Many homeowners over 55 find themselves in a unique position: they own property worth hundreds of thousands of dollars, but lack the liquid cash needed to make major purchases or investments. This is where equity release can provide a powerful solution, especially for those looking to buy additional property.
Equity release allows you to access the wealth tied up in your home without having to sell it. This financial tool has become increasingly popular as property values have risen and retirement planning has evolved. If you’re considering using equity release to buy a house, this guide will walk you through everything you need to know about the process, benefits, and considerations involved.
What is Equity Release?
Equity release is a financial product that allows homeowners aged 55 and over to access some of the value tied up in their property. Instead of selling your home to access its value, equity release lets you borrow against it while continuing to live there.
Types of Equity Release
There are two main types of equity release products available:
Lifetime Mortgages
A lifetime mortgage is the most common form of equity release. You take out a loan secured against your home while retaining ownership. The loan, plus accumulated interest, is typically repaid when you die or move into long-term care. Some lifetime mortgages allow you to make monthly interest payments, while others let the interest roll up over time.
Home Reversion Plans
With a home reversion plan, you sell part or all of your home to a reversion company in exchange for a lump sum or regular payments. You retain the right to live in the property rent-free for life, but you’ll only benefit from any future increase in value on the portion of the home you still own.
How Much Can You Release?
The amount you can release depends on several factors:
- Your age (older applicants can typically release more)
- The value of your property
- Your health and lifestyle
- Current interest rates
- The specific lender’s criteria
Generally, you can expect to release between 20% and 60% of your home’s value, with the percentage increasing with age.
How to Use Equity Release to Buy a House
Using equity release to purchase another property is a legitimate strategy that many people employ for various reasons. Here’s how the process typically works:
Step 1: Assess Your Financial Situation
Before proceeding, carefully evaluate your current financial position. Consider:
- The current value of your home
- How much equity you might be able to release
- Your ongoing income and expenses
- The cost of the property you want to buy
- Whether you’ll need additional funding beyond the equity release
Step 2: Choose the Right Equity Release Product
Not all equity release products are suitable for property purchases. You’ll likely need a lump sum rather than regular payments, which means a lifetime mortgage or home reversion plan that provides immediate access to funds.
Step 3: Get Professional Advice
Equity release is a complex financial decision that will affect your estate and potentially your entitlement to means-tested benefits. It’s essential to seek advice from aqualified financial advisor who specializes in equity release. They can help you understand the implications and ensure you’re making an informed decision.
Step 4: Apply for Equity Release
Once you’ve chosen a product, you’ll need to:
- Complete the application process
- Have your property valued
- Undergo financial and health assessments
- Review and sign the legal documents
Step 5: Use the Funds for Your Property Purchase
Once approved, you can use the released equity as a deposit or to buy a property outright, depending on the amount released and the cost of the new property.
Important Considerations
Property Restrictions
Some equity release providers have restrictions on how you can use the funds. Make sure your chosen provider allows property purchases before proceeding.
Tax Implications
Buying additional property may have tax implications, including capital gains tax when you sell. Consult with a tax advisor to understand your obligations.
Ongoing Costs
Remember that owning two properties means double the ongoing costs, including maintenance, insurance, and potentially property taxes.
Benefits of Using Equity Release to Buy a House
Access to Property Investment
Equity release allows you to enter or expand your property portfolio without having to sell your current home. This can be particularly attractive if you believe property values will continue to rise or if you want to generate rental income.
Downsizing Without Moving
If you want to downsize but can’t bear to leave your current home, equity release might allow you to buy a smaller property that you can move to later, while keeping your options open.
Helping Family Members
Many people use equity release to help their children or grandchildren get on the property ladder. You could buy a property for a family member to live in, providing them with housing security while potentially benefiting from property appreciation.
Diversifying Your Assets
If most of your wealth is tied up in your home, using equity release to buy another property can help diversify your assets. This strategy can provide additional security and potentially better returns than keeping all your wealth in one property.
Generating Income
Buying a rental property with equity release funds can provide you with additional income during retirement. This can be particularly valuable if you’re concerned about having enough money to maintain your lifestyle.
Flexibility for the Future
Owning multiple properties gives you more options for the future. You might decide to sell one property to fund care costs, or you might want to move to a different location as your needs change.
No Monthly Repayments
Unlike a traditional mortgage, most equity release products don’t require monthly repayments. This means you can buy additional property without taking on monthly payment obligations that might strain your retirement budget.
Potential Drawbacks to Consider
While there are benefits to using equity release to buy a house, it’s important to understand the potential drawbacks:
Reduced Inheritance
Equity release will reduce the value of your estate, meaning there will be less to pass on to your beneficiaries.
Compound Interest
If you choose a lifetime mortgage where interest rolls up, the amount owed can grow significantly over time due to compound interest.
Property Market Risk
Property values can go down as well as up, so there’s no guarantee that your property investment will be profitable.
Complexity
Managing multiple properties can be complex and time-consuming, especially if you’re renting them out.
Early Repayment Charges
If you need to repay your equity release early, you may face significant charges.
Making the Right Decision
Using equity release to buy a house can be a smart financial move for some people, but it’s not right for everyone. Consider your personal circumstances, financial goals, and risk tolerance carefully.
Key questions to ask yourself include:
- Do I have experience managing property investments?
- Am I comfortable with the risks involved?
- How will this affect my beneficiaries?
- Are there alternative ways to achieve my goals?
- Can I afford the ongoing costs of multiple properties?
Taking the Next Step
If you’re considering using equity release to buy a house, the most important step is to seek professional advice. A qualified financial advisor can help you understand your options, assess whether equity release is right for you, and guide you through the process if you decide to proceed.
Remember, equity release is a significant financial decision that will affect your future and your family’s inheritance. Take your time, ask plenty of questions, and make sure you fully understand the implications before moving forward.
The property market offers many opportunities, and equity release can be a valuable tool for accessing them. With careful planning and professional guidance, you can make an informed decision that supports your financial goals and retirement plans.