Selling your house is one of the best ways to raise a significant amount of money.
Whether you are downsizing or renting for the foreseeable future, any equity in your property becomes available after a sale.
But what if there was a way to unlock the equity in the house, without selling it?
This is what equity release does.
Read on to find out more about what it is, how it works, and more.
What is equity release?
Equity release refers to a financial method of accessing some of a property’s value (equity).
It is available for homeowners aged 55 and over, enabling you to release equity tied up in the home without paying tax.
You can receive this in one lump sum, several smaller instalments, or a combination of the two.
The released equity is a long-term loan that only needs to be paid back once the homeowner passes away or sells the property.
There are two types of equity release schemes:
1. Lifetime mortgage
This is the most popular equity release scheme. With a lifetime mortgage, the homeowner agrees to release a percentage of the property’s equity.
This money comes attached with a fixed interest rate which accumulates and adds to the total money owed.
Some homeowners choose to make interest payments to lower the debt, and so their beneficiaries still get more inheritance when they die.
2. Home reversion scheme
In this scenario, the homeowner will trade a percentage of their home’s future sale profits for smaller equity. The upside is that there’s no interest on this equity.
Some lenders also offer enhanced lifetime mortgages.
These are a great option for homeowners with shorter life expectancies who want to release some cash from their homes to cover the costs of private care.
Can I sell my house if I have equity release?
You can sell your house if you have Equity Release in the UK.
When you do this, any funds from the sale will firstly be used to pay off the loan you took out for equity release, before any remaining cash is then transferred into your bank account.
The equity release loan may also involve an ‘early repayment charge, ‘ so look for this and calculate the financial implications before you make a decision.
Equity release will be repaid in most instances once the property is sold after death or if the owners move into long-term care.
How much will I make if I sell my house with equity release?
The amount you make when selling your house with Equity Release depends on several different factors. These include:
- The value of your house
- The amount of equity you took out
- The terms of your loan
- How much equity you still have in the property
Furthermore, the profit from all house sales also depends on the estate agent’s commission, the amount you pay on conveyancing, and the removal costs, amongst other things.
The loan you took out for the equity release will need to be paid off before you then receive your money.
Does my equity release adviser take a percentage of the house sale?
In the majority of instances, no – although it has been known to happen. You can check your contract with the adviser for more details.
Most financial advisers charge an up-front fee, rather than commission on any future sales further down the line.
However, a few firms still operate this way, so checking your contract going into the deal will guarantee that you don’t fall victim to this.
Speak to your adviser for more guidance on the terms of your deal.
Can I move to a new house if I have equity release?
In most instances, yes – although this can vary for each provider.
Any equity release plans that meet the Equity Release Council standards will guarantee you the right to move your plan to a new property.
This means you can sell your house and transfer the debt to your new one, providing the new property meets the lender’s criteria at that time.
One of the most common criteria providers will require is for the property to be freehold.
You could find that you are offered downsizing protection or have the chance to apply for it. This means you could avoid the early repayment fees.
Can I buy a second home if I have equity release on my first home?
Yes, it is possible to do this in the majority of instances. Your main hurdle will be convincing the lender to give you a loan – but if you are in a strong enough financial position, then it should still be achievable.
Remember that if you buy a second home using equity release, you will typically still be required to live in your main home for at least six months of the calendar year.
Will equity release affect my credit score?
No, Equity Release will not affect your credit score.
Similarly, you should qualify for Equity Release (with most providers) even if your credit score is not ideal.
This is because it is not a typical/direct ‘loan’, meaning the organisations are more lenient.
Alternatives to equity release
If you are over 55 and want to access more cash, then there are a couple of alternatives worth considering.
Firstly, you could downsize into a smaller home. This will enable you to utilise the profit from your house sale, and also reduce your monthly mortgage payments.
Extending your mortgage term could reduce your monthly payments, too, therefore giving you more money to work with.
Renting out a spare room in your house could increase your income and, therefore, strengthen your financial position.
Selling other major assets—such as a car, jewellery, or unneeded belongings—is an avenue that lots of people also consider.
You could also sell your house fast to a cash buyer such as Sold.co.uk. We can complete the transaction within 7 days, and get the money in your account 48 hours later, if you need a lump sum.
