If you have taken out an equity release plan, you might worry that selling your home is not an option. Fortunately, you can still relocate or downsize.
Downsizing protection for equity release
This option allows you to downsize and repay your equity release plan in full – either voluntarily or if the new property does not meet your lender's criteria – without incurring any early repayment charges.
If you have a significant amount of equity in your primary residence, you can tap into it through a home equity loan. You can then use that money for any purpose you wish, including buying a second home or an investment property. However, using a home equity loan to buy another house is not without risks.
Yes. You can sell your home if you've taken out a home equity loan. However, you will have to pay off the outstanding debt, including the home equity loan, as part of the closing process.
Yes, this is possible. Most lenders will apply early redemption charges at the early stages of your equity release scheme.
Equity release plans provide you with a cash lump sum or regular income. The "catch" is that the money released will need to be repaid when you pass away or move into long term care. With a Lifetime Mortgage, you will owe the capital borrowed and the loan interest accrued.
How Much Equity Do You Need? To determine the amount of equity you need when selling your home, you need to know your reasons for selling. If you're looking to relocate, then you will need about 10% equity. If you're looking to upsize to a bigger home, you will need at least 15% minimum equity.
A home equity line of credit, also known as a HELOC, is one of the best ways to access equity in your home without selling it. Instead of taking out a loan at a fixed amount, a HELOC opens a pool of money that you can utilize, but you don't have to take it all at once or use it all.
When your home is worth more than you owe on your mortgage and other debts secured by the property, the difference is called home equity. If you sell the home—a sale with equity, or equity sale—you can keep the excess funds once all debts and closing costs are paid.
Loan payment example: on a $50,000 loan for 120 months at 6.10% interest rate, monthly payments would be $557.62.
A home equity loan could be a good idea if you use the funds to make improvements on your home or consolidate debt with a lower interest rate. However, a home equity loan is a bad idea if it will overburden your finances or if it only serves to shift debt around.
How long do you have to repay a home equity loan? You'll make fixed monthly payments until the loan is paid off. Most terms range from five to 20 years, but you can take as long as 30 years to pay back a home equity loan.
In general, it is financially more advantageous to downsize than it is to release equity.
You can use the sale proceeds of your property to pay your equity release back in full when you move to a new home. However, you may incur an early repayment charge. Moving house doesn't always mean you need to pay your plan back in full. Instead, you can port your existing plan to a new property.
You can take equity out of your home in a few ways. They include home equity loans, home equity lines of credit (HELOCs) and cash-out refinances, each of which has benefits and drawbacks. Home equity loan: This is a second mortgage for a fixed amount, at a fixed interest rate, to be repaid over a set period.
Using your equity will increase how much you owe and the interest charged. Ensure that you will still be able to afford your new repayments after accessing the equity as you don't want to put yourself into financial hardship. Your lender will be able to inform you of your new repayment amount.
To claim the whole exclusion, you must have owned and lived in your home as your principal residence an aggregate of at least two of the five years before the sale (this is called the ownership and use test). You can claim the exclusion once every two years.
The main disadvantage of equity release is that it does not pay you the full market value for your home. You will receive far less money than you would from selling the property on the open market – although of course in that situation you would still have to find somewhere else to live.
The most obvious alternative to equity release is to downsize – i.e. sell your current home and move into a smaller property (or at least one that is less expensive).
The main advantage of remortgaging is that it will usually prove the cheaper option overall. Equity release rates are generally much higher than rates on traditional mortgages, and if you roll up your interest instead of paying it off as you go, equity release debt accumulates quickly too.
However this can be more difficult and therefore more costly for those that offer equity release because they don't have a steady, predictable stream of cash coming through in interest payments. Finally and most significantly there is the impact of compound interest that makes equity release so costly.