Equity release is becoming an increasingly popular way to raise money, allowing you to receive a huge lump sum and use your home as a financial asset. If you have paid offer your mortgage, you can essentially ‘release equity’ from your home and raise 25% to 90% of the property’s value which is purchased upfront by another lender or provider.
The lender charges a small rate of interest and hopes that the value of your property increases – so when you die, they claim their stake in the property and the remaining percentage can be passed onto your children in the form of inheritance.
Reasons to use equity release
Equity release is commonly used to free up some finance for an ageing couple, whether it is used to supplement their retirement, debt consolidation, home improvement or to give money to their children to get onto the property ladder. The main benefit is that homeowners can continue to live in their home until they die and the income is transferred in one lump sum or stages and is tax-free.
What is the criteria?
- Must be UK homeowners and own the property outright (no other secured loans outstanding on the property)
- Applicant must be over 55
- Property must be worth a certain minimum value (depending on the lender)
Types of equity release
This is considered to last a lifetime, allowing you to still live in your property until you die and you benefit if the value of the property goes up. You can typically borrow around 25% to 60% of the property value and it is tax deductible. Customers can continue to borrow money as and when they need it.
This is the equivalent of giving up your entire property to a lender or provider – hence you can usually borrow up to 90%. However, you lose ownership of the property so do not benefit if it continues to go up in value.
What are the risks?
- You are charged arrangement fees and interest on top of giving away equity in your property, which can leave very little for inheritance.
- Equity release schemes can be hard to unravel if you change your mind after a few months or years
- If there is another property boom, you potentially lose a huge increase in income
- Using equity release might affect your entitlement to state benefits.
How will equity release affect inheritance?
It is still possible to put money aside for your children as inheritance if you use equity release. The issue is that using a lifetime mortgage or home reversion will take up more of the inheritance that you give, especially with home reversion plans where very little is left and it does not take into account the increase in house prices.
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