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Equity Release 101: What It Means and How It Works

If you are looking for options to have a more comfortable retirement, you should consider an equity release. An equity release may help you boost your finances and top up your pensions so that you can be relaxed and worry-free in the latter years of your life.

Are you curious about equity release? Here are essential things you must know about it.

What Is Equity Release?

Equity release is a way for people of a certain age to get more cash out of their property than they can get from a sale or by letting it out to a tenant. Equity release lets them sell the property, but they get a regular income from the sale proceeds instead of receiving the total cash sum.

What Happens in an Equity Release?

When you do an equity release, you can get more cash out of your property than you can by selling it or letting it out to a tenant.

To qualify for equity release, one must be over 55 or 65 for a home reversion scheme. Once found eligible, the equity may be released in instalments, or it can also be arranged to be paid via a lump sum.

Then, if you want to identify the final amount, subtract the amount of your final mortgage from the current property value.

What Are the Types of Equity Release?

There are two main types of equity releases: lifetime mortgages and home reversion schemes. Here are the things you must know about each of them.

1. Lifetime Mortgages

A lifetime mortgage is a type of equity release that gives you a lump sum that you can use as you please. You can use the money to do your renovations, pay off bills, weddings, or other items such as funeral costs and maintenance work.

Even though lifetime mortgages are attractive, they come with some negative features.

For example, most lifetime mortgages can only be used in retirement, and they stop once a borrower dies. If the person who borrowed the money dies before the direct payments stop, the value of their property will be used to pay for the balance of the debt.

If you are interested in a lifetime mortgage, you should at least be over the age of 55. Most lifetime mortgages do not require you to make repayments on balance, which means you accrue more and more interest.

Then, the interest is deducted from your estate when you die or enter a care home. However, some mortgage lenders will allow you to pay off the interest if it’s an option you want right away.

2. Home Reversion Schemes

A home reversion scheme is an equity release that lets borrowers use their property as security. In return for the security, the borrower will receive an income for the rest of their life.

In a home reversion scheme, you will sell a part of your home or all of it for a lower price than its market value. What you get back is a tax-free lump sum or a payment in monthly instalments, usually amounting to 20 to 60 per cent of the value.

Ultimately, you won’t be able to sell your home until you move into a care facility or pass away. But, the home reversion scheme will allow you to live in your home rent-free on a long-term lease.

How Much Does Getting an Equity Release Cost?

The typical lump-sum repayment for an equity release is about 20 to 60 per cent of the property's value.

For the first option, which gives you lifetime tax-free payments from the property sale proceeds, the fees usually amount to around £3,000.

For the second option, the lump-sum payment is usually £25,000, plus legal fees of about £4,000.

However, for a Plan 3 mortgage, also called a 'joint life' mortgage, the fees will usually amount to £6,000.

What Are the Fees Involved in an Equity Release?

For a lifetime mortgage equity release, here are the most common fees to be aware of:

  • Arrangement Fee - You will have to pay a fee upfront when you take out a lifetime mortgage.

  • Legal Fee - Since you will work with an equity release solicitor to act on your behalf for all the legal stuff, you have to pay for their services.

  • Financial Advisor Fee - You can also work with a financial advisor to help you along the way. You can get the option to pay them upfront or add the fees for their service added to the loan.

  • Interest Rate - You’d also have to pay 3 to 5 per cent as the average interest rate of a lifetime mortgage.

  • Valuation Fee - Before you can get an equity release for your home, you’ll need to have it valued by a chartered surveyor. Remember to factor property survey costs into the total amount of the valuation fee.

For a home reversion scheme, here are the most common fees you should know:

  • Arrangement Fee - Like with a lifetime mortgage, you have to pay the home reversion plan provider.

  • Legal Fee - You should also pay the solicitor you appoint to assist with all the legal requirements.

  • Financial Advisor Fee - Your financial advisor will ask for an upfront payment for their expert advice toward setting up the home revision scheme.

  • Valuation Fee - Have a surveyor conduct a property valuation and seek payment.

How Long Will an Equity Release Application Take?

A lifetime mortgage takes four to six weeks to process, while a home reversion scheme takes six to eight weeks, but these ranges are not cast in stone. Ultimately, The time it takes for your whole equity release process to be complete will vary depending on the surveyor and solicitor you choose.

When you send out an application and get it approved, you should discuss it with a chartered surveyor and ask them to evaluate your property. At the same time, it is also good to go over the entire process with your equity release solicitor to ensure everything runs smoothly for you. To help ease the stress of spending time looking for a lender, make sure a solicitor and surveyor are chosen early on in the process to speed everything up.

Final Thoughts: Is Equity Release Worth It?

Many people choose to do equity release to help them live better in retirement. However, equity release doesn’t come without its risks. That is why it is essential to consult a financial advisor or solicitor before proceeding.

If you’d want to learn what you can do about your property, book an appointment with the best conveyancing solicitors. Here at Conveyancing Calculator, we can help you through expert advice about your property—from how to understand the essentials of conveyancing to how to compare conveyancing quotes. Contact us today to learn more.


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