If you need money but don’t want to move, equity release may seem like a good option. However, because this is a significant decision, it should never be made without seeking independent professional advice. Here we explain what equity release is and how it works, as well as answer any questions you may have.
What Is Equity Release?
Equity release is a financial arrangement that allows older homeowners to convert equity in their homes into tax-free money that they can use however they want while still owning their home. It is important to note that any money released must first be used to pay off any outstanding mortgages. The remainder is yours to spend as you see fit, such as on home improvements or to assist your family.
Lifetime mortgages and home-reversion plans are the two main types of equity release. The lifetime mortgage, which is aimed at homeowners aged 55 and up, is the most popular of these. It enables you to borrow against the value of your home while maintaining 100% home ownership for the rest of your life without making monthly payments.
Taking out one of these mortgages is thus becoming an increasingly popular way for people aged 55 and up to benefit from the equity in their homes.
It’s critical to distinguish between equity release mortgages and remortgaging to free up equity. When you remortgage, you must make monthly payments to cover the cost of your borrowing as well as the interest.
What Is Home Equity Release?
‘Equity’ refers to the value of your home less any money owed on it (on your mortgage).
‘Home equity release’ allows you to access some of your equity while still living in your home. For example, you may require funds for home improvements, medical expenses, or to assist with living expenses.
There are several ways to access equity in your home, including:
● Reverse mortgage
● Home sale proceeds sharing (home reversion)
● Equity release agreement
● The Government’s Home Equity Access Scheme (formerly the Pension Loans Scheme)
The amount of money you can receive is determined by:
● Your age
● The value of your house
● The type of equity release
Your decision may have an impact on your partner, family, and anyone else with whom you live. So take your time talking it over, seek independent advice, and make sure you understand what you’re getting into.
How Does Equity Release Work?
There are two ways to get money out of your home’s equity: with a lifetime mortgage, you can borrow against part of it, or with a home reversion plan, you can sell part of it.
1. Lifetime Mortgages – For Those Aged 55+
This is the most commonly used type of equity release. You borrow a lump sum in the form of a mortgage, which is repaid from the sale of your home when you die or enter long-term care. The amount you can borrow is typically between 18% and 50% of the total value of the property – typically, the older you are, the more you can release.
The amount you owe will grow with interest, but you can sometimes reduce it by paying off the interest as you go (this is known as a ‘interest paying mortgage’). You will have a ‘interest roll-up mortgage’ if you do not pay off the interest as you go. Because interest accumulates over time, you will end up repaying more overall in this case.
Most lenders now offer a ‘no-negative-equity guarantee,’ which means that the debt will never exceed the property’s sale price. However, this could still imply that the entire value of the property has been depleted by paying off the mortgage.
If you have a serious health condition or an unhealthy habit, such as smoking, you may be eligible for an enhanced lifetime mortgage. This may allow you to borrow more money or pay lower interest rates.
2. Home Reversion Plans – For Those Aged 60+
A home reversion plan is the other type of equity release product, though it now accounts for less than 1% of the market. In this type of scheme, you sell a portion or all of your property to a plan provider, who then pays you a tax-free lump sum.
Because the provider is giving you the right to live there rent-free for the rest of your life, this lump sum will not be for the market value of your home. When you die, your property will be sold, and depending on the percentage purchased, some or all of its value will go to the company that sold you the reversion plan.
For example, if you sell a 40% stake in a £200,000 property for a lump sum of £40,000, the cash you receive is a significant discount to the £80,000 this share is actually worth (at current market prices) – primarily because the provider will have to wait many years to recoup its investment. If your home is eventually sold for £300,000 after you die, the provider is entitled to £120,000, which is equal to 40% of the sale proceeds.
Home reversion plans are thus better if property prices remain flat, and worse if they rise significantly.
How Does Equity Release Mortgage Work?
1. Seek Advice
As a first step, you should consult with a financial adviser who is qualified to provide advice on equity release products. Your adviser will verify your eligibility and work with you to determine whether equity release is right for you. Your advisor will make a recommendation based on your personal wants, needs, and financial situation.
2. Offer and valuation
If you decide to proceed, appoint a solicitor who specializes in equity release to act on your behalf and provide independent legal advice. Your adviser will then assist you in submitting your application to your preferred lender. Your lender will contact you to arrange for a home valuation. Your lender will send the offer and terms to your solicitor once your application has been approved and your valuation has been completed.
3. Receiving Your Money
If you accept the offer, your lender will release the funds to your solicitor. Your solicitor will then release the funds to you in the manner agreed upon with your lender, such as in one lump sum or the first smaller sum in a series.
How Much Does Equity Release Cost?
The current average interest rate on lifetime mortgages is around 4.5 to 5%, with the lowest rates closer to 4.25%. This is lower than it was ten years ago, but it is still significantly higher than the top rates on conventional residential mortgages. And just because a loan has a low interest rate does not always imply that it is the best deal.
When deciding which equity release product is best for you, keep in mind that the eye-watering price tag your estate would have to pay comes from the fact that you chose not to make monthly repayments to reduce the debt, so the interest compounds and compounds.
For example, if you borrow £20,000 at the age of 60 at 5.1% on a £120,000 home, the amount you owe will roughly double every 14 years. So if you live until 74, you owe around £40,000; if you live until 88, you owe £80,000.
In addition to the interest cost, you will be charged a number of fees. This will most likely cost between £1,500 and £3,000, depending on the type of plan being arranged, and will include arrangement and valuation fees, as well as legal and surveyor fees.
Is Equity Release a Good Idea for You?
Your circumstances will determine whether equity release is appropriate for you. Consider the following reasons:
● Your other savings and/or sources of income will not be sufficient to meet your retirement needs
● You do not want (or are unable to) downsize
● You are okay with reducing your family’s inheritance (or you have no beneficiaries)
● You have been advised by an independent financial adviser that this is the best option for you
Some reasons to choose an equity release alternative include:
● You can supplement your retirement income with other sources
● You have the opportunity to free up money by downsizing your home
● You want to leave as much of your estate as possible to your family
● An independent financial adviser has advised you that this option is not the best one for you
When deciding whether equity release may be appropriate for your personal circumstances, there are numerous factors to consider. Whatever route you take for advice, you will have the opportunity to discuss your circumstances and determine whether equity release is the best option for you. It’s possible that there’s a better option for you than equity release, such as remortgaging or downsizing to a smaller home.