Understanding how much tax free cash you can release with Equity Release is an important first step in deciding if Equity Release is right for you.
People make use of Equity Release for a wide variety of reasons. However, it is usually either to make a large purchase, provide income, or to make a generous gift to a loved one. As such there is usually a specific amount or a range of amounts that are needed.
Getting an idea for how much money could be released is a useful first step in deciding whether equity release is right for you.
For those aged 55 and over you can generally release between 20% and 60% of the value of your home.
The amount that you can release from your home through Equity Release depends on several factors, with the main ones being:
Generally the older you are and the higher the value of your property is, the more you can borrow.
It also depends on the type of Equity Release you are taking out. There are 2 main types of Equity Release, the original type of the “Home Reversionary Plan” and the more modern and common “Lifetime Mortgage”.
With a Home Reversion Plan, you sell a portion or all of your property to a provider in exchange for a lump sum or regular payments and the right to remain in your home for the rest of your life as “lifetime tenants”.
With a Lifetime Mortgage, you can borrow an amount of money secured against your home, much like a standard residential mortgage. The key difference to a Home Reversion Plan is that you retain ownership of your home, which tends to lead to more options and flexibility. For more details on the difference, please read our article on what is a Lifetime Mortgage.
The amount that you can release is based on a percentage of the value of your home.
In general, you are able to borrow between 20% and 60% of the value of your home, as long as you are at least 55. This percentage is mainly based on your age and health.
Your equity release provider will estimate how long they think you are likely to live, based on your age, general health and lifestyle choices. Past medical conditions may also be factored in. Should you wish to submit a joint application, these calculations will be based on the age and health of the youngest applicant.
With equity release plans available to people from age 55 and over, you will typically be eligible to borrow a smaller amount if you are closer to 55. This is because it will take longer for the equity release lender to recover their investment, as you may live for another 20, 30 or 50 years. Whilst Lifetime Mortgages are generally available from age 55, Home Reversion Plans tend to be only available to those over the age of 60. Neither of them has an upper age limit.
Usually the most you can release as a person aged 55 is around 20% – 28% of your property’s value. If you are under 55 then there may still be other, alternative, options available to you. Getting in touch with an Independent Financial Adviser can be a good way of exploring these options.
However, if you are older and living in your 70s and 80s, this could make you eligible to release higher percentages of 50% or 60% of the property’s value. Your health status may also be taken into account, since someone with ongoing medical conditions may be viewed differently in terms of what percentage they can release.
The value and condition of your property will be important when determining how much you can release. The equity release lender ideally needs to lend against something that will maintain or increase in value over time.
As the amount they will lend will be a percentage of your property value then the higher the value, the higher the amount of cash you can release.
The lender will insist on a 3rd party valuation, which it will arrange. The cost of the valuation may be met by the lender or there could also be a valuation fee for the customer to pay. Your adviser should make you aware of this cost alongside any others that you may need to pay.
Although your property will be subject to a professional valuation prior to approval, there are also certain properties that they may refuse to lend against, such as flats near commercial properties or houses of a certain type of construction material.
The area you are in can also have an impact – if the provider believes you are in an area with high potential house price growth then they may be willing to lend you more (as there is less risk of negative equity with rising house prices).
An equity release provider will need to consider any other outstanding debts that you have, both secured (such as other mortgages) and unsecured (such as credit card debts).
The lender will need to assess whether you have an outstanding mortgage or any other secured loans since these will likely need to be cleared for the equity release plan to go ahead, to allow the lender to take the First Charge over the property. If you have a lot of debts outstanding, this may require the lender to offer you a higher percentage to pay these off, whilst taking your age and property value also into consideration.
Whilst you can use the money from Equity Release to pay off any outstanding debts you currently have, careful consideration needs to be taken. If you are not careful you may end up paying back more overall, over a longer time period (even if the interest rate is lower).
In summary, when you apply to take tax-free cash out of your property, the Equity Release provider will look at the age and health of the applicants and the value, type, location and condition of the property, when determining how much they may be able to lend.
Past medical conditions may also be factored in. Should you wish to submit a joint application, these calculations will be based on the age and health of the youngest applicant.
There are two main types of Equity Release, Home Reversionary and Lifetime Mortgage, with varying amounts of how much you are able to release depending on which type you decide to go for.
Equity Release can be a great way to release tax-free cash to use for what you want today. Knowing how much you are able to borrow can be key in deciding whether you want to go ahead. Speaking to a regulated and authorised Equity Release adviser can be a way of getting a more accurate answer, as they will be familiar with how the Equity Release providers calculate how much they will lend. For example, we (Leaf Financial Advisers) offer a free consultation where we can discuss all the aspects of Equity Release and give you an indication of how much you may be able to borrow and what it may cost. Please get in touch on 01173 853 823 or email@example.com if you would like to find out more.