What Exactly is Equity Release (and Should You Take Advantage of It?)

Although mortgage lenders and economists feel that an equity release is a viable financial solution for older homeowners, 67% of them don’t know what it is. If you want to take advantage of an equity release, this article will help you learn what it is and how to use it appropriately.

What is an Equity Release, and How Does it Work?

Equity release describes the process of a homeowner accessing the equity (or cash) tied up in their home. Homeowners who are over the age of 55 can take this money out in a lump sum, through a collection of small installments, or both and still retain ownership of the home.

Although there are several types of equity release, the two most common are home reversion plans or lifetime mortgages. Of those two types, lifetime mortgages are the most popular.

Equity Release on a Lifetime Mortgage

An equity release on a lifetime mortgage can be given via a lump sum or in stages. There are no required monthly payments, but you may have the option to make them. If you don’t pay a fee, compound interest is added based on the amount borrowed and previous interest.

Equity Release on a Home Reversion Plan

Although a home reversion plan is less common, some homeowners will use this option to sell part or all of their property to a plan provider to receive a tax-free sum. The provider allows you to live rent-free in your home for the rest of your life in exchange for the asset when you die.

How Much Equity Can I Release? 

The best way to get a quick estimate of how much equity you could release is by using an equity release calculator online. For UK readers, enter in your postcode, address, and property value. Readers from other countries may need to use another site for an accurate estimate.

How Do I Get an Equity Release?

The process of getting an equity release includes many steps, but these steps are easy to complete for most homeowners. 

Here’s how to get an equity release on a property:

1. Speak to an equity release broker

2. Set up an appointment with an adviser

3. Select your equity release option

4. Get your home professionally valued

5. Understand the amount you can release

6. Consider the offer with a solicitor

7. Listen to the sets presented by your solicitor

8. Once done, the solicitor will transfer the funds

To qualify for an equity release, you’ll need to be above the age of 55 and own a home with a minimum value of $50,000-$100,000, depending on the country or lender. In most countries, you can only release equity from your permanent residence, not businesses or other homes.

The equity release gets repaid once you pass away or enter long-term care if you have a lifetime mortgage. Under a home reversion plan, you’re repaid after you perform the release.

Should I Take Advantage of an Equity Release?

The biggest benefit of an equity release is it gives you money you can spend right away instead of leaving it locked in your home. If you’re house poor, you can use the equity in your home to prepare for retirement. This comes in handy if you need to pay long-term care costs.

However, an equity release comes with a few disadvantages, regardless of how you obtain your equity. You may receive less than the total value of the property, you may not be able to move once you perform an equity release, and your family may have to settle up your estate quickly.

Before performing an equity release, get your solicitor to review your contract carefully to ensure this option is in the best interest of you, your spouse, your family, and your beneficiaries.