How Does Equity Release Work in a Mortgage?


Equity release is a big financial commitment, so understanding how it affects you and your family is vital. 

At Barlow Irvin, we have years of experience helping families to achieve their home owning goals, and this includes equity release mortgages.

What is equity release?

Equity release is a way of turning some of your home’s value into cash. Releasing equity basically swaps a portion of your property value for a lump-sum or smaller increments over a period of time as you wish. 

Many homeowners use equity release to raise funds for one-off events such as retirement, putting a deposit on another property or financing an expensive family event. 

How does equity release work?

If you are aged 55 or over, you can take cash out of your home, tax-free. Equity release allows you to do so without having paid off your existing mortgage, however, this must be repaid from the money that is released. 

The loan is repaid using the proceeds of your home’s sale after you or the last remaining borrower dies or enters long-term care. 

With equity release you don’t need to worry about having to meet monthly reinstallments and you can release the funds as either one lump sum or over the course of a chosen period of time.

What are the equity release options?

There are two types of equity release options. 

The first option is a lifetime mortgage. If you agree to a lifetime mortgage, you can borrow money against the value of your home. The amount you borrow does not need to be paid back immediately and it is only repaid when you or the last borrower in the house passes away or moves into long term care. 

Any interest that builds up over time is included in the final payment, however, you can choose to make repayments if you wish. 

The second option is called a home reversion plan. This scheme allows you to sell a portion of your home to the reversion company in exchange for funds. You don’t need to move out, however, the reversion company will receive their share when you eventually sell the house. 

The percentage of your property you can sell to the reversion company will depend on your age and the value of the house.

Pros and cons of equity release in a mortgage

Just like any kind of mortgage product, they do have their pros and cons that should be considered. 

Pros of equity release in a mortgage:

  • You can take the cash as either a lump sum, a smaller lump sum and then smaller amounts, or smaller amounts over a longer period of time.
  • No monthly repayments are required even though interest will be added to the amount owed.
  • You continue to own your home until the mortgage needs to be repaid after death or moving into long-term care.
  • You can set aside some of the value of your home to be passed on as inheritance.

Cons of equity release in a mortgage:

  • You must fit a limited criteria to be eligible for equity releases in mortgages.
  • Taking a lump sum can impact the benefits you may receive.
  • Interest rates are usually higher than those applied to traditional mortgages.
  • Some lenders may implement an early repayment charge.

What are the costs involved in mortgage equity release?

Even though equity release can be a great option if you need to access a large sum of cash relatively quickly, there are still costs that may come alongside it that you should be aware of. 

These costs can include:

  • Surveyor valuation 
  • Solicitor fees
  • Lender applications 
  • Advice fees
  • Completion costs 
  • Early repayment fees
  • Interest 

FAQs about equity release mortgage

Is it better to remortgage or release equity?

Equity release is usually only accessible for those who are aged 55 and over, so if you’re younger than this, then remortgaging may be the only option for you. 

However, if you do qualify, equity release may provide you with the chance to access more cash from your property than if you were to remortgage. This is because there is no obligation to make monthly repayments when you have a lifetime mortgage. 

However, when you remortgage, how much you borrow will depend on what you can afford to repay back each month. Since this is determined by your income, if you have already retired and have a smaller income, you might not be able to secure the size of the mortgage you’re looking for. 

If you can’t decide whether remortgaging or equity release is better for you and your circumstances, you can get in touch with our team today for expert and personalised advice.

What is the best age to take out equity release on a mortgage?

While there is no definitive answer for what is the best age to take out equity release on a mortgage, it is generally suggested that retirement age is the most ideal. 

Although equity release is aimed at those aged 55 and above, many lenders prefer applicants to be aged 60 or older

Can you still sell my house if you have equity release?

Yes, it is possible to sell your house if you have equity release. However, you will have to pay back the equity release loan in full, from the value of your sale. There may also be early repayment charges if you sell soon after agreeing to an equity release mortgage. 

About the author 

The Barlow Irvin Team

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