IN THINKING about later life, many of us are understandably consumed with feelings of anxiety and worry over other, more positive feelings. While getting older should be a joyful thing, it is instead a point of concern today; simply put, rising costs make it harder for retired people to maintain their lifestyle.
There are numerous ways, though, in which older people can review and engage with their finances for a comfortable later life – one key example of which is equity release, a product that has become increasingly popular in the last two decades. What is it, and how does it work?
What is Equity Release?
Equity release is a form of financial process that enables homeowners to ‘release’ part of the equity they have in their property, without having to sell, rent or otherwise vacate the property. It remains in the homeowner’s name and deed until said homeowner enters long-term care or passes away – at which point, profits from the property’s sale will be used to pay off what remains of the outstanding balance.
Generally speaking, then, equity release is a form of credit that uses the property as collateral. There are numerous different forms that equity release products can take, and they offer different forms of income receipt and different structures for repayment.
Lifetime Mortgage vs. Home Reversion
The two key forms of equity release are lifetime mortgages and home reversion policies. Lifetime mortgages work in a manner similar to regular mortgages; an institution provides a homeowner with a loan against their property, which is repaid with interest upon the eventual sale of said home.
Lifetime mortgages make a profit for lenders through the fixed interest rate they agree. An equity release calculator is a handy way to understand the impact of interest on an equity release plan, as well as the amount available for a given person or property. Crucially, though, lifetime mortgages do not require ongoing repayment. Recipients might choose to pay the interest in order to decrease the size of the eventual repayment, but are not bound to do so.
Home reversion plans are less common than lifetime mortgages, and can in some situations be more costly to repay. However, that cost is applied instantly as opposed to gradually, due to how providers make a profit. Rather than taking a loan and paying interest, a homeowner instead receives a percentage of their home’s equity in exchange for a larger percentage of equity on the home’s sale.
Eligibility and Use
Equity release products of any kind are not available to anyone below the age of 55 – and some providers may have a higher age threshold for eligibility, dependent on the product in question. You must also own property, to use it as collateral for the loan in question. Lastly, you might have your credit history assessed for lenders to evaluate your risk as a borrower.