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Times are tight at the moment, with bills on the rise and supermarket shops getting more expensive by the day. Pensions aren’t getting any larger for those on or nearing retirement – but there are ways for you to unlock finances for later life without borrowing money you don’t have, one major example of which is equity release. But what is equity release, and how exactly does it work?
What is Equity Release?
Equity release describes the process by which the value of an asset – its equity – is released in the form of an advance loan. These advance loans can either be released as a lump sum or as an annuity of sorts and can be paid back incrementally or on the sale of the asset in question. Typically, equity releases are linked to property and are commonly referred to as ‘lifetime mortgages’ or ‘home reversion plans, each of which represents a different type of scheme. You are eligible to release equity in the form of a lifetime mortgage from the age of 55, and in the form of a home reversion plan from 65.
In essence, equity release enables you to unlock the value of your biggest investment without having to sell it; the value of the loan can be recouped via monthly repayments, or the sale of the home when you move out or enter long-term care.
Equity releases are paid back with interest, but you can choose to pay for just the interest in order to make the most of your money.
How Do People Utilise Equity Release?
Equity release, whichever scheme is chosen, enables you and your partner the freedom to live in your property right up until you move out, or pass away. Free from the worries of subsisting on pension payments alone, you are able to use your equity to live life comfortably, or afford passion projects and life experiences you may not otherwise have been able to.
The amount of money your property represents can be life-changing – and many choose to use equity release schemes for life-changing reasons. Home improvement is a common reason for releasing equity, while others choose to use their existing equity to pay off remaining mortgage payments and reduce their monthly outgoings.
What to Consider Before Releasing Equity
While releasing equity can make a significant difference to your quality of living, it is a serious decision to make with a number of potential ramifications. Borrowing the entirety of your home’s equity in one can result in extensive interest payments down the line, as compound interest on your property’s value guarantees a large sum of interest over time.
You are also more or less guaranteeing the sale of your home in the event of your transition to long-term care – potentially reducing any inheritance to kin or loved ones. Discussion with your solicitor, or with a professional financial advisor, can help you clear up any questions you may have.
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