How do you pay back Equity Release?

There are many different reasons why people consider equity release. For some, it is an effective way to top up their monthly income and enjoy a better quality of life. Others want to access a lump sum to help their children, purchase a new vehicle or meet other financial goals.

Whatever your reason, one important consideration is understanding how you pay back equity release.

How repayment works depends on whether you choose a Lifetime Mortgage or a Home Reversion Plan. Let’s look at each option individually.

A Lifetime Mortgage

With a Lifetime Mortgage, you release a portion of the equity built up in your property and can use the funds however you choose.

A roll-up Lifetime Mortgage means you take out a loan secured against your property. Unlike a standard mortgage, you do not make mandatory monthly repayments. Instead, the interest is added to the loan and compounds monthly or annually, meaning the amount owed increases over time.

The loan is typically repaid when you move into long-term care or pass away. At that point, the property is usually sold and the proceeds are used to repay the Lifetime Mortgage.

The executors of your estate will generally have up to one year to repay the Lifetime Mortgage.

What about a Home Reversion Plan?

A Home Reversion Plan works differently. Rather than borrowing against your property, you sell part or all of its value to a home reversion provider in exchange for a tax-free cash lump sum.

As a result, ownership of the property is shared according to the percentage you decide to sell. You will only have no equity remaining if you choose to sell 100% of your property’s value.

With this type of arrangement, repayment generally occurs when you move into long-term care or pass away, as this is when the property is usually sold.

If you decide to sell your property earlier, the Home Reversion arrangement would normally be settled at that point instead.

Some providers may also allow you to buy back the share you have sold based on the property’s current market value. Depending on whether your property’s value has increased or decreased, this could work in your favour or against you.

Understanding how equity release is repaid is an important part of deciding whether it is the right financial solution for your circumstances.

A useful first step is to use an Equity Release Calculator to estimate how much you could release and whether equity release is likely to make financial sense for you.