I think you’ll agree with me when I say…
Trying to understand what is equity release can be confusing, especially if you don’t have access to the right information.
You may be wondering how does equity release work in UK?
Moreover, considering the numbers of hours researching, and the expenses that come with professional consultations, getting to grips with equity release can be a daunting task.
By checking out this guide, you can finally get the answers you’re looking for without breaking a sweat or – the bank.
Are You Considering Equity Release?
Unlocking the Equity Tied Up in Your Property
There are over ten ways to release equity from your home. 40% of homeowners in the UK opt to sell their homes and downsize to a smaller, more affordable one. But then again, what if you don’t want to move out of the family home you love – where you have made lots of happy memories over the years?
That is when you turn to equity release.
Primarily, equity release is accessible to couples made up of at least one partner who is at least 55, or in some cases, 60.
It enables homeowners to raise tax-free cash from the equity tied up in their property. The amount that you can release depends on a number of factors, among which is your age. In other words, the older you are, the more cash you can release!
For instance, if you’re 65 and still in perfect health, with a property value of £500,000, you could get a maximum of 30% of the property value. This would allow you a maximum equity release of up to £150,000 with a plan provider like Aviva or LV.
But wait, it gets better:
Recently, equity release firms have introduced impaired life schemes that provide ‘enhanced’ rates to those who are not as fit and healthy as they used to be. These plans increase the percentage that you can withdraw from your property.
Consequently, if your 65, but are a smoker with high blood pressure, type 2 diabetes, and a history of heart attacks, you could get more, probably from £180,000 up to £190,500 with the enhanced lifetime mortgage1 scheme.
The Two Primary Types of Equity Release Schemes
As previously mentioned, the minimum age for equity release is 55. Even if you still have a small mortgage balance, you could still be eligible – the catch is that this has to be the first thing you cross off on your ‘debts’ list once you release the cash.
When you’ve cleared your mortgage and have more cash, you have the right to spend it as you wish and – you won’t have to make any monthly repayments. You only have to pay back the loan (plus interest), when you decide to sell the house – which will typically be when you die or move out permanently (into long-term residential care).
How Does Equity Release Work in the UK?
It’s a straightforward process.
When you’ve done in-depth research and carefully considered all equity release alternatives, you can get the ball rolling and finally find out how it works.
The equity release process can vary from one individual to another, and from lender to lender. However, you need to ensure that you’ve got plenty of support along the way.
Here are the steps you must take:
- First things first, to be sure that you’re eligible; you need to talk to an expert. You won’t have to take things any further if you don’t qualify.
- Consult your financial adviser2 – you can do this over the phone or in person. They’ll answer your questions and guide you in your decision. They’ll also confirm the advice given in writing before you make any further decisions.
- Plan for a follow-up meeting – talk through the advice you got from your adviser. You’ll have the chance to ask any other burning questions you might have and ensure you’re ready to proceed.
- Fill in your application with the help of your adviser. They might even offer to submit the application on your behalf. If the equity release company acknowledges it, they’ll arrange a valuation. They’ll use the valuation to make you a loan offer.
- Head to the solicitor’s office – talk to him/her about your offer and get independent legal advice. They’ll look at all the legal details and walk you through each item. After they scrutinise the proposal and you accept, your equity release will be complete.
- Acquire your equity through your solicitor and finally get on with putting those plans into action!
All you have to do is to ensure that you receive proper guidance along the way, and when it’s done, you’ll have access to the cash you need to ensure you get the retirement you deserve.
How Soon Can You Unlock the Cash From Your Home?
It varies from one plan provider to another. However, for most like Legal & General, it ranges from 8 to 12 weeks from when they receive your application to the day your solicitor sends you your cash.
Well, there are various ways you can pull money out from your home. You can choose multiple loan options like home equity loans, home equity lines of credit, reverse mortgages, cash-out refinance, or equity release.
With equity release, you only need to ensure that your home is worth more than £70,000 and in the UK. You also have to ensure that you are above the age of 55 and, for some, at least 60 years.
