If you have been paying off your mortgage for a number of  years, or your house has increased in value, you have most likely built up equity in your property. The equity you have in your property can be described as the difference between what you owe on your mortgage and the overall value of your property. 

People choose to release equity for many reasons. From a lump sum of cash that you can use for anything from house improvements to starting your own business. Equity release is also popular amongst people who have reached retirement age, and could benefit from extra funds to be able to enjoy their golden years. 

What is equity release, and how does it work?

You can think of Equity release as a way of borrowing cash against the value of your property. Let’s say the overall value of your home is £200,000, and so far, you have paid off £100,000 of that sum. This would mean that you have £100,000 of equity in your home. Through equity release, you could access some of that £100,000 as a lump payment to spend or invest. 

The process of equity release is basically a way to unlock the value of your home without having to sell it. There are multiple ways of releasing equity, each with its advantages and disadvantages. Nevertheless, you must remember that releasing equity accumulates additional debt, as the money that you ‘release’ will be re-added to the overall value of your mortgage.

For example, if you release £100,000 worth of equity, you have to be well aware that you will still owe that amount, plus the remaining value of your home, to the lender. How you repay this amount depends on how you release equity and the individual terms and conditions of the lender. 

There are two main ways you can release equity from your home:

Lifetime Mortgage 

A Lifetime mortgage is the most popular form of equity release. It involves releasing the value of your property in one lump sum, or smaller instalments over time, which are then paid directly into your bank account. Releasing equity through a lifetime mortgage is only available to people who are 55 years of age or older. 

Releasing equity in your home through a lifetime mortgage is commonly done to help senior homeowners support themselves throughout their retirement or to improve their standard of living. It’s sometimes a choice for those who may not have children or are simply not concerned with leaving their house as an inheritance for younger descendants. 

You can make repayments on your lifetime mortgage to start building your equity back up, but there is usually a cap on how much you can pay each year. Most often, those who decide to release equity through a lifetime mortgage will choose for their debt to be repaid through selling their property post their death or once they move to a retirement home.

This means that they can retain full ownership of their home for as long as they like, without having to make monthly payments, and enjoy the additional funds available to them.

If you do decide to make regular payments on your lifetime mortgage, you have a choice of repaying the capital or just the interest. This will reduce the overall amount of debt you owe and stop interest from accumulating on top of the value of your home. 

Advantages and Disadvantages of releasing equity through a lifetime mortgage

Advantages

• Tax-Free cash - When you take out a lifetime mortgage, you can receive the money in a lump sum or through smaller instalments over a longer period of time, tax free. 
• Don’t have to make regular repayments - Unless you decide otherwise, you will not have to make repayments on your lifetime mortgage, as your mortgage value will be repaid through the sale of your home after you die. 
• You retain full ownership of your home - You remain the legal owner of your property until you die.

Disadvantages 

• Interest can build up quickly - If you choose not to make any repayments over the duration of your lifetime mortgage, interest can accumulate quickly and increase the amount of your debt. 
• Reduced inheritance - If you choose not to make repayments on your lifetime mortgage, your loved ones will be unable to inherit it after your death. 
• Potential early repayment charge - If you choose to repay your debt early, you could be faced with an early repayment charge. 
• Higher interest rates - The interest rates on a lifetime mortgage tend to be higher than a regular mortgage. 

Before you decide to release equity through a lifetime mortgage, it is advised that you consider selling your property to purchase a less expensive, smaller one. This option appeals to many people, as it will give them some disposable income from the sale, as well as a property that they can then pass on to their children.

Home reversion plan

A home reversion plan is available to people aged 65 or older and allows you to ‘sell’ a portion of your property to a lender slightly below market value. This enables you to continue living in your property without having to pay any additional rent for the portion you no longer own. Put simply - it’s a way of splitting ownership between the current owner, and a lender, who will then be entitled to the property’s value equivalent to their share. 

The case study below will help you visualise exactly how a home reversion plan works:

Beth decides to take out a home reversion plan and sell 40% of her property, currently valued at £200,000. She receives £40,000 for the 40% share, which technically speaking, is below market value. However, she receives the cash in a lump sum, which she is welcome to use as she pleases whilst still retaining ownership of 60% of the property. She is also allowed to live in the house without having to pay any additional rent on the 40% she no longer owns. 

Once Beth dies, the house will be sold by the lender. The house has now risen in price and has sold for an overall price of £300,000. Seeing that Beth still owned 60% of the property, now equivalent to £180,000 - the money will be passed on as inheritance to her children. The lender will keep the remaining 40% valued at £120,000. 

This works for the lender as the £120,000 they receive for their 40% share is more than the original 40,000 they paid to Beth. Beth was satisfied with this agreement, as she still received an additional 40,000 to spend during her golden years, and was able to continue living in her property whilst still knowing some proceeds from the sale of her home after her death will be passed down as inheritance. 

Here are some Advantages and Disadvantages of using a home revision plan to release equity:

Advantages:

• You can continue living in your home - a home revision plan will allow you to continue living in your home without having to pay any additional rent for the share of the property you no longer own 
• Tax Free - when selling a share of your property under a home revision plan, you will receive one tax-free lump sum that you can spend as you like. 
• No interest - You will not be required to pay any interest or any additional fees after a home revision plan is completed.
• Inheritance - You still own a percentage of your home meaning you will be able to leave an inheritance to your loved ones that is equal to your share of the property. 
• Portable - There is a possibility to move a home revision plan to a different property, if you choose to move. 

Disadvantages: 

• Minimum age requirement - A home revision plan is not available to anyone below the age 65. 
• You will not be paid the market value of the share that you sell.
• Difficulty moving - Although it is possible to move your home revision plan to a different property, this process can be troublesome and time-consuming.

Overall, a home revision plan is a good alternative to a lifetime mortgage if you wish to retain ownership of your property and be able to pass on an inheritance to your loved ones.