Equity release loans are available to homeowners (with or without mortgages) who wish to remain living in their home whilst at the same time releasing capital from it that they have accrued through ownership. This loan amount can be in the form of a lump sum or drawn down as if it were an income. Unlike more traditional loans, equity release loan repayment is repaid usually when either the borrower (homeowner) sells their property or dies.
In the US and some other countries, equity release loans are more commonly known as “reverse mortgages”. In the UK, there are two main types of equity release schemes: lifetime mortgages and home reversion.
A lifetime mortgage is is a loan secured against your home, without a requirement to make repayment until you either relocate and sell your property or you pass away. When this happens, the loan amount given as well as interest on the loan are repaid.
Home reversion is where you sell your home (or a stake in it) to a loan provider, with the agreement that you continue to live in the property throughout your life, but you have to pay for it’s upkeep.
As with other types of lending, there are benefits and drawbacks to taking an equity release loan.
Benefits of Equity Release Loans
- Equity release loans can reduce the exposure to inheritance tax that comes out of the estate when you die.
- They can provide you with a much-needed injection of a substantial amount of cash (the %percentage of agreed equity released will vary, but usually it can be up to 60% of the value of your property).
- There are legal requirements on lenders to protect equity release borrowers from negative equity problems should property prices decrease.
- Borrowers are not tied to the equity release lender and so may choose to refinance their loan with another lender to get a better deal.
- You are expected to pay for maintenance of the property while your remain living in it.
- You will likely not leave as much in the way of an inheritance for your family.
- As equity release is a form of loan, you will pay making it more expensive than selling your home.