You probably know that your home is a valuable asset. But did you know that you can unlock its financial potential without having to move out or sell?
Equity release is a brilliant way to make the most out of your home. It enables homeowners aged 55 or over to convert the sometimes substantial, but otherwise dormant, asset of home equity into a cash supply.
Types of equity release
Equity release products come in two forms: Home Reversion Plans and Lifetime Mortgages.
Home Reversion Plans involve selling a portion or the entirety of your home to a reversion company. You retain the right to live in the house rent-free until you pass away or move into long-term care. The proportion of the property you sell determines the cash sum you receive.
Lifetime Mortgages on the other hand, allow you to borrow a portion of your home’s value while retaining ownership. Interest is charged on the loan amount, which along with any interest rolled up, is paid back when your home is eventually sold. This usually occurs upon your death or when moving into long-term care.
But why might you consider equity release?
Perhaps you need to bridge the gap between retirement and receiving a state pension. Maybe you’d like to support your children to get on the property ladder. Perhaps you’d like to purchase a second home. Or maybe you want to jet off on the holiday of a lifetime.
Equity release can make all these visions a reality.
Supporting the first-time buyers in your life
First-time buyers are finding it increasingly challenging to get onto the property ladder, especially considering recent economic turbulence.
Years of rising property values have now outpaced wage growth. Because of this, many first-time buyers aren’t being granted the loan amount they need from their lenders to purchase their first homes. Also, the cost of living has gone up and it’s harder to save money for a bigger deposit. First-time buyers find themselves trapped in a catch-22.
Equity release could potentially solve this issue. Parents or grandparents can use an equity release scheme to help their children or grandchildren access the funds required for buying a house.
They could release equity from their own property to gift a deposit to a first-time buyer or reduce the mortgage required. This would help first-time buyers obtain a mortgage and take the important first step onto the property ladder.
Purchasing a second property
When considering equity release to buy a second property, it’s important to understand the differences between remortgaging and equity release.
Remortgaging involves switching your mortgage for, hopefully, a more competitive rate than you are already paying or the standard variable rate you might be going on to. Equity release allows homeowners to access their home’s value to get a mortgage for a second property. But be aware, using equity release for a second home can reduce or even use up the inheritance you want to leave behind.
The process of buying a second home using equity release is like the initial home buying process. The bank will review your credit record, income, and other personal circumstances to determine if you qualify.
When using equity release to buy a second home, you need to consider several factors. You need to think about the type of property you want to purchase. This can include rental properties, holiday homes, and business property. Additionally, you should also factor in any additional expenses, such as capital gains tax.
While using equity release to buy a second property is indeed possible, it’s crucial to be mindful of the significant financial implications. Comprehensive financial planning and advice from a professional financial advisor are key to navigating these complex decisions.
Reducing inheritance tax
The implications of equity release on inheritance tax are significant. Funds raised through equity release reduce the value of an estate, potentially lowering the inheritance tax liability.
Here’s an example of how:
Every person has a nil-rate band of £325,000 and a residence nil-rate band of £175,000. If a person marries and their spouse dies, they then inherit their spouse’s unused nil-rate bands. Overall, they now have £650,000 of nil-rate bands and £350,000 of residence nil-rate bands.
On the death of the second spouse, these nil-rate bands are used to reduce the size of the estate, importantly the residence nil-rate band can only be used if you have owned a main residence and the estate is being passed to direct descendants.
If the descendants had been left a house by their parents worth £800,000 and cash worth £400,000, they would need to pay 40% inheritance tax on everything over the nil-rate bands. Using this example, this would be everything over £1m. They would have to pay 40% inheritance tax on £200,000.
However, if before they passed, the parent used equity release to take 25% of the house’s value in cash to spend elsewhere, this would then drive the equity remaining in the house down to £600,000. Now, on their death, the net estate will be worth £1m and after using the nil-rate bands, no inheritance tax will be due.
Equity release is a brilliant asset that unlocks the power of your home’s value. It can support you and your family to reach your next goal or ambition.
If you’re considering exploring equity release, contact our mortgages team today. They will help you understand your options and walk you through the process.
