I have just been recording a series of videos for my property sourcing business in which I explain to my clients exactly how equity release works.
The principle should be (note “should be”) that equity is released from a property you already own, either outright or with a relatively small mortgage. This capital (or cash) is then invested in something that gives a return on that money – enough to pay the cost of borrowing and leave you with a profit to spend.
Now that sounded straight forward to me but maybe I need to break it down a bit further and explain what the general public would do in comparison.
There are many equity release schemes that enable people over 55 years old to release capital stored in their property – to use it to boost their failing pensions. And while the news reports advise caution and speaking to your financial advisor (which is sensible) the average person does not understand the power of leverage in this model. They would take this cash either as a lump sum or monthly payments and use that to pay their bills.
When we released £200,000 equity from our family home – we didn’t spend the money or put it in a bank – we invested in 7 buy to let properties in the north of England. The properties were let out to tenants and after the mortgage, insurance, management fees and maintenance was paid – we averaged about £250 per month per property profit.
Seven times £250 is a health £1,750 which we then used to pay back the cost of borrowing the £200,000 from our home. The remaining cash, over £1,250 a month in our case, became extra income into our household budget.
Using my knowledge and experience as a property investor and particularly my understanding of the power of leverage I have been able to maximise the return on our cash. In effect creating £1,250 per month extra money by using the banks money (Using Other People’s Money; how to invest in property 2nd edition, contains the full story and more).
Can you think of family members that might benefit from extra cash flow, which can be achieved by leveraging the capital in your house? If you start now, you could still qualify for a mortgage (because you are still employed) and start benefitting from the cashflow rather than wait until you are in your 60’s – maybe you could even retire early once your personal financial plan (I can help you – please let me know) is in place. If you have questions please let me know