reversion Plans
A home reversion plan involves selling all or part of your home to an equity release provider. You can get a lump sum or smaller monthly payment and still live on the property until you die or move to permanent care without paying rent.
Providers usually set higher age limits for home reversion plans, and you may need to be at least 60 to qualify.
The percentage of the equity you can release using a home reversion plan can be as much as 80%. However, the amount you get will be less than the home’s market value.
Providers usually take a significant percentage of the property to protect their investment since they may have to wait long to make any returns.
Home reversion plans are considered riskier, and most advisors recommend using a lifetime mortgage to release equity.
What Factors Affect How Much Equity You Can Take Out?
The amount of equity you can take out of your home will depend on:
Your Age and Health
Your age and health help providers determine how long you’ll live. Your life expectancy is vital because the lender will not make any return on equity release until the end of the plan when you pass away or move into a permanent long-term care facility.
The longer you remain living on the property, the longer it will take for the lender to receive the repayment.
Therefore, providers offer higher amounts for older homeowners with a shorter life expectancy. They can also provide more significant amounts if you have a health condition or lifestyle habit that is likely to reduce your lifespan, such as smoking.
Property Value and Condition
The lender will need a professional valuation to determine how much your home is worth. They’ll consider any potential increases or decreases in value to determine how much equity you can release.
The amount you can release will also be lower if your property is in poor condition. Lenders want to ensure your property is easy to sell, so it may be deemed unsuitable if it requires some work before selling.
Some providers may even require you to use some of the funds for repairs as part of the agreement.
Property Type
Your property type can also impact how much equity you can take out. The provider may offer a lower amount or refuse to lend if you have a non-standard property like a listed building or a house with a thatched roof.
Non-standard properties feature less demand and unpredictable prices, making them unattractive to equity release providers. They can also require additional maintenance or specific insurance that can be costly, making them less appealing to potential buyers.
What Are the Pros and Cons of Releasing Equity?
Considering the advantages and limitations of equity release can help you determine whether it’s the right option for you.
Pros
- Tax-free cash – You can get tax-free cash as a lump sum or regular payment.
- Stay in your home – You can stay in your property for as long as necessary. It allows you to enjoy your retirement in a familiar setting and provides the money you need to adapt your home to your changing needs.
- Peace of mind – Since you don’t have to make any payments, you can live in your home without financial pressure or penalties until you move or die.
- Broader eligibility – Providers aren’t usually concerned with your credit history or income like standard mortgages.
Cons
- Impact on benefits – The money you get by releasing equity can affect the benefits you’re entitled to.
- Reduced inheritance – The loan and accumulating interest will gradually reduce your equity. Your loved ones can only get what’s left after the loan is repaid or the portion you didn’t sell.
- Lifestyle restrictions – The lender may set restrictions like not leaving the house empty for long periods, using the home as a holiday let, or making structural changes.
- Application costs – You may pay substantial fees for solicitors, valuation, and transaction arrangements.
- It can affect future care plans – Releasing equity too early can affect your options when you need money to fund long-term care for you or your partner in the future.
- Bills and maintenance – You’ll still be responsible for paying all the usual bills like council tax and arranging maintenance and repairs. You may need to set aside money for this regularly.
Can I Release More If I Already Have Equity Release?
Yes. You may be able to release more equity from your home, but you may have to wait. You can find out if you’re eligible from your provider and any costs involved. They can also provide all the details you need to make an informed decision.
You can also consider asking for a combination of a lump sum and drawdown facility in a lifetime mortgage.
It involves only taking a portion of the loan amount as a lump sum and getting smaller amounts as a regular income or when you need money, up to the agreed maximum.
Related reading:
- Reasons for remortgaging.
- Remortgaging to release equity.
- Remortgaging to buy another property.
- Remortgaging with bad credit.
- Remortgaging for home improvements.
- I own my house outright can I remortgage?
- Capital raising mortgages.
Why Should You Seek Advice when Considering Equity Release?
Releasing equity is a lifetime commitment that will impact your future and your loved ones. Equity release products can be complex, and you get a clear and accurate explanation of the terms and conditions and pros and limitations before entering a scheme.
You must speak to an equity release specialist before deciding to ensure you understand the risks. They’ll give you essential information and help you understand your choices and alternative options to consider so you can make the right decision for your situation.
Ensure you consult an adviser or broker authorised by the Financial Conduct Authority (FCA). They should also be an Equity Release Council (ERC) member.
ERC members must adhere to specific standards, and you must ensure that the product you’re considering meets all of them. These include:
- Assurance that you can stay in your home for life or until you move into care.
- Interest rates are fixed or, if variable, they’re capped to a maximum rate for the scheme’s duration.
- Ensuring you have received independent legal advice from a solicitor who is an ERC member.
What Are the Alternatives to Releasing Equity?
Alternatives you can discuss with your advisor include:
- Downsizing – You can sell your home and move to a cheaper or smaller property. It allows you to get the funds you need from the profit but can significantly impact your social life.
- Unsecured Borrowing – If you only need a small amount and can afford repayments with your usual income, consider an unsecured loan. It can be cheaper and less risky than equity release.
- Savings and assets – Using your savings is a fast, cost-free option to help you pursue your desired goals. You can also sell other assets or investments that are less valuable than your home.
Call us today on 01925 906 210 or contact us to speak to one of our friendly advisors.
Final Thoughts
The equity you can take out of your home will depend on your age, health, and the property’s value, condition, and type. Ensure you get impartial advice from an independent adviser and think carefully before entering an equity release.
