When buying property, it’s important to look ahead and plan what the investment can be used for later. One way to make use of the value of a property is through equity release. To help buyers and sellers get the most out of their property transactions, we’ve put together this piece to explain all you need to know about equity release. This includes how it works, the options available, and why it’s important to consider.
What is equity release and how does it work?
Equity release is a mechanism that allows you to turn an amount of your home’s total value into cash. This can be given as a lump sum or in smaller amounts over time. Equity release is possible for both residential and commercial property. There are two options for equity release – lifetime mortgage and home reversion.
Lifetime mortgage
Available to homeowners over the age of 55, a lifetime mortgage essentially allows you to borrow money against the value of the property. This is possible even if you haven’t paid off all of your existing mortgage. You can choose to pay back the loan immediately or you can leave it to build up interest over time. Equity release interest rates will vary depending on the lender used. In most cases, the lifetime mortgage is prepaid when you or the last named borrower in the property passes away or goes into long-term care.
Home reversion
This is a scheme that gives home owners the option to sell part or all of their property, without having to transfer ownership or move out. The reversion company will send you a sum of money in exchange. They will receive the determined share of the value when you come to sell the property. This percentage you can sell is dependent on your age and the total value of the house. Eligibility for home reversion can vary, although you typically have to be at least 60 years old.
Is equity release a good idea?
Equity release can leave you with a sum of tax-free cash, or small payments over time. In either case, it’s how you choose to use these funds. Common reasons for freeing up equity include:
- Preparing for retirement.
- Enabling major home improvements.
- Raising funds for a loved one to make a property deposit, or to make a second one yourself.
- Paying off debts or a mortgage.
- Downsizing to a smaller property and gifting the remaining cash to a loved one.
- An expensive purchase.
Ultimately, whether releasing equity is a good idea or not will depend on the individual and their personal situation. Your conveyancing solicitor will be happy to advise on any potential downsides when it comes to financial decisions such as this.
How to calculate equity release
If you’re looking to judge whether equity release is the right option for you, the costs need to be weighed against the benefits. The most significant factors affecting the value of an equity release are your age and the value of your property. Typically, the older you get, the higher the maximum percentage of property value that can be released. For example, a 55 year old might be able to release 25% of the value of their property, where this might increase to 40% by the time they’re 70. Other factors might include:
- Lender fees.
- Joint applications.
- Medically enhanced plans.
- The nature of the property construction.
- Lodgers.
Fixed fee conveyancing services for homeowners
At Toomey Legal, we help buyers and sellers achieve the best results which align with their individual goals. Our team is reliable, fast, and professional in the legal support we provide. Whatever your reasons for pursuing a release of equity, selling your property, or transferring equity, we’re here to help. Simply contact us through our website for an initial chat, or if you have any questions about our services.