Not only are UK property prices soaring at an exponential rate in the UK, but cumulative property wealth on these shores reached a record $4.6 trillion during Q2 2021.
This is great news for older property owners, who may be able to release the equity in their homes through a variety of vehicles in order to create accessible wealth during their later years and retirement.
But what exactly is equity release, and what are the various ways in which this concept works? Here’s a brief breakdown on your behalf:
What is Equity Release?
In simple terms, equity release or an equity release mortgage enables you to realise the corporeal value of your home while still retaining ownership of the asset in question.
Generally speaking, equity release is a concept that can be leveraged against any object or asset that holds capital value, although it’s most synonymous with real estate ownerships and mortgages.
Equity release unlocks the residual value of your home as a tax free source of income, which may be accessed through a number of alternative vehicles and means.
It’s also increasingly popular in the UK, and people become increasingly familiar with the concept and continue to understand it on a much deeper level.
How Does it Work – The Main Equity Release Vehicles
The question that remains, of course, is how does equity release from a practical perspective? Here are some of the key vehicles through which property owners can realise the value that exists in their homes:
#1. Lifetime Mortgages
This vehicle is characterised as a lump sum, which is withdrawn in the form of mortgage and eventually repaid from the sale of your home (either when you die or move into long-term care).
Typically, the amount that you can borrow is between 18% and 50% of your property’s total value, while the older you are the more equity you can release.
This explains why the average age of an equity release client is 70, as this demographic is able to realise the full value of their property in a large, lump sum.
#2. Drawdown Equity Release
According to Key, a drawdown lifetime mortgage remains the most popular equity release vehicle, with this accounting for 63% of product applications during Q3 2021.
This has increased from just 55% during Q2 of this year, with the flexibility of drawdown products arguably more viable in the current economic climate.
A drawdown lifetime mortgage enables you to take cash from your home as and when you like, creating a fluid and flexible stream of income up to a fixed and predetermined amount.
You’ll only pay interest on the cash you’ve taken, so such plans often work out to be more cost-effective as interest grows at a considerably slower pace.
#3. Home Reversion Plan
We’ll close with a home reversion equity release plan, which will see you sell all or part of your property while retaining the legal right to continue living in it until you die or move into long-term care.
In this case, the money can be paid out either in the form of a lump sum or as regular income, whichever you prefer as an individual.
This option also offers flexibility to individuals, although many baulk at the idea of selling even part ownership of their home.