Equity Release is a popular option for people looking to free up cash for retirement. But what exactly is Equity Release? And how does it work?
Here’s everything you need to know about Equity Release.
Equity Release is simply borrowing against your home to pay off your mortgage. The money you borrow is called ‘equity’. A more common term is ‘reverse mortgage’.
It works like this…
When you take out a loan, you give the lender a security interest over your property. This means that the bank owns your house until you repay the loan.
In return, you receive a lump sum of money. This is known as the ‘release price’.
This amount is usually equal to the outstanding value of your mortgage plus any fees and charges.
So, if you owe £200,000 on a property worth £250,000, then the release price would be £250,000 plus any fees and charges, such as stamp duty.
If this is confusing, you can use a calculator to determine your equity release potential.
How Does Equity Release Work?
Once you’ve paid off your mortgage, you own the property outright. However, you still have a monthly payment to make towards the debt.
With Equity Release, you don’t have to make these payments. Instead, you use the equity in your home to pay off the rest of the debt.
As soon as you sell the property, the equity goes straight into your pocket. It doesn’t go back to the lender.
Who Can Use Equity Release?
Anyone can use Equity Release. There are no restrictions on who can apply.
However, there are certain conditions that must be met. For example, you must be able to afford the repayment.
You also need to be able to prove that you own the property outright, rather than living rent-free.
The most common way to do this is to show that you own another property. If you’re renting an apartment, you could buy a second home.
Alternatively, you could prove that you own shares in a company.
If you own a business, you may be able to use the equity in your business to pay off your mortgage instead.
There are other ways too. For example, if you own a holiday home, you could use the equity in that property to pay off your mortgage, rather than selling it.
Is Equity Release Right For Me?
Equity Release isn’t right for everyone.
For example, if you live in a rented property, you won’t be able to use the money to pay off your mortgage and free up your home. Instead, you’d have to find somewhere else to live.
