What's Equity Release?

Equity Release Mortgages: The Complete Guide

What’s it?

You’ll probably agree with me when I say…

Getting a straight answer with so much conflicting information available on the subject is no easy task.

This not only makes your attempts to understand these financial products troublesome but, it’ll probably scare you away from what’s arguably one of the most flexible and useful financial products available to you.

But, fortunately for you, we can help!

With more than ten expert consultations and many hours spent engrossed in research – we’re in the ideal position to help you figure this out! This guide will not only give you an inside look at the world of equity release but, it will also explain you how does releasing equity work and send you into a life-changing spin towards your retirement dream.

Are You Considering Equity Release?

Equity Release Explained

You’re rich in land, but cash is tight. You may have benefited from rising property value over time, but without money, your options are limited.

You have time to do the things you want to do as well, but you can’t, because all your money is tied up in your home.

Imagine you could afford the upgrade, buy a new car, or go on that holiday you’ve been dreaming about for years. Imagine you could do all that and still keep your home.

Well, we’re here to tell you that there’s a way that you can get the best of both worlds. You can access the value tied up in your home and still stay in your home!

It’s called equity release and is booming in the UK. You’ve seen it on the news, you’ve heard about it on the radio, and you probably know someone whose thinking of doing it right now. Every 12 minutes, someone over 55 in the UK releases equity from their home.

Now: let’s take a closer look at what it is.

If you’re 55+, you can unlock the value of your estate by translating it into a cash lump-sum or monthly payouts.

Unlike conventional mortgages, equity release schemes allow you to stay in your home until you pass away. Only then will the loan be paid from the proceeds of the sale of your property.

If you’re over 55 years of age and own your home, you’re almost certainly eligible for an equity release product. It’s tax-free, and you can spend it on anything you want— from travelling the world, and renovating your home to preparing an inheritance for your family, or simply enjoying a stress-free retirement with the additional income.

If you’re like the rest of us, you’ve probably been waiting for the time to be able to do what you want when you want for far too long. Now you can with a tailored equity release plan.

But, is it safe?

What Does Equity Release Mean?

Equity release applies to a variety of items that allow you, (if you’re over the age of 55), to access the equity (cash) locked up in your home. The money you release can be taken as a lump sum or, paid out in several smaller sums (or as a combination of the two).

Do You Qualify for a Property Equity Release?

To be eligible for an equity release scheme you’ll have to be 55+ and own your own home in the UK, with only a small outstanding mortgage balance or none at all.

However, there are other things you must consider (and criteria you must meet) before you can apply for any equity release products.

These equity release criteria are based on which services you’re interested in and, which companies to use to gauge whether you are eligible to release money from your home.

Here’s an outline of what the rules and requirements are:

#1. The Location of Your Home

The location of your home is considered – it has to be situated in the UK. Some equity release providers impose location-based restrictions.

For example, Northern Ireland is presently limited to only two independent providers. Some might insist that their services are limited to the mainland, thus ruling out any islands.

You might be asking, can I release equity from my house? So, before making any decisions, be sure to consult with your adviser and find out whether your home’s location makes you eligible for a home equity release scheme or not.

#2. The Property Criteria

The property value most providers will accept is usually £70,000. Theoretically, there’s no upper valuation limit. Nevertheless, you’ll find that some impose an upper limit to guard them against the risks. Equity release providers like Aviva and Legal & General can impose a release limit of up to £1 million.

Moreover, equity release companies will expect you to keep your home properly maintained. The condition of your home could affect it’s value and is a factor that will be taken seriously.

#3. The Loan Amount

Like the consideration above, this one is subject to your provider’s specific requirements. However, most lenders give a minimum ranging from £10,000 to £100,000.

The maximum you can lend is dependent on the age of the youngest homeowner, their health and lifestyle, and, of course, the home’s market value. The older you are, the more equity you can release.

But wait, there’s something you must do first!

Before calculating how much cash you can unlock for personal use, you have to first settle your outstanding mortgage. You can either settle your mortgage before the application stage or after you release your equity so that you can use it to clear your outstanding balance.

