Your equity in your home is how much you own. Think of it as the amount of your mortgage that you have already paid off, or the difference between your home’s market value and what you still owe the lender. So, once you have paid off your mortgage completely, you have 100% equity: you own it entirely. But as the value of your home appreciates, there is no immediate benefit to you in terms of cash. You will not be able to profit from the increase in value until you sell your property, and if you never sell, your estate and beneficiaries will be the only ones who are better off.
An equity release mortgage offers a way around this. These mortgages are becoming increasingly popular for homeowners aged 55 and older, as they give you a way to benefit from the equity you have built up in your home. An equity release involves a lender giving you a portion of the value of your home as a lump sum or a series of payments, in exchange for interest or a portion of the proceeds when your home is sold down the line. Unlike traditional mortgages, an equity release is not paid off over a set term, it can only be repaid when you sell your home. If you don’t sell your home until you die, this usually means that your beneficiaries will get less of an inheritance. However, it is your money, so prioritize your finances as you see fit. Many people use the cash from an equity release to pay off other debts or give themselves a more comfortable retirement. There are two main types of equity releases:
- Lifetime Mortgage: A lifetime mortgage is the most popular type of equity release for those age 55 and older. In a lifetime mortgage, you take out a loan at a fixed interest rate secured against your property, and these loans often require no repayments during your lifetime, hence the name. Once you have taken out the loan, the interest accrues somewhat rapidly. Some lenders allow you to pay off the interest each month, but some don’t, so keep this in mind when considering lenders for your equity release. A lifetime mortgage is typically taken out as a lump sum, but some lenders offer drawdown products which allow you to take money out of your property a bit at a time. A benefit of a drawdown style loan is that the interest is only charged on the money you have already withdrawn from your home’s value. To qualify for a lifetime mortgage you must be at least 55 years old and own your property in full.
- Home Reversion Scheme: In a home reversion mortgage, you sell some or all of your property to a home reversion provider at a tax-free rate below market value. In return, you can continue to live in your home rent free for as long as you want. When you die and your property is sold, the proceeds from the sale are split up according to the percentage that you and the home reversion provider each own. For example, if your home is worth €200,000, the lender may buy a 20% stake in your home for €10,000, well below market value. If you die, and your home is sold for €300,000, the lender will then recoup their 20% stake at a value of €60,000. Most lenders restrict the age for a home reversion loan to 65 and above.