Is equity release safe?

By Marc Elliott De Lama · 29 November 2023

If you're a homeowner aged 55 or over, then you may have been looking into equity release.

Equity release is a special type of mortgage which enables you to access the money – or equity – that has built up within the value of your home over time.

Many people use these funds to buy a second property – be it their dream home, a second home, or a holiday home – as taking out equity is often a much simpler way of borrowing money than obtaining a traditional mortgage. But is it the safest way?

Here, our expert Spanish Mortgage Brokers walk you through the benefits and pitfalls of equity release, and whether it could be the best option for you.

What is equity release and how does it work?

We've covered the very basics already, but there's much more to it.

As we've mentioned, equity release is a special type of mortgage that allows you to access the money – AKA, the equity – that has built up over time, which is the current value of your property minus any outstanding mortgage debt.

There are two main types of equity release you can choose from:

• Lifetime mortgage
• Home reversion plan

Depending on the equity release plan you choose, you can claim your money as one large lump sum, in a series of smaller lump sums, or a combination of both. Usually, you should receive between 20%-60% of the market value of your property.

Many people use these funds simply to pay off their mortgage and make their retirement more comfortable. However, others may decide to do this and put the rest towards another property – either their dream home, a second residence, or even a holiday property.

This is a huge decision, so it shouldn't be taken lightly, and you should seek specialist financial and legal advice before you do anything.

How could I benefit from equity release?

There are many benefits of releasing the equity in your property, including:

• Obtaining a large lump sum or monthly payments to help with bills, home improvements, and care costs.
• You can (usually) stay in your property for as long as you need to.
• You can set aside part of your property value as an inheritance for family members.
• The loan is only paid back when you pass away or move into long-term care.
• You won't have to pay tax on the equity released from your main home.

Some people also opt for equity release to help them pay off any debts – easing the pressure from creditors and stopping them from taking legal action.

Is equity release a safe way to borrow?

For many people, releasing their equity is a much simpler way of borrowing money than obtaining a traditional mortgage – but this doesn't mean it comes without its downfalls.

The biggest being reduced inheritance.

Since you've exchanged a chunk of your property's value for cash, your beneficiaries will have a significantly smaller inheritance.

Once the sale of the property is complete, they'll only receive what's left after your equity release mortgage and the compound interest is paid back. Which leads us on to the next pitfall.

As the interest is compounded, the total repayable amount increases significantly over the years.

Also, if you're currently claiming benefits, you could end up losing them if the income you gain puts you above the eligibility threshold, so keep this in mind when considering equity release.

What are the basics you need to know about an Equity Release mortgage or a Spanish Lifetime Mortgage here in Spain?

• All title holders of the property must be age 65 or over, married couples with one person under the age of 65 do not qualify unfortunately
• The property you wish to mortgage must be your main residence for at least 3 years
• The property must have a large chuck of equity held within it, ideally you own your home outright with any old mortgages paid off
• Currently, your property must have a value of 150.000 € or more (This may be subject to change depending on the lenders criteria)
• Applicants must prove that they have been living in the property for a minimum period of 3 years
• Equity release/Spanish Lifetime Mortgages (hipotecas inversas) are governed and regulated by the Bank of Spain under Law 41/2007 Ley_41-2007.pdf

We've been helping our clients to secure Spanish mortgages for over 16 years, providing tailored advice and support throughout the buying process and beyond.

To find out more about how we can assist you, don't hesitate to contact our team.

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