Supplemental income is a powerful tool that can provide financial security. It is the money you earn in addition to your monthly paycheck. You might need additional income for several things, like renovating your home or financing your children’s education. If you are looking for ways to earn some extra cash, equity release is an excellent way to do so. This article sheds some light on equity release and its advantages and disadvantages.

An in-depth understanding of equity release
Simply put, equity release is a way by which you can unlock the value of your assets, in this case, your property, and turn it into cash. This means you can either take the released money as a lump sum, in smaller instalments, or a combination of both. There are two types of equity release. These are mentioned below:

• Lifetime mortgage
  This involves taking out a mortgage secured on your residential property, i.e., your primary residence. Some companies may allow you to ring-fence a certain portion of your property to use it as an inheritance for your family. You have an option to make repayments to reacquire your property or let the interest roll-up. The loan amount and built-up interest, if any, are paid off by selling the property when the last borrower moves into long-term care or passes away.
• Home reversion
  Unlike mortgaging, home reversion allows you to sell a part of your residential property to a home reversion provider for a lump sum amount or regular payments. While you can still live in the property, you need to maintain and insure it according to the requirements of the reversion company. Home reversion also allows you to earmark a part of the property as an inheritance for your family. The percentage of the property you retain remains the same irrespective of the change in the real-estate value in your area. The residential property is sold after the last borrower dies.

Who is eligible for an equity release?

• Age
  If you are 55 years and older, you can apply for a lifetime mortgage, and if you are 65 years or older, you opt for home reversion.
• Resident
  Those who are residents of the UK are eligible for an equity release.
• State of the property
  Your residential property should be in reasonable condition and over a certain value if you want this form of supplemental income.

It is essential to note that this scheme is unsuitable for you if your dependents live with you. If the dependents wish to live in the same property, they have to sign a waiver affirming that they don’t have the right to stay there if you die or move into residential care.

Here is how to calculate equity release:
Equity release is calculated by multiplying the loan-to-value (LTV) ratio by the residential property value. For instance, if you are 55 years old and are applying for a lifetime mortgage on a £300,000 house, with 31% as a standard term of LTV, you are entitled to get £93,000 as an equity release. It is important to note that standard terms of LTV increase with age. Home reversion rates simply depend on factors such as the value of the house, age, and the percentage of your residence you are willing to offer in exchange for an equity release.

Equity release rates
An equity release rate is essentially the interest rate on the equity release. While equity release rates vary with time, the current value ranges between 2 and 3.5 percent. As of Jan 2022, the equity release scheme rates are as low as 2%! This is quite a reduction from the equity release cost of 6% five years ago.

Advantages and disadvantages of equity release

• Advantages
  It allows you to access tax-free cash against your property, which you can get as a lump sum amount or in regular payments to fulfill your financial goals without moving out of your property. In fact, if you wish to, you can relocate to an alternative property in the future. This is because equity release is transferable.
• Disadvantages
  One of the most significant disadvantages of opting for equity release is that it reduces the value of your property and the amount your beneficiaries will receive. If you opt for equity release in the form of home reversion, the home inversion company will own a part of your property. Moreover, using the money from equity release for supplemental income reduces your entitlement towards means-tested benefits like income-based jobseeker’s allowance, pension credit, and tax credits like a child tax credit and working tax credit.