How does Equity Release Work?

Equity release works by providing you with a cash value that is based on the equity you own within your home. An equity release lifetime mortgage is a loan that is secured against your home equity; it is important to note that you still retain ownership of your home with this type of product. For the purposes of this guide when we refer to equity release, we are specifically referring to a lifetime mortgage.

Pension income is not enough to support retirement plans. Taking out an equity release plan can ease the burden of having to juggle paying for essential living costs and doing the things you love. Many people look forward to their retirement years as it is their chance to use the time to relax, go on that holiday and spend quality time with family and friends.

Taking out a plan can mean that there is more cash to enjoy these moments in life without having to sacrifice them to pay for ongoing and/or unexpected bills and not having a lot of money left over.

Unforeseen costs. Once retired it can be harder to gain access to some forms of credit that would be typically available prior to retirement such as a second mortgage. This type of plan could be a solution to pay for unforeseen costs in retirement such as home renovations, medical costs or the death of a spouse.

Giving family members a helping hand. Being there to financially help children and grandchildren through key life events can be a rewarding experience. Whether it’s to help children with home improvements, help a grandchild to get on the property ladder, pay for a wedding or help with getting a university education, taking out a plan can give you more flexibility in the way you can help family members.

Earlier retirement. Taking out an equity release plan could be a viable solution to pay off a debt that is still within its repayment term and cannot be paid for with pension income alone. Examples could be an interest only mortgage, credit card debts or a car loan. The cash from the plan could be used to pay off a debt meaning that monthly expenditure has been reduced to a point that means that pension funds are sufficiently projected to support retirement.

Equity release plans and secured loan differences

A secured loan (also called a second charge mortgage, home owner loan or home loan) is often used to borrow sums of money in the region of £10k to £1,000,000. The main difference is that a secured loan normally requires you to start to pay the money back after the first month of taking the loan out. Repayment terms are normally monthly and normally range between 3 to 30 years.

With an equity release plan you would normally intend to pay all or a significant amount in the far future; perhaps when you go into long term care or upon death. Another major difference between the two plans is that there is a minimum application age for an equity release plan which is 55 years old.

Equity release and bridging loan differences

A bridging loan can also be used to borrow money to make home improvements, they are also often used to buy other properties. In a retirement scenario a bridging loan may be more suited for if you wanted to downsize or move to a different area. An example would be that you wanted to move to say Spain and you saw an ideal property, however, you hadn’t sold your current home yet. You could potentially take a bridging loan to buy the property in Spain whilst you were waiting for your property back home to sell.

It’s important to note that a bridging loan offers a short term solution to any cash that you may have tied up in an asset. They are only designed to be taken out over 12 to 24 months.

Equity release and buy to let mortgage differences

Buy to let mortgages are taken out if you become an accidental landlord or you intend to purchase a property for investment purposes. In both scenarios you would not live in the property. In a retirement scenario you may become an ‘accidental landlord’ if perhaps you decided to move into your partners house. Or perhaps you wanted to downsize but you didn’t want to sell your current home, you wanted to rent it out instead. In retirement you may also want to invest in an additional property as a means of gaining an additional retirement income. A key difference is that you would not be living in the property that you would take the buy to let mortgage out on. Whereas with an equity release plan you would take that out on your home and you would still live in your home.

Equity release and traditional mortgage differences

Traditional mortgages are usually taken out over long repayment terms of 10 years plus. A lender will also look at the income you are generating each month and will typically want to see a salary coming in. With a mortgage you would be expected to start to pay the money you have borrowed back after the first month of taking the mortgage out. Mortgages is quite different in terms of eligibility and criteria.