Equity is the value of your property that can be utilised to give you a cash lump sum. The process by which this sum is made available is known as equity release.
Equity release is usually a cash generation choice that people take advantage of in later life when they have paid off existing mortgages and are no longer getting a regular income from employment.
There are two main methods of equity release; lifetime mortgage and home reversion.
A lifetime mortgage works in a similar way to a standard mortgage. The value you release is secured against your main residence, whilst you retain ownership of the property.
Lifetime mortgage providers often give you the choice of paying off the interest as it accrues or allowing it to accumulate over the duration of the mortgage. Some providers do now also offer an option to pay off the interest along with some of the capital mortgage sum during your lifetime.
You should seek independent financial advice before entering into any financial arrangements like this.
There is often an option to ring-fence some of the value of the property to protect that sum for inheritance tax purposes.
When you die or move into long-term care the balance owing on the mortgage (the interest and the initial sum) payable from the value of the property.
Home reversion operates in a different way. If you sell part of or all of your home and get a lump sum or regular payments for the amount of the property you have sold. Unlike a standard sale you get the right to remain living in the property until you die. During the period between the receipt of the advance and the end of the loan period you will not have to make any regular payments to the company that has bought the property/share in it; however you do still have to maintain and insure the property.
Similar to lifetime mortgages you can choose to ring-fence a portion of your property for inheritance purposes. This percentage will remain the same, even if there are any changes in the value of the property.
The cashed in value of the property is repaid to the company when the property is sold. The proceeds are distributed in the relevant proportions.