PF Financial

How do you pay back Equity Release?

There are many different reasons why people consider equity release. For some people, this is an effective way to top up their monthly income so that they can enjoy a better quality of life. There are then those who want to access a lump sum so that they can help their children or purchase a new vehicle, for example. No matter what applies, one thing you do need to think about is how you are going to pay the equity release back. 

Well, this all depends on whether you opt for a lifetime mortgage scheme or a home reversion scheme. Therefore, we need to take a look at both options individually for you to understand how they are paid back.

A lifetime mortgage scheme

With a lifetime mortgage scheme, you are able to free up a portion of the equity that has been built up within your property. You can then use these funds in any way that you see fit. 

A roll-up lifetime mortgage means you will take out another mortgage on the property. However, you do not make payments each month. Instead, the interest is compounded on an annual or monthly basis, which does mean that it grows a lot quicker. 

So, when do you pay this interest off? Well, it is either repaid when you move into long-term care or you pass away. When this happens, the executors of your state will have up to one year for the lifetime mortgage to be paid off. 

What about home reversion?

Home reversion does not work in the same way. These plans were created so that a homeowner could either sell all or some of the value of their property in return for getting a tax-free cash lump sum that the reversion company provides. 

As a consequence, with this scheme, you will partly own the property. It all depends on the percentage you decide to sell. The only way you will have no equity left is if you sell 100% of the value of your property. 

With this type of loan, you will typically repay it when entering long-term care or passing away, as this is when the house is sold in most cases. However, if you sell the property earlier, you will pay the home reversion loan then. 

Sometimes, there is the option to buy back your share based on today’s prices. Depending on whether the value of your property has increased or fallen, this could be a bad thing or a good thing.

Understanding how you will pay off your equity release is vital. After all, you need to make sure that you can afford this prior to making your decision. The best thing to do is to use an equity release calculator so you can figure out whether this is something that makes sense for you economically.