The question of whether to release equity in a home is one often asked in many households. The chance to obtain funds that may help support later life, assist family members, or improve the home can often be tempting. Thanks to what it can offer, many people take up the option. However, sometimes, even with those funds obtained, circumstances may lead to a need for a house sale. Is that possible when you have released equity though?
In short, yes. You can sell your house if you have equity release. You just need to make sure that you meet some specific criteria.
In this edition of our blog, we explain how you can sell a house with equity release.
What does equity release mean?
Before explaining the process behind selling a property with excess release, we will explain what it is so you can make an informed decision as to whether it is something you feel comfortable taking advantage of.
Equity release is available to homeowners aged 55 or above and allows you to access a percentage of the equity you have in your home. It’s tax-free and allows you to keep your home and not be required to make mortgage payments on it.
Instead, payments on this loaned amount are made when the property is sold, or the owners pass away. There are two types of equity release available, each offering different benefits. You should research them both first to make an informed decision as to which option may be the best for you.
Lifetime mortgage home equity release
The lifetime mortgage option for home equity release is the most popular. It works by giving you one lump sum that starts to accrue interest. It acts much like your traditional mortgage but is instead paid once the property is sold or you pass away. You are though, allowed to make payments sooner if you wish.
Once your property is sold, the loaned amount plus any interest is paid back and then should there be any money left, the estate will receive it. It would be advisable to always look for an equity release scheme that offers a no negative equity guarantee. This way your estate will not be made responsible for making any payments that total more than the value of your home.
There will be two options commonly available in lifetime mortgage home equity release. One where you can take a lump sum or another where you take portions of the equity as you require. This second option is known as drawing down and will see interest calculated a little differently. Interest will still be calculated but only on the amount you have drawn down and not on the full amount of cash you haven’t yet taken.
Home reversion equity release
The second option is home reversion. If this option of home equity is taken, you sell a portion or the entire property to a home reversion provider. You keep the property for as long as you wish without needing to pay any rent for it. You will though, be required to keep up payments on any insurance or maintenance.
Payments to you are made either as a lump sum or in instalments but can also be a mix of the two if you prefer. Upon selling the home the home reversion provider receives their money back and any profit on their share with the remainder going to you or your estate.
Home reversion is often preferred when the housing market is flat, but should prices be rising fast or quite high, it is not advised. Offers from home reversion companies tend to be calculated on values much lower than the traditional market, therefore if prices are rising, you are potentially selling your home, or a share of it for much less than you could if you chose other avenues.
Retirement interest-only mortgage
Whilst not strictly equity release, this option works the same as a lifetime mortgage equity release plan. Just like the lifetime mortgage, you receive a lump sum secured against the future value of your home.
The key difference is that interest is paid back each month, rather than when the property is sold. In a lifetime mortgage, interest is compounded, although should you wish to make monthly payments on it, you can.
A Retirement interest-only mortgage, or RIO, can be used to replace your current mortgage and works just like applying for a regular mortgage. You will need to prove that you can afford it and pass the relevant checks. The amount you borrow will be based on not just the property value but also your age, income and property type.
Is equity release a good idea?
Ultimately, this depends on your reasons for wanting to release equity. If you just fancy a holiday or treat yourself, you should weigh up the total cost implications. Not only will there be interest added to the money you borrow, but the total deductions mean that your estate beneficiaries stand to inherit less when the property is sold.
That being said, equity release does allow you to receive a lump sum that allows you to enjoy the things in life you feel you may have missed out on or help provide for family members who might need a little more assistance. Furthermore, you may be able to put the funds towards some home improvement that could increase the value of your home in the future. This may not only benefit you if you sell but your estate too when you pass away.
It must be stated though that equity release does pose risks and costs. Equity release is a loan; therefore, it will need to be paid back, with interest. This could mean your loved ones will receive less cash than you had first hoped.
In addition, you should either be mortgage-free or only have a small bit of it left to pay to be eligible. However, some lenders may not see this as a particular requirement.
You may also find that you are offered significantly less than market value for the share you are willing to sell. In some cases, this can be as little as 25%!
There are also costs to bear for setting up an equity release plan. This varies but could set you back thousands of pounds.
Among the most important factors is that you can only take equity release when you are aged 55 or above.
You should also consider the likelihood of being in a worse situation than the one you started in. If you have opted for a home reversion scheme, you could find yourself owning less of a new home than you thought. If, for example, you sold a 40% share of your home to the reversion scheme and then sold the property to buy a new one at a much cheaper price, the scheme operator may require a percentage of the new home to maintain the value they initially invested.
The last thing to consider about whether it is a good idea to release equity is that you will not be able to list your home in your will. Being in an equity release scheme requires the property to be sold off to clear any outstanding amounts owed.
Can you sell a home with equity release?
Yes. In most cases, a sale takes place after the death of the owner but should you have an equity release plan and decide to sell whilst you still live there, it is possible. If you have a lifetime mortgage plan, you can pay the amount back at any time and therefore, end the equity release agreement early. So when it comes to selling, the funds you receive go to both the lender and yourself. Just be aware that as you will be ending the agreement early, you may find substantial early payment charges added. If you have been paying back between 10%-40% of the amount owed per year, no charges are likely to be added.
Before selling, you should book a valuation to ensure that the lender can work out the correct amount to be paid back.
Could I buy a new house even though I have equity release?
If your equity release provider has offered you a portable option, you may well be able to move house with equity release. How you go about it will vary per lender but for the most part, you will need to ensure:
- The property you are moving into matches lender-specific requirements.
- If the property is worth less than the existing home, you may need to pay back some of the loan as well as interest. These funds are normally taken directly from the sale of the original property.
As you could clear the loan with the sale of the original property, you may find that you are subjected to early repayment fees, however, downsizing protection can stop this from happening.
If you are unsure if equity release is for you, speak to a solicitor or financial advisor first to get additional clarity. Should you then decide to sell, speak to Cairds! We are the experts at selling property in Epsom and Ashtead and all the surrounding areas! Furthermore, should the same area be one you still want to remain living in, our comprehensive listing of houses for sale in Epsom Surrey means you can find your dream home easily. Contact our team today and get a property valuation booked so you can start your house move plans tomorrow!