People are sitting on potentially huge funds that they are unlocking, and they are looking to make the most of it.
With equity release, you can free some of the money you have tied up in your home. To make it even better, you can then use this cash to make equity investments which could increase your money even more.
Think it sounds too good to be true? Keep reading to find out how you could do it too.
What Is Equity?
Equity simply means the value of what you own.
What you have – What you owe = Equity
How to Release Equity from Your Home
Many homeowners have equity (cash) tied up in the value of their property.
Value of home – Value of debt (such as a mortgage) = Equity
Equity release allows you to get to some, or all, of this. It can be a great idea if you want some extra funds but don’t want to leave or lose your current home.
These funds can be given to you as a lump sum or in smaller installments, and you can use the money however you’d like to.
There are typically two ways to release equity from your home; a lifetime mortgage or home reversion.
Lifetime / Reverse Mortgage
This lets you borrow money against your home.
The house is still yours, and you have the right to live there until you die or go into long-term care. When that happens, the house is sold to pay off the mortgage plus any interest. Anything extra goes to your beneficiaries.
Most lifetime mortgages have a “no negative equity guarantee”. This means that, even if the sale of your house isn’t enough to repay the amount owed, you don’t have to pay any more.
This is another way to release equity from your home. You sell some or all of your property and continue to live there as a tenant, but you don’t have to pay any rent. When the property is sold, the home reversion company will get their share of the money made.
Using Your Equity Release to Make an Equity Investment
Once you’ve released cash from your home, you can use it to make equity investments.
What Is an Equity Investment?
Equity investment means investing in companies by purchasing their stocks and shares. Investors aim to buy them as cheaply as possible, hoping that their stocks and shares rise in value.
Investors hope to get their money back, plus profit, when:
- They sell their stocks and shares to other investors
- The company’s assets are liquidated, the debts are paid, and anything left is shared
Benefits of an Equity Investment
If the company that you have an equity investment in does well on the market and earns a profit, you have the chance to substantially increase your money.
If the company uses its profits to reinvest in itself and grow, your shares become more valuable. If you sold them now, you would have more money than you started with. This is known as capital gain.
If the company makes a profit but doesn’t want to reinvest for growth, they may pay dividends to investors. If you’re looking for a regular income from your equity investment, then invest in blue-chip companies who have a history of paying regular dividends.
Risks Related to an Equity Investment
The return on your equity investment is at the mercy of the market.
The company may not perform well and could make a loss. If this is the case, then your shares could become worth less than you paid for them. You also cannot rely on dividend payments.
Equity investments are also easily affected by other factors beyond your control. These can include foreign currency fluctuations, political changes, and inflation. All of these can have potentially negative effects on company profits and the value of your shares.
Different Types of Equity Investments
You could invest in stocks and shares in specific companies. You would have a high degree of control over your investments, but you won’t have spread your risk. If one company performs poorly on the market, your investments could be very negatively affected.
These are pools of a variety of stocks and shares, meaning you would have a wider range of equity investments. This diversification would lower your overall risk. If one company performs poorly, you have investments elsewhere that may still be doing well.
Passive equity funds are typically lower risk and lower return. Active funds are more volatile and require a fund manager to be more involved in managing your investments.
Private Equity Investments
This involves investing in stocks and shares of companies that are not yet listed on the stock exchange. This tends to be during the early phase of a company. These investments are extremely high risk, but with potentially very high returns.
Real estate is another form of private equity investment. You purchase and maintain properties, with sales or rental income providing your return.
An extremely popular way to do this in the US is with 1031 exchanges, where investors pool together, own a range of properties and benefit from the tenants’ payments. You can learn more about 1031 exchanges here.
Using Equity Release to Make Equity Investments
By releasing funds currently tied up in your home, you have the potential to make smart equity investments that create a lot of cash.
Consider using a lifetime mortgage or home reversion to release equity from your property, in exchange for a cash lump sum or smaller more regular payments.
If you’d like to make this money go further, and the benefits outweigh the risks, then an equity investment may be right for you. This could be an investment in individual stocks and shares, equity funds or private equity investments.
Before making any decisions, you are strongly advised to seek professional and independent financial advice. Advisers are monitored, certified and published in the UK and US, as well as in other countries.