What is equity release and how does equity release work?
What is equity release and how does equity release work?
What is equity release?
Equity release (the collective term for a lifetime mortgage and a home reversion plan) is an option available to older homeowners (aged 55 or older) that enables them to access some of the money that is tied up in the value of their property. The benefit to homeowners is that they can release a cash lump sum, without having to move home or downsize. On top of this, there are no monthly repayments to make. A lifetime mortgage is the most popular type of equity release product and this article will only cover this type of equity release mortgage and discuss home reversion in a later article.
Equity release is a long term loan that is secured against your property.
The amount of money you can borrow depends on your health, age, value of your property and the equity release product you choose.
You can either take a single, tax-free cash lump sum or take a tax-free cash lump sum along with a pre-agreed reserve with the lender that you can access later.
Lifetime mortgage equity release pros include:
You remain a homeowner.
There is no mortgage repayment to make.
The equity release loan (along with the interest) is typically only repaid upon the sale of your home when you and your partner die or go into permanent residential care, depending on the equity release scheme.
Releasing equity allows you to fund a more comfortable lifestyle.
Your equity release provider may offer a 'no negative equity guarantee' so you will never have to pay back more than the best price it can be reasonably sold for (we will only ever recommend this type of lifetime mortgage so you and your family will never be left in negative equity on your home).
You may still be able to move and transfer the lifetime mortgage to the new property (although this may be subject to an early repayment charge, depending on the equity release product).
You may be able to make voluntary partial repayments, if you come into some money, for example.
Lifetime mortgage equity release cons include:
A lifetime mortgage is a secured loan on your home.
Interest builds upon the loan each year and is subject to an interest rate.
Interest is charged on the original lump sum loan and can quickly add up.
The amount of money you can leave as an inheritance will reduce.
The loan may affect your eligibility for state benefits and impact your tax position.
Although there is a large choice in the lifetime mortgage market, not all equity release advice is responsible.
Can I release equity from my house?
In order to qualify for an equity release plan, such as a lifetime mortgage, and extract tax-free cash from the value of your home, you will need to meet certain criteria.
Lifetime mortgage equity release eligibility checklist:
The applicant must be a homeowner.
The applicant must be over 55.
The minimum amount of money you wish to borrow should be at least £15,000 - depending on the lender.
You must be mortgage-free or only have a small mortgage that must be paid off as part of the lender agreement (early repayment charges may apply).
Your home must be in the UK and normally have a minimum property value of £75,000.
Your home must be freehold or normally have at least 160 years remaining on the lease.
Your home must be your main residence and should not be unoccupied for more than 6 months at a time - some lenders may be more flexible than others on this point.
Is equity release a good idea?
An equity release lifetime mortgage loan offers eligible, older homeowners the opportunity to release a tax-free cash lump sum from their home, without having to move or budget for a monthly payment in retirement. Many homeowners that take out an equity release product choose to spend the money on once in a lifetime activities or home improvements. Others will choose to use the money to supplement their income if living costs are rising faster than their pensions and investments in retirement. The money raised from a lifetime mortgage really could open lots of doors for eligible homeowners in retirement.
What do people do with the money raised from an equity release scheme such as a lifetime mortgage?
Home improvements
Helping family members with education fees or a house deposit
Topping up regular income in retirement
Holidays
Accessible home amendments to facilitate independent living
Funeral costs
Cars, motorhomes and caravans
Hobbies and leisure
Inheritance tax planning
At-home care costs
However, an equity release mortgage is subject to a loan interest rate and will attract compound interest over time. This could erode the equity in your home over time, reducing the amount you can pass on when you die although some providers offer an inheritance protection guarantee. Equally, your existing mortgage may be subject to an early repayment charge, which could impact the money you are left with after taking out an equity release product.
As a result, lifetime mortgage products may not be a good idea if you have access to savings, investments or other money that is more readily to hand. In addition, you may prefer to take advantage of rising house prices and downsize, moving to a smaller home or less expensive area, therefore releasing funds as part of the sale and still enjoying the benefit of no regular payments. This would enable you to maintain full ownership of your property and the benefit of any growth in house prices over time.
