How Much Equity Can I Release From My Home?
If you are considering taking out an equity release product, this article should answer many of the questions you have and help you to decide if it is the best financial option for your circumstances.
- How much equity do people typically release?
- How does property condition affect equity release
- What are my options with equity release?
- Lifetime Mortgage
- Home Reversion plans
- How to calculate the amount of equity you can release
- Can I release more money if I already have an equity release plan?
- What can equity release money be spent on?
- What are the alternatives to equity release?
How much equity do people typically release?
The maximum amount you can borrow
In terms of the maximum amount you can borrow, you can usually borrow up to 60% of the value of your property. The exact amount that you are able to release will depend on a variety of factors, including the value of the property, whether there is any money still outstanding on the mortgage and the age of the homeowner.
The condition of the property and even the property construction materials can also determine how much you are able to release.
Usually, applicants will release between 20% and 60% of the market value of their property through equity release. Most equity release companies will have a minimum equity loan available, to ensure that it is financially profitable for them.
Some homeowners may only require a smaller sum and do not want to take out the maximum amount, as they want to leave more inheritance to their family. The amount you want to release will depend on the plans you have for the future and whether leaving inheritance is a priority.
How does property condition affect equity release
If your property is in poor condition and is likely to require a lot of work before someone would buy it then this could impact how much you are able to release. Some lenders may even ask that you use some of the money to pay for repairs as a requirement of the agreement.
In a similar process to when you buy a property and the mortgage lender requires a valuation, the provider will require an assessment of the property to check its condition. They will be checking for any reasons that would make the property difficult to sell, such as it being an unusual type of property or if it is an area affected by flooding, for example.
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What are my options with equity release?
There are two main options for equity release products:
Lifetime mortgages are the more common type of equity release and generally you will never have to pay anything back while you are alive. This type of equity release involves a loan being secured against your property and when you die or go into long-term care, the loan is repaid when the property is sold.
You retain ownership of the property and are able to stay living there until you die or move into long-term residential care. If you take the lifetime mortgage out in joint names, the last living person is able to stay in the property after the other dies or moves into residential care.
What is the minimum age for a lifetime mortgage?
The minimum age that you are able to take out a lifetime mortgage is usually 55 and some lenders have a minimum age of 60 or 65. When a lender is deciding how much to lend, the age and health of the homeowner are a vital considerations.
The longer that the homeowner remains living in the property, the longer it will take the lender to receive the repayment of the loan, which is why some lenders stipulate a higher minimum age.
Some lenders will be prepared to lend a larger amount if the homeowner has a health condition or a lifestyle habit such as smoking that is likely to reduce their lifespan.
With a lifetime mortgage, interest rates must be fixed or have a cap, as this condition has been set by the Equity Release Council. Years ago, the equity release market was not as well-regulated but if the lender is a member of the ERC, homeowners are more protected from mis-selling, for example.
An additional benefit of taking out a lifetime mortgage is that the product has a no negative equity guarantee, which is another level of protection. Historically, without the guarantee in place, situations could arise where the loan escalated to more than the price that the property was sold for.
This meant that beneficiaries of the estate would be required to repay the outstanding amount after the property was sold. The no negative guarantee ensures that this situation is no longer possible.
Home Reversion plans
Home reversion allows you to sell a part, or all, of your property to an equity release provider. The minimum age for this type of product is usually higher than for lifetime mortgages. Providers usually only offer a home reversion product to homeowners who are aged over 60, or over 65 with some providers.
The percentage of the market value you are able to release will usually increase the older you are. You also have the right to live in the property until you die or move into permanent residential care, like you do with a lifetime mortgage.
People tend to opt for a lifetime mortgage rather than home reversion because the home reversion product does not provide the homeowner with the home’s market value. The other factor to consider is that you will no longer own your home and it can cost you a lot more to buy your home back than the amount you received in the equity release.
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How to calculate the amount of equity you can release
The two main factors in the calculation are age and property value.
Examples based on a lifetime mortgage:
A 55 year old with a property value of £200,000 might be able to release £57,000.
To compare this to an older homeowner:
A 75 year old with a property value of £200,000 might be able to release £100,000.
These figures will vary depending on the provider and the other contributing factors used in the calculations, but these two examples give an idea of how age affects the amount you could release.
For example, at 55 you could release £114,000 on a property valued at £400,000.
At 75, you could release £200,000 on a property valued at £400,000.
Can I release more money if I already have an equity release plan?
If you think that you may want to release more money in the future, a drawdown policy may be more suitable for you. A drawdown policy allows you to take an initial lump sum and then you can take smaller amounts over time, in addition to the lump sum.
What can equity release money be spent on?
One of the main attractions of equity release is that you are able to spend the money on anything you want. With other products such as a loan or remortgage, there is stricter criteria around what you are allowed to spend the money on. For example, you may only be able to take out a loan against your home if you are spending it on home improvements, so it is adding value to your property.
With equity release, your money can be spent on whatever you want to spend it on. You could spend it on holidays, a car, a holiday lodge or simply have regular payments to allow you to live a bit more luxuriously.
You can even use your equity release money to provide financial support to your family while you are still alive, instead of as inheritance. They may require a lump sum to use as a deposit to buy a home and equity release will enable you to provide this for them.
What are the alternatives to equity release?
When you are deciding if equity release is right for you, you should consider whether there are any alternative options that could be more suitable. One of the key benefits of equity release is that you do not need to repay the loan until after you die, so there are no monthly repayments to make.
With other types of finance, such as a standard loan, you would usually be required to make monthly repayments. You could also struggle to find a lender who will provide you with a standard loan if you are no longer working and earning a salary.
You should also consider whether you want to leave a certain amount of inheritance to your family. With a lifetime mortgage, you are usually able to ringfence a certain amount that is guaranteed to go to your beneficiaries.
Downsizing is generally the main alternative to equity release. If you are happy to sell your home and move into a cheaper property, then this could be a better option for releasing equity from your home. However, if you do not want to move home, then you may prefer the equity release option, as you can live in the property until you die.
If you are worried about how equity release could impact your family’s inheritance, it is a good idea to discuss it with them before you make your decision. They may be happier to get some financial support now rather than later, or they may want you to spend your money however you choose to.
Equity release can provide you with the money to enjoy your later life in a way that you probably would not be able to without the released money. Before you make any decisions, you should speak to a specialist broker about your financial circumstances.
Boon Brokers provides free, impartial advice on financial products and we have a specialist team who help to arrange the best equity release products to suit your needs.
Contact our team to discuss which options are available and to receive expert advice on how equity release would affect you and your family.