When most people think about buying a new home, they automatically consider a traditional mortgage. However, if you’re nearing retirement or already retired, equity release might offer an alternative route to securing your next property. While equity release is often used to unlock funds from your current home for retirement purposes, it can also be a useful tool for purchasing a new home. In this guide, we’ll walk you through how to buy a new home using equity release, the pros and cons, and key factors to consider before diving in.
What is Equity Release?
Equity release allows homeowners aged 55 or older to access the equity in their property without having to sell or move out. Essentially, it lets you tap into the value tied up in your home through two main options:
- Lifetime Mortgage: This is a loan secured against your home. You continue living in the property, and the loan is repaid from the sale of the home when you pass away or move into long-term care.
- Home Reversion Plan: In this scheme, you sell part or all of your home to a reversion company. In return, you receive either a lump sum or regular payments, but you can continue living in the property rent-free for the rest of your life.
Both options let you access funds without having to move out, but they can also be used to fund a new home purchase.
How Can You Use Equity Release to Buy a New Home?
Equity release can help you purchase a new property by unlocking value from your existing home. Here’s a simple breakdown of the process:
1. Sell Your Current Property
To buy a new home with equity release, the first step is usually selling your existing property. You can then use the proceeds from the sale to:
- Use the Equity Release Funds to Buy Your New Home: Depending on how much equity you release, you could either fully or partially fund the purchase of a new property.
- Leverage Funds for a New Property: In some cases, you may release a portion of equity to help finance the new home, with the proceeds from your sale covering the rest.
2. Use the Funds for Your New Home
Once your equity release plan is in place and your current property is sold, you can use the funds to purchase the new property. Keep in mind:
- The equity release loan isn’t due for repayment until you pass away or move into long-term care.
- You can use the funds from equity release to either pay for the new home outright or as a contribution toward it, depending on the amount released.
3. Ensure Your New Home Meets the Lender’s Criteria
Not all properties are eligible for equity release. Lenders have specific requirements for the type of property they’re willing to lend against. These include:
- Age Requirements: Equity release is generally available to people aged 55 and older.
- Property Type: Most lenders will only accept residential homes, but some may consider bungalows, flats, or retirement homes.
- Property Condition: The property must be in good condition and not require major repairs.
4. Choose the Right Equity Release Plan
Picking the right equity release plan is critical for buying a new home. Whether you opt for a lifetime mortgage or a home reversion plan, make sure you compare the terms, interest rates, and levels of advice available to ensure the plan meets your needs.
5. Seek Independent Financial Advice
Equity release is a significant financial decision. It’s wise to consult an independent financial advisor before committing to any plan. A good advisor will help you understand:
- The amount of equity you can release.
- The potential impact on your estate.
- Other options, like downsizing or a traditional mortgage, which might offer better terms.
Advantages of Using Equity Release to Buy a New Home
1. Access to Home Value
With equity release, you can access the value tied up in your current home without needing to sell it, allowing you to buy a new property without a conventional mortgage.
2. Maintain Control of Your Property
Particularly with a lifetime mortgage, you retain ownership of your new home, and the loan is repaid only when you move out or pass away.
3. Tax-Free Lump Sum
The lump sum or regular payments you receive from the equity release are tax-free. You can use them to buy your new property or for other financial needs.
4. Lifetime Occupancy
With a lifetime mortgage, you can continue living in your new home for the rest of your life, which is a significant advantage for those looking to stay in their property long-term.
Disadvantages of Using Equity Release to Buy a New Home
1. Interest Accumulation
With a lifetime mortgage, the interest on the loan compounds over time. This means the debt grows, which could reduce the value of your estate and leave less for your heirs.
2. Eligibility Criteria
Equity release is typically available only to homeowners aged 55 or older. Therefore, it’s not an option for younger buyers or first-time homeowners.
3. Impact on Inheritance
Since the loan is repaid from the sale of your home after your death, your beneficiaries could receive less inheritance.
4. Property Value Considerations
Your home must meet the lender’s criteria, and the value of your current property may affect how much equity you can release. If your home isn’t worth enough to cover the purchase of your new property, you might need to explore other financing options.
Things to Consider Before Using Equity Release to Buy a New Home
1. Long-Term Financial Impact
Think about how releasing equity will affect your long-term financial health, especially during retirement. Consider whether you’ll have enough funds left for future needs, such as healthcare costs.
2. Costs Involved
Equity release plans come with various costs, such as administration fees, legal fees, and potential early repayment charges if you decide to pay off the loan sooner than expected.
3. Explore Alternatives
Before committing to equity release, explore other alternatives like downsizing or obtaining a traditional mortgage. These options might offer better terms depending on your circumstances.
4. Estate Planning
Equity release can affect your estate and inheritance plans. If passing on your home to your family is a priority, you’ll need to consider how equity release might impact that goal.
Conclusion
Using equity release to buy a new home can be a viable option, especially if you’re entering retirement and want to avoid traditional mortgages. However, it’s crucial to fully understand the long-term implications, including interest accumulation and its impact on your estate. Always seek independent financial advice before proceeding. With proper planning, equity release can be an effective way to secure your new home and maintain independence in later life.