Is equity release a scam?
Equity release is not a scam. The equity release market is governed by the Financial Conduct Authority (FCA) and those offering advice on an equity release scheme have to be qualified (more often than not, equity release advisers are qualified mortgage advisers that have chosen to sit additional exams). As a result, there is a lot of oversight, procedures to follow and compliance processes to adhere to when giving financial advice in relation to equity release.
Nonetheless, as equity release is only available to older homeowners and involves giving up a portion of the value of their home, some family members may consider equity release to be a scam as it affects the amount of inheritance they may receive. This news may often come as surprise as older generations may have different attitudes toward the open discussion of money and may not have mentioned their need for extra funds or plans to release some of their home equity to their children. This news may then only come to light after a family member has passed away and as we all know, inheritance often does funny things to people, not least when it may be significantly less than someone expected to receive.
In addition, some fraudsters have created equity release calculators that use your personal information for identity theft and as part of a database of high-pressure sales targets, so be particularly vigilant about the amount of information you give away and to whom.
You can read our in depth article ‘What's the catch with equity release and is it a scam?’ for more details.
We also have a free equity release calculator that requires no personal information, so you can decide if Equity Release is right for you.
Is it better to release equity or remortgage?
The best place to start when comparing equity release to a remortgage is to ask yourself why you need the money. Both equity release and a mortgage are a big commitment and you will always need to take financial advice before making any decisions.
Read our dedicated article ‘Is it better to release equity or remortgage’ for a full rundown on the pros and cons of equity release.
How does equity release affect state benefits?
Equity Release is a big decision and, while the benefits of equity release can be great - namely a large cash injection to live on, enjoy your retirement, help your family, improve your home and more – it can also affect your means-tested state benefits.
The State Benefits that are affected by Equity Release include:
Pension Credit.
Council Tax Reduction.
The State Benefits that are not affected by Equity Release include:
Help with certain NHS treatments and costs, such as dental treatment, glasses and transport costs for hospital appointments.
Transport benefits such as free bus pass and a blue parking badge.
You can read our in-depth article ‘How does equity release affect state benefits’ for more details.
Can I lose my house with Equity Release?
Can you lose your house with equity release? The short answer is no, providing you abide by the contract. The long answer though, is a little more complicated.
You can read our in-depth article ‘Can I lose my house with equity release?’ for more details.
Free equity release calculator no personal details required.
Think equity release may be the right solution for you? You can head over to our equity release calculator to get a quick estimate on the amount of money you could release from your property with a home equity loan and no personal details are required. It’s totally anonymous, instant and no salesperson will call (because we don’t ask for any personal details).
Where can I get responsible equity release advice?
If you need responsible equity release advice you can speak to a Chartered Financial Adviser here in Tunbridge Wells, wherever you are in the UK. Our financial advisers are Equity Release experts and on hand to help you find an equity release plan that suits your needs, whether that's a lifetime mortgage or home reversion plan. We are members of the Equity Release Council and signatories of the Financial Vulnerability Taskforce.
Your financial adviser can also offer broader financial advice on a range of topics from mortgages, remortgages, pensions and investments to inheritance tax and estate planning. We offer a free, no-obligation initial consultation at our office, over the phone or by video chat regardless of where you are in the country. Locally, we serve clients across Kent including Ashford, Maidstone, Sevenoaks and Tonbridge. In East Sussex, we have clients in Bexhill, Crowborough, Eastbourne, Hastings, Heathfield and Uckfield.
What’s next?
Equity Release can be a complex subject and it’s a big decision. To help you decide if Equity Release is right for you, you’ve got a few options. You can head over to our dedicated Equity Release page for a more detailed look at Equity Release, FAQs and more. Alternatively, you can try our Free Equity Release Calculator that requires no personal details and gives an instant, anonymous result.
This article offers information about financial planning and should not be taken as personal advice. Equity Release will reduce the value of your estate and may affect your entitlement to state benefits. Think carefully before securing debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.