Equity release is, in a nutshell, a mode of unlocking the value of your property and turning it into a lump sum.
You can do this via several policies which allow you to access – or ‘unlock’ – the equity attached up in your residence if you are over 55.
A lifetime mortgage scheme is a way of unlocking a lump sum from the equity in your estate.
The plans work by securing a loan against your residence. The mortgage and any interest you have to pay are reimbursed when your house is sold, so you don’t have to make any monthly repayments.
Equity release may not be right for everyone. It can hurt your claim to state privileges and it lowers the value of your habitation.
It can alter your means-tested benefits like pension and savings and council levy. It is, therefore, vital that you fully understand your circumstances.
You can also always see what you are entitled to with your Benefits Agency, the Citizens Advice, or your Local Authority.
Equity release, as you know, affects your means-tested benefits, but it doesn’t affect your state pension. However, the guarantee credit part of pension credit, which tops up the state pension to increase pensioners’ weekly income, can be.
The guarantee credit’s mainly for topping up the basic state pension of £125.95 a week for individuals to £163. You are allowed access to £10,000 before your pension credit’s affected. Then, for every extra £500 in savings you have, you’ll lose £1 a week in guarantee credit.
Homeowners and UK residents aged 55 and above have been unlocking the value of their homes and turning it into a cash lump sum. However, how does equity release play into probate issues?
Well, since you’re taking out capital based on the value of your home, you’ll be reducing the significance of your family’s inheritance. When the plan provider puts up your home for sale, it will inevitably reduce the amount of money you leave to your family.
While it’s not possible to be in negative equity at the time of sale, the value of your estate can be more or less the same as the repayment to be made to the lender. It means that there might eventually not be much capital left when the plan term ends.
It won’t also be possible to leave an estate to your family as the rules of the equity release plans stipulate that the lender must sell the home when you pass on. Your family will enjoy the residual value as a cash inheritance.
Considering all this, you have to ensure that you re-word your Will. If it includes sums of money that you plan to leave to your heirs that are mostly based on the value of your home, since equity release will change that, you need to revisit it and update it.
If you’ve, however, used percentages rather than fixed amounts, there’s no need to make any alterations since those will apply to the residual value once the lender sells your estate.
The divorce rates in the UK have been edging up. For the couples that bought an estate together, it’s essential to understand how to calculate purchasing out your spouse’s share of the property in the event of a divorce.
If neither of you wants to stay, or one can’t afford to purchase the other out, you can always opt to sell the house and split the proceeds. However, if you don’t want to sell, taking out an equity release plan is the best option for you.
It not only allows you to free up some cash but also in buying out your partner, thus making the divorce process smooth sailing.
It may reduce how much inheritance levy you have to pay (your inheritance levy liability) contingent to how you use your release.
There may be more fitting ways of reducing your liability, and so it’s crucial to get financial guidance from a levy specialist so that they can offer you proper advice on inheritance levy planning.
Nevertheless, if you wish to get more advice from a levy consultant, see how much equity you can release and chat with one as a perk.
Yes, you do. For lifetime mortgages, you repay the loan plus the interest accrued when you die or move into long-term care.
However, the home reversion plan isn’t a loan, and so, the plan provider benefits from the sale proceeds of their share of your estate when you die.
Requesting for an equity release can usually take somewhere between 4 to 6 week for a lifetime plan and about 6 to 8 week for the home reversion plan, assuming the title is clear.
If you took out the equity with your spouse, the abode is usually sold once the last remaining lendee has died. If you took it on your own, then when you perish, the lenders are obliged to merchandise your property.
With lifetime one, the capital that is made from the transaction is used to settle the initial pledge, plus any annuity that has accumulated. If there’s sufficient value in your home or if your family members wish to repay, the lender does not have to put your property up for auction.
With a home reversion plan, however, a fraction of the property will be the reversion firm’s. If any piece of the residence doesn’t belong to them, then the fraction from that portion will go to your residence.
In some circumstances, the percentage sold can be repurchased by other funds in the residence or for example by family members.
