5 Little-known Facts About Equity Release: What You Need To Know Before You Consider It

By Author: Finance Advisors
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Equity release can be a game-changer for homeowners looking to unlock the value tied up in their property, especially during retirement. While many are familiar with the concept of releasing equity, there are several lesser-known aspects that could have a big impact on your decision. If you’ve ever wondered how to release equity from home, here are five key facts you might not know.
1. You Don’t Have to Move to Release Equity
A common misconception about equity release is that you need to sell your home to access the money tied up in it. The truth is, equity release schemes allow you to unlock a portion of your property’s value while still living there.
Whether through a lifetime mortgage or home reversion plan, these options enable homeowners to receive a lump sum or regular income without having to move out. This is especially appealing for older homeowners who want to stay in the home they’ve lived in for decades but need extra funds for retirement or medical expenses.
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... 2. The Interest is Compounded – So It Can Grow Quickly
When considering how to release equity from home, it's crucial to understand the long-term costs. Unlike traditional mortgages where you pay interest on the loan each month, most equity release schemes, especially lifetime mortgages, have compound interest.
This means that the interest accumulates on both the original loan and the interest already added. While this can seem advantageous in the short term because no repayments are needed initially, over time, the debt can grow substantially. Be sure to carefully consider the long-term impact this could have on your estate or beneficiaries.
3. You Can Release Equity Even If You Have a Mortgage
It’s not uncommon for homeowners to believe they need to have their mortgage fully paid off before they can release equity. While it’s true that many prefer to clear their mortgage before taking out an equity release plan, it's possible to release equity from a home that still has an outstanding mortgage balance.
In such cases, the lender will use the equity released to pay off the existing mortgage, with the remainder available to you. However, it’s important to note that the total amount you can release might be reduced based on the size of the remaining mortgage.
4. Equity Release Isn’t Just for Retirees
Though equity release is primarily marketed to retirees, it's not exclusively for this group. You might think releasing equity is something you’d only need to consider after retirement, but many younger homeowners are turning to equity release options for a variety of reasons.
For example, some use it to consolidate debt or make home improvements. If you're in your 50s or 60s and still working, you could qualify for an equity release plan depending on your property value and other factors. Keep in mind that releasing equity earlier in life means the loan has more time to accumulate interest.
5. You Can Choose How to Release the Equity
When it comes to release equity, there are more options than you might expect. You don't have to take a one-size-fits-all approach. Equity release products generally offer a choice between lump sums, drawdown options (where you release small amounts as needed), or regular payments.
The lump sum option provides you with a one-time cash payment, while a drawdown plan gives you flexibility in withdrawing funds over time. This is helpful for those who don’t need a large amount immediately but want access to funds as and when needed, without having to reapply for a loan.
Final Thoughts: Equity Release Isn’t a One-Size-Fits-All Solution
Equity release can be an excellent tool for homeowners seeking to access funds without having to sell or downsize, but it's essential to understand both the benefits and the risks. Before deciding how to release equity from home, take the time to explore all your options, speak with a qualified advisor, and carefully weigh the long-term implications.
With the right advice and preparation, equity release could help you live more comfortably, whether you're looking to fund your retirement, improve your home, or just have a bit more financial freedom. Just remember: it’s a big decision, and there’s no rush—take your time to get the full picture!