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What are ‘equity’ and ‘equity release’?

March 16, 2020 Residential Conveyancing

The term ‘equity’ describes a property’s value over and above any mortgage or loan secured against it. For example, if you own a property with a market value of £150,000 that has an outstanding mortgage of £50,000, then there is £100,000 of equity in the property.

In contrast, if you had purchased your property for £100,000 with a £95,000 mortgage and the market value of the property dipped to £90,000, then the property would have a negative equity of £5,000. What that means is that if you had to sell the property whilst it is in negative equity, then you would owe your lender an additional £5,000 before being released from the mortgage.

‘Equity release’ is the term for accessing the value that is locked up in your property. To access it, you need to seek financial advice from a specialist independent financial advisor who is authorised by the Financial Conduct Authority to assess your suitability for equity release.

If you are unsure of who to approach, then contact Jones Whyte’s equity release solicitors on 0141 375 1222 or for further guidance.

To qualify for equity release, you must be a homeowner, aged 55 years or over and have equity in your property. If you are a joint homeowner, then you both have to be aged 55 or over.

Many homeowners in Scotland have built up wealth in their estate as the equity in their home has grown thanks to decades of inflation in property values. This has led to many homeowners who are either reaching or are in retirement having equity tied up that could otherwise be better used and enjoyed.

Equity release can be done in one of two different ways: Either through a ‘Lifetime Mortgage’ or through a ‘Home Reversion Scheme’.

This type of equity release scheme is similar to taking out a normal mortgage that comes with interest, but the main difference is that the homeowner doesn’t make any repayment to the lender during their lifetime. Instead, the lender receives payment of the mortgage and interest on the mortgage from the homeowner when either of the following happens: (1) the borrower moves into long term residential care or (2) the borrower dies.

In comparison with a lifetime mortgage, the home reversion scheme requires homeowners to be at least 65 years old and it sees the homeowner sell a share or all of their property to a lender for less than the market value— typically between 20-60% of the market value depending on your age and health.

In return, the lender pays the homeowner a lump sum or guaranteed income, or even both. Another positive is that, as with lifetime mortgages, the lender will allow you to remain in the property. The lender then receives payment of their share of the property from the homeowner’s estate after they have moved into residential care or have died.

Where the property market begins to stagnate or even depress in value, then the equity in your property would also reduce. A benefit of equity release schemes is that the lender providing the lifetime mortgage or home reversion scheme takes on the risk that the value of the property will fall below the money paid to the homeowner.

Another benefit for homeowners is that the lender cannot claim more funds than the property is worth when the homeowner’s estate is being wound up before distribution to the beneficiaries of the borrower’s estate. This helps to protect the estate, if the property happened to go into negative equity, would have otherwise had to pay the shortfall to the lender from other parts of the deceased’s estate.

Homeowners who find themselves with considerable equity tied up in their estate may find that equity release not only helps them to enjoy a well-earned retirement and later life, but it could also help to reduce their inheritance tax liability. The reason for this being that both of the above types of equity release are treated as debts that will be deducted from the value of the estate when calculating any inheritance tax owed to HMRC.

If you are a homeowner with equity tied up in your property that you would like to access, then Jones Whyte has the experience and expertise to assist you.

We provide professional, timely and valuable legal advice to clients from across Scotland who want to release the equity built up in their homes that will allow them to realise their goals later in life.

If you are interested in knowing more about the legal aspects of equity release or would like us to assist in releasing the built up equity in your property, then contact Jones Whyte’s equity release solicitors on 0141 375 1222 or today.

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