If you want to – yes, you can. Nevertheless, it’s essential to reiterate that most equity release plans require you to repay the loan when you pass on or move into residential care.
For joint applications, this is typically dependent on the last Death or last applicant moving into long-term care. At this point, your plan provider can use the security they hold on your home to instigate a sale and reclaim the cash you owe them.
Nonetheless, plans like the voluntary repayment option enable you to pay back the equity release plan early, but you’ll incur an early repayment fee. These fees vary from one plan provider to another.
Equity Release schemes are becoming increasingly flexible, so it’s worth considering a plan that offers downsizing protection.
Many schemes levy an early repayment charge if you end your agreement early but it’s possible to get an Equity Release plan without these charges, but not all providers offer this option.
It depends on your plan provider.
Typically, equity release schemes are designed only to be settled if you move into long-term care or die. Defined as, if the plan is settled in full within the contract’s course, then charges may arise depending on the plan.
Yes, it can.
Any lender that’s a member of the Equity Release Council allows the transfer of an equity release plan to a new, suitable property.
However, that house must meet the contractual requirements of the lender.
Unlike for lifetime, a home reversion plan is not a mortgage.
Instead, the equity release organisation benefits from their share when it’s sold after your death.
If you qualify, the amount of equity you can unlock from your estate is usually between 20% and 55% of the value of your home.
However, this depends on various factors like:
How much your estate is worth – this will be determined by the property appraisal. Your plan provider will also look at the type of property construction, what materials the house is made of and if it’s a listed building. They’ll also check the condition of the property and the amount of debt secured against your estate.
Your age- If it’s a joint application, it’ll depend on the age and health of the youngest applicant.
You can release from £10,000 to £100,000.
However, this is all dependent on various factors. For instance, the younger you are, the less you can expect to release from the value of your estate. It’s because most plan providers have to estimate how long it’s likely to be until they can secure the final equity – your property.
If you’re, however, nearing your 70s, then you’re more likely to release a handsome amount of money since your life expectancy is low.
Another factor is your health. Most plan providers require you to offer information about your pre-existing medical conditions. If you have certain illnesses like high blood pressure, diabetes, among others, then you can be sure to unlock a considerable amount of capital.
Another factor that the lender will take into account is the actual market value of your home. The higher this is, the more you can expect to get in your payout.
There are minimum value thresholds in place when it comes to this – your home has to be at least £70,000. Nevertheless, most companies impose higher minimum values of £75,000 or £100,000.
If you’ve been paying down your mortgage over the years, you’ll have built up equity in your property, which you can then cash in on when you sell.
When your home goes to closing, between the down payment and the mortgage loan, the buyer will come with funds equal to your home’s sale price.
With equity release, selling of the house takes place when you either die or move into permanent care, and the plan provider takes the amount owed from the sale of the home.
If you, however, want to move house, you have to ensure that the estate you’re moving to offers enough security for the capital you have borrowed.
Your plan provider will have to approve the transfer and that it meets the requirements of your contract.
To calculate it, and you can do so this way:
- Firstly, find out your home’s current market value.
- Then subtract your outstanding mortgage balance from the amount to find out how much equity is in your home.
Equity release is a financial product that offers you the right to retain the ownership of your home while also receiving a lump sum or recurrent income.
The “catch” with this plan is that you have to repay the plan provider when you die or move into long-term care.
Yes, equity release plans are a smart financial option. If you don’t want to move to a smaller apartment and receive some extra cash for your retirement projects, then you need to consider taking these plans out.
Nonetheless, if you plan on leaving some inheritance to your kids, it might not be the ideal option for you.
Like any other financial product, equity release is not something you should rush into. So, take your time, prudently consider your options and make an informed decision. Keep in mind that taking out a lifetime mortgage reduces the inheritance you leave behind, so it would be wise to involve your family in your choice too.
That said, if you’ve got any questions or need more information on what equity release is, be sure to not only use our free online calculator, but also to receive an equity release advice by talking to our expert for free!
How Much Can You Release?
Use the FREE Calculator Below