How To Buy A New Home With Equity Release: A Comprehensive Guide

By Author: FinanceAdivor
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When it comes to buying a new home, many people think of traditional mortgages as the only route. However, there’s a less conventional way to finance a property purchase, especially for homeowners who are in retirement or approaching it: equity release. While equity release is typically used to unlock funds from the value of your current home, it can also be used to help you buy a new one. In this article, we’ll explore how to buy a new home with equity release, the pros and cons, and things to consider before you take the plunge.

What is Equity Release?

Equity release allows homeowners aged 55 or older to access the equity (the value) tied up in their home, either as a lump sum or through regular withdrawals, without having to sell or move out. There are two primary types of equity release schemes:

Lifetime Mortgage: A loan secured against your home, where you continue to live in the property and the loan is repaid from the sale of your home when you pass away or move into long-term care.
Home Reversion Plan: ...
... You sell a share or all of your home to a reversion company in exchange for a lump sum or regular payments, but you can continue to live in the home rent-free for the rest of your life.

Both options allow you to tap into the value of your home but are typically used for purposes like funding retirement or paying for healthcare. However, they can also be used for purchasing a new home.

How Can You Buy a New Home with Equity Release?

Equity release can be used to purchase a new property by leveraging the value of your existing home. Here’s how the process works:

1. Sell Your Current Property

To buy a new home using equity release, the first step is usually selling your current property. When you release equity from your home, you will be unlocking a portion of its value, but if you plan to buy a new home, you will need to either:

Release equity from your existing home and use the proceeds from the sale towards the purchase of your new home.
Buy the new home outright using the funds from the equity release if the value of your current home allows it.

In some cases, if you want to stay in your current home for a longer period, you may consider selling and then using equity release for a smaller amount of the funds required for a new property.

2. Use the Proceeds for Your New Property

Once the equity release scheme has been arranged, and you’ve sold your existing property, you can use the funds to purchase the new home. It’s important to note that:

The equity release loan will not need to be repaid until you either pass away or move into long-term care.
You can use the released funds to pay for the new property in full or in part, depending on how much equity has been unlocked.

3. Ensure Your New Home Meets Equity Release Criteria

Not all properties are eligible for equity release. Lenders typically have specific criteria for the type of property they will lend against, including:

Age Requirements: Equity release is generally available to people aged 55 and older.
Property Type: Most lenders require that the property be a residential home, though some will accept bungalows, flats, or retirement homes.
Property Condition: The home must be in good condition and not require major repairs.

4. Find the Right Equity Release Plan

To purchase a new home, it’s vital to choose the right equity release plan for your needs. Depending on your financial situation and goals, you may consider a lifetime mortgage or a home reversion plan. Be sure to compare interest rates, terms, and the level of advice you’re getting before proceeding.

5. Get Independent Advice

Before committing to an equity release plan, it’s essential to seek independent financial advice. Equity release is a big decision, and a financial advisor can help you understand:

How much equity you can release.
The impact of the loan on your estate.
Alternatives to equity release, such as downsizing or getting a traditional mortgage.

Advantages of Using Equity Release to Buy a New Home

Access to Home Value: You can access the value of your home without having to sell it, allowing you to fund your new home purchase without a conventional mortgage.
Stay in Control: With equity release, particularly with a lifetime mortgage, you maintain ownership of your new property, and the loan isn’t repaid until you move out or pass away.
Tax-Free Lump Sum: The lump sum or monthly payments you receive from the equity release are tax-free, which can be used for the new home or any other expenses.
Flexibility: You can still live in your new home for the rest of your life if you go with a lifetime mortgage.

Disadvantages of Using Equity Release to Buy a New Home

Interest Accumulation: If you opt for a lifetime mortgage, the interest on the loan will compound over time. This means the debt grows, reducing the value of your estate and potentially leaving less inheritance for your family.
Eligibility: Equity release is typically only available to people over 55, so younger homeowners or first-time buyers won’t be eligible.
Reduced Inheritance: Since the loan is repaid from the sale of your home after your death, your heirs will receive less inheritance.
Property Value Considerations: The property must meet the criteria set by the lender, and its value may influence how much you can release. If the value of your home doesn’t cover the purchase of your new home, you may need other financing options.

Things to Consider Before Using Equity Release to Buy a New Home

Long-Term Impact: Consider how releasing equity will affect your financial situation in the long term, especially in retirement. Will you have enough funds left for future needs such as healthcare?
Costs: Equity release plans come with associated costs, such as administration fees, legal fees, and potential early repayment charges if you decide to settle the loan early.
Alternatives: Explore other options, like downsizing or taking out a traditional mortgage, which may offer better terms depending on your circumstances.
Estate Planning: Think about how equity release will impact your estate and inheritance plans. If you’re concerned about passing on your home to your family, equity release might not be the best option.

Conclusion

Using equity release to buy a new home is an option that could help you leverage the value of your current property, especially if you're entering retirement and want to avoid a traditional mortgage. However, it’s important to understand the long-term implications, including interest accumulation, the impact on your estate, and the cost of the release. Always seek professional advice to ensure it’s the right choice for your situation. With the right planning and advice, equity release could be a viable way to secure your new home and maintain your independence.