Guide to Equity Release
Read our Guide to Equity Release
What is equity release?
Equity Release is a way of releasing capital that is locked up in the value of your home without having to move. The equity (value) in your home is defined by its open market value minus any debt held against it.
Who qualifies for equity release?
Equity release schemes are aimed at older people who own their homes outright, so you have to be over a certain age (usually over 50) and own your own home.
How does equity release work?
When you take out an equity release scheme, you receive the money that has been unlocked from the value of your home either as a lump sum payment, regular payments, or both, to use as you wish. You continue to live in your home and retain responsibility for its maintenance.
Are there different types of equity release schemes?
What is a home reversion scheme?
With a home reversion scheme, you sell all or part of your home to a reversion company, or an individual sourced by a reversion company. You therefore no longer own your home, but you can remain living there as a tenant for as long as you wish.
With a home reversion scheme you have the money as a lump sum and can then reinvest this to provide you with regular payments, and you can continue living in your home for the rest of your life.
How does a lifetime mortgage work?
With a lifetime mortgage, you take out a loan that is secured against the value of your home. You continue to own your home, and the loan is paid back using the proceeds from the sale of your home, which will be sold either when you die or if you move permanently into a care or residential home.
Are there different types of lifetime mortgage?
Yes, there are four main types of lifetime mortgage:
- You can receive a lump sum or ad hoc amounts
- Interest is added to the loan amount annually or monthly
- The interest you owe is 'rolled up' so you do not have to pay it until your home sold.
- You get a cash lump sum or ad hoc amounts
- You pay interest on the loan each month
- You pay back the amount you borrowed when your home is sold
- You get a cash lump sum
- You don’t pay interest each month or at the end, but agree to pay the lender a higher sum than you borrowed when the house is sold
- You decide on this sum at the outset
- You get a cash lump sum
- You use this lump sum to buy an annuity that supplies a regular income
- The interest on your loan is paid by using the annuity
- The loan is be repaid when your home is sold
What are the benefits of equity release?
Many of the older generation are 'property rich, cash poor' because their home has increased in value significantly, but their pension or other income is not enough for a comfortable lifestyle.
Before equity release schemes were available, the only way of unlocking this capital was by downsizing. But for many people, a home is more than just bricks and mortar, it holds memories and they don't want to move.
Equity release allows you to benefit from the cash released without having to actually move. And, with life time mortgages you can still benefit from any further rises in the value of your property.
What are the drawbacks of equity release?
Equity release can reduce the value of your estate and therefore, the amount of inheritance you are able to leave behind. They involve borrowing against or selling all or part of your home, which can work out more expensive than other methods of raising the funds you need, eg downsizing. Equity release can also affect your entitlement to means-tested benefits and grants.
A drawback of home reversion plans specifically is that they can be poor value for money; the sum received will be significantly less than the true market value of the property – usually only between 35 per cent and 60 per cent. This is because the buyer cannot sell your home until you die or move out. Therefore, the older you are when you start the scheme, the more you are likely to get.
What are the alternatives to equity release?
If your property has risen in value, there are a couple of alternatives to equity release. The main and most common alternative is to buy a cheaper property. If you choose to do this, you have two options:
- Buy a smaller house in the same area
- Buy a house the same size, but in a cheaper area
The advantages of downsizing is that a large amount of tax free cash can be raised, the disadvantage is that you have to move, and uprooting can be especially difficult for the elderly in terms of their health and the emotional attachment they may have for the area in which they live.
Another alternative to equity release is a 'low cost mortgage', this is for the elderly that still have a decent income - they can look to take out a simple mortgage to release equity built up within a home. It is preferable to an equity release scheme but then it is not open to everyone.
Are there fees and costs with equity release?
Yes, there will typically be an arrangement fee, of between £300 and £500 and a valuation fee, which will be linked to the value of the property, but it will probably be around £300. You will also have to pay legal costs of between £300 and £700 and if you repay your lifetime mortgage before the end of the contract, i.e., before you die or move out, you may have to pay an early repayment charge, but this will differ between lenders.
With some home reversion plans, there are rental charges. This is because you no longer own all or part of your home, so are effectively a tenant. Not all home reversion companies will charge rent and even ones that do, the fee will be minimal.
What happens if I want to move?
Most lifetime mortgages can be transferred to another property, so you can move house. If your new property is of lower value, you will generally have to repay part of your lifetime mortgage. If your lender will not allow you to transfer the scheme, you will have to repay the whole of the lifetime mortgage using the proceeds from the sale of your home.
A home reversion plan is not portable as you have sold all or part of your house. By choosing to leave the property, the lease is terminated and the reversion provider is free to sell the property. . After the house has been sold, any proceeds due to you may not be enough to buy a new property.
What if I owe more than the property is worth?
If you have a roll-up lifetime mortgage, the interest being added to the property can grow quite quickly, and if it rose to more than the value of the property, you would be in negative equity, which is where you owe more than your property is worth. If this happens, the lender may ask you to start paying interest, or, after your death, your beneficiaries would have to pay the extra. However, all reputable providers of equity release schemes are members of “SHIP” – Safe Home Income Plans and subscribe to the Code of Conduct which provides a “no negative equity guarantee”.
What happens to my partner if I die?
If the equity release scheme was taken out jointly, the scheme will continue as before. If it was in your name alone, the property would have to be sold and your partner would have to move out, unless they could afford to repay the lifetime mortgage in full.
How do I find out more about equity release?
We offer an equity release service which puts you in touch with an equity release specialist who:
- Will offer you friendly and helpful advice
- Has access to top equity release schemes
- Can give you no obligation equity release quotes