How Does Equity Release Work?
The equity release market is growing at an astonishing rate, with more and more people turning to this type of mortgage as a solution for their retirement. But what does it mean? How does equity release work? Who can apply for equity release mortgages?
What Is Equiity Release? Equity release has been around in one form or another since 1918 when Legal & General became the first company in Britain offer lifetime annuities that could be cashed-in early. With interest on savings rates crawling back up over recent years, many homeowners are taking out loans against their properties so they have access to the funds to cover their retirement needs. What this means in practice is that a homeowner takes out an equity release loan against their property (usually for 40 or 50 years) and then they pay back either interest only, monthly installments of both capital and interest combined, or repayments with no additional charges.
How does it work? Equity release works in one of three ways;
A homeowner pays back the loan with monthly installments that can include interest, capital and repayment charges. In this case there is no benefit to taking out an equity release because they are paying off the debt anyway so any savings made by releasing some cash early would be offset by higher repayments later on.
If a borrower chooses the ‘interest only’ option then their regular mortgage payments will cover the cost of both principal and interest installment payment for as long as needed which usually means until retirement age or when house prices rise sufficiently high enough to return most (if not all) of what was borrowed. With fixed rates at historic lows it’s now possible to borrow up to 75% LTV without the risk of a hefty mortgage rate.
If they take out an equity release loan with no additional charges then it’s usually because their property is not worth enough to generate any cash and so there are no repayments at all, hence why this type of equity release makes sense for those who own properties that have gone down in value substantially or where there is little prospect of ever recovering anything back on resale.
Who Can Apply? Anyone from age 55 onwards can apply for an equity release but lenders will want proof that you’re able to cover your basic living costs until retirement (and beyond) without needing access to capital again before then.