How Does Equity Release Work (2024)

FAQs

How Does Equity Release Work? ›

Equity release is a way to turn some of your home's value into cash. Releasing equity effectively swaps a percentage of your property value for a lump-sum or in smaller amounts over a period of time you can spend as you wish.

The main disadvantage of equity release is that it does not pay you the full market value for your home.

Equity release plans provide you with a cash lump sum or regular income. The "catch" is that the money released will need to be repaid when you pass away or move into long term care. With a Lifetime Mortgage, you will owe the capital borrowed and the loan interest accrued.

Home equity loans use your home as collateral. You could lose your home if you can't keep up with your loan payments. Home equity loans should only be used to add to your home's value. If you've tapped too much equity and your home's value plummets, you could go underwater and be unable to move or sell your home.

You could pay off an existing mortgage and/or any debts – as you don't need to make monthly repayments with equity release, this may be a good option.

Another option is a Retirement Interest Only mortgage (commonly referred to as a RIO). RIO mortgages have no fixed term; instead, they can run for the rest of your life. And you are only required to make monthly interest payments to keep the capital owed level.

There's one question people always ask when they're looking into equity release: “How much can I borrow?” Well, you can usually release between 20% and 60% of your property's value.

For home improvements or launching a business

A HELOC can be used for a series of home improvements, for example, or for launching a small business. HELOCs are generally the cheapest type of loan because you pay interest only on what you actually borrow.

Usually, there are no upfront costs in setting up an equity release, as most advisors and solicitors only charge on completion. However, it varies on the advice firm, solicitor and product. Some advisors will charge an upfront application fee or a fee when the lender provides an offer.

Equity release interest rates

Usually, lifetime mortgages offer higher rates of interest than standard fixed-rate mortgages. You can expect to find interest rates of around 3-5%, but these vary from one provider to the next.

Can I pull equity out of my house without refinancing? ›

If you're wondering, "Can you pull equity out of your home without refinancing?" The answer is yes. There are multiple financing options homeowners can pursue that don't impact their current mortgage.

The straightforward answer is no.

Getting a home equity loan or HELOC, often referred to as a “second mortgage,” does not alter the interest rate of your primary mortgage. These are distinct financial products, each with its own terms and rates.

What is a home equity loan (often known as a second mortgage)? Unlike a HELOC, which allows you to draw out money as you need it, a second mortgage pays you one lump sum. You then will make fixed-rate payments on that sum each month until it's paid off.

Where an equity release application is to be made to a lender, you should expect a timeframe of around eight weeks until you receive your equity release funds. We have frequently seen applications taking as little as three weeks. However, we have also seen more complex applications that take several months to complete.

Yes, you can release equity to pay off debt – in fact, it's a very common use for it. You can pay off anything from a previous mortgage or a car loan to a credit card or a loved one's debt. Your adviser will help you check your options, and make sure that equity release is the most cost-efficient one.

You Lose Control: When you give up equity in your startup, you are giving up control of the company. You will no longer be able to make decisions about how funds are spent, who is hired and fired, or how the company is managed.

Loss of control: You are no longer the sole decision maker, and you have other people to agree with strategic decisions. Unfavourable Valuation: More often than not, giving away equity at an earlier stage of your journey means you are giving away far more of the company as you are getting investors in early.

What happens if your equity release lender stops trading? In the instance that your lender fails, and is unable to continue trading, their existing plans will be sold onto another lender.