Equity Release When Purchasing a Property

Over 55 and want to buy a second property? Or just want more financial freedom? Then equity release could be for you.

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Equity Release When Purchasing a Property

You can take a cash lump sum out of the value of your current property and potentially buy that holiday home you’ve always dreamed about. You can even take the cash in smaller amounts, or even do a combination of both.

Equity release can be used for purchasing a new property and using the value. Say you currently live in your own home, but you’re paying an interest-only mortgage, if you were to sell this home then you wouldn’t be able to buy another property.

Unless you have other finances available, the sale of the house would clear the existing mortgage and you will be left with less than the property is worth when your property is sold. If you choose an equity release purchase option, you can use the equity on the house after you sell it, to purchase your new property and cover your existing mortgage.

Choosing an equity release will give you the financial freedom to purchase a new property, and without worrying about repayments until the property is sold.

For additional information, it is always best to contact a financial advisor regarding your current financial circumstances. This will also help with what options could be available to you.

Equity Release vs Downsizing

You may be thinking, why would I choose equity release when I could just downsize? And even though it’s a good question, there is an even better answer.

First of all, equity release means you can stay in your current home. If you want to downsize, you will have to sell your beloved home and then look for something smaller. It also could mean you don’t actually have enough money left over and end up having to downsize to something even smaller than the original downsize.

With equity release, you could actually keep your own home and purchase another property with the lump sum payment. Whether this is a holiday home abroad, or somewhere on the coast in the UK.

The cash you receive is tax-free, so it is literally yours to do with as you please, to a certain extent. This money could also be used on paying off any unwanted debts, home improvements or even an investment property.

This trumps the idea of moving, as moving in itself is an expensive task, not to mention the emotional upheaval of having to move. Buying a second property could be your answer.

If the house you currently live in is too large and in fact you want to downsize, instead of selling it, there’s always taking the equity out of it, buying a new property and then renting out the old house. This would be an ideal way to have an investment income seeing you into retirement.

The added bonus to this is that you don’t have to pay back the equity taken out until the house is sold or you pass away. This will really give you the financial freedom you’ve longed for, for years. But if you are going to use equity release, there are two options available for you, these being home reversion or a lifetime mortgage.

Home Reversion

A home reversion is when you sell part or all of your home to a reversion provider. This will then provide you with a lump sum one-off payment or regular smaller payments.

Even if you do so, you may still have the right to live in your property, as long as you maintain it. It also means you can live in the property, rent-free. But if you are wanting to purchase another property, your future property has to be acceptable to your reversion provider, as it is continuing security for your equity loan.

This has no negative equity guarantee, which means that when your property is sold and all the fees have been settled, even if there isn’t enough money left over, this will be left and your estate will not be liable.

There are a few downsides to home reversion, especially if you want to purchase a new property, as first of all some providers can be strict on age. Home reversion providers can be 60 upwards and some even 65, in comparison to a standard equity release age of 55.

In most cases, home reversion providers won’t give you as good a price for your property you could sell it or use another form of equity release. Even though the prospects of living rent-free seem flexible, it isn’t flexible if you want to purchase a new property.

This is where a lifetime mortgage would probably be more suitable.

Lifetime Mortgages

This is the most common and preferred method of equity release, whether you are using the cash for select finances or you’re purchasing another property.

A lifetime mortgage is when you take the value out of your current property and it doesn’t have to be paid back until the house is sold or you pass away. You can borrow up to 60% of the value of your property, depending on your age and the value of the property. This is ideal if you are wanting to purchase another property and wish to use this as a lump sum.

Like a home reversion, this also has no negative equity guarantee. However, if you are using the money to buy another property, this will have to be accepted by the Equity release council standard, to ensure continuing security for your equity release. This is also similar to home reversion.

But the main overall benefit of using equity release to purchase new property is that it is tax-free cash and there are no monthly repayments. This means your retirement income isn’t affected and the repayments won’t begin until you have passed away, gone into a retirement home or the house is sold.

Related Questions

Can I use equity release to pay off a mortgage?

This is definitely doable, but you need to bear in mind that this needs to be secured against the property by completion. For the best advice on a matter like this, it is always best to seek financial advice from a mortgage broker.

What is the criteria for equity release?

The basic criteria stands at being aged 55 and over, that you own your own property and that it is valued at at least £60,000. This can change depending on lender/provider and is always best to consult with your financial advisor about specific terms and conditions.

The value of investments and any income from them can fall as well as rise and you may not get back the original amount invested.

HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.

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