When releasing equity, you’ll find that the funds you release will typically be used to settle your existing mortgage, and your remaining balance will be available for you to do with it as you please.

Your solicitor will arrange all this for you, thus saving you from the hassle of running around looking for ways to settle your mortgage.

#4. The Age of the Homeowners

Currently, when taking out a lifetime mortgage, a service provider will require you to be at least 55 years of age. However, some may require you to be over the age of 60. The age of the youngest homeowner will always form the foundation of the equity release calculation.

Since the minimum age differs, always check with an adviser beforehand to make sure your eligibility won’t be an issue.

#5. Your Credit History

Typically, equity release plans will not require repayments – this means it’s more hassle-free than residential mortgages and other forms of credit.

Nonetheless, credit matters.

Poor credit scores can affect your chances of being approved for an equity release. This will depend on the severity of the situation as well as the provider’s individual terms and conditions.

Some will insist on you being at least 55 years old and conduct no credit checks. However, others will insist on checking your credit score.

So, before taking out any plan, request a copy of your credit file from one (or more), of the major credit bureaus and ensure your credit history won’t impede your chances.

The Benefits of Releasing Equity From Your Home

Equity release is ideal for anyone looking to improve their living standards after retirement. Here are some of equity release pros and cons you need to know:

#1. It Offers You Financial Freedom

When you’ve release equity in your home, you can spend the proceeds however you want. Whether you need to upgrade your kitchen, make improvements like new double-glazed windows, loft & cavity wall insulation, go a marvellous world tour, or help your children buy their first home, it’s all up to you.

And if that’s not enough…

What you receive will be tax-free, and you can opt to take it as either a lump sum or as supplemental income split up into several smaller chunks (‘drawdown’) – for more flexibility.

#2. You Do Not Need to Downsize

With an equity release, you don’t get to experience the hassle, inconvenience, and expense of moving out of your treasured family home to a smaller one.

#3. It Offers You the ‘No Negative Guarantee’

All plans provide you with the benefit of a ‘no negative guarantee’ as long as you choose one that’s regulated by the Financial Authority (FCA¹ ). The no negative equity guarantee scheme² ensures that any equity release adheres to SHIP’s regulations.

This means that once you’ve passed on, your estate won’t have to pay any amounts exceeding the value of your property. This includes estate agent and solicitor fees as well as the outstanding loan balance.

Therefore, your estate and beneficiaries cannot incur any debt over and above the market value of your home. Isn’t that a relief?

Types of Equity Release Schemes

There are two main ways to uncover the cash tied up in your home. You can either choose a lifetime mortgage or a home reversion scheme.

What’s a Lifetime Mortgage?

It’s the most common equity release option, and you can secure it against your primary residence. It’s tailored to run for your lifetime, during which the house remains 100% yours (and therefore in your name!).

Unlike with traditional residential mortgages, it has no payment requirements, and you can continue living in your home. The money you release is repaid (plus interest), when your home has been sold or if you go into long-term care.

If there’s any cash left after the loan has been settled, it goes to your estate and can be distributed as per your will.

But wait, there’s another option you should be aware of!

With the current economic challenges and changes, more and more providers will allow you to make voluntary repayments to aid you in controlling the balance if needed.

There are several flexible options, and they offer you the ability to:

• Pay either on an ad hoc basis or regularly via the monthly scheme, which will help you control your mortgage balance.

• Protect a percentage of your estate with an Inheritance Protection Guarantee.

• Make tax-free equity withdrawals on a drawdown basis, following the establishment of an initial cash reserve facility.

• Innovative elements like downsizing protection and compassionate early repayment both assist in negating the need for early repayment charges.

• Borrow more or offer a lower interest based on one’s health and lifestyle conditions.

What’s a Home Reversion Plan?

Open to UK homeowners aged 65 and over, a home reversion scheme is different from a lifetime mortgage. The provider purchases a percentage (or all), of your home (at less than market value), in exchange for a tax-free equity lump sum.

You are then offered a lifetime tenancy that allows you to live rent-free in your house for life or until you go into permanent care.

By selling a percentage of the value of your home, you’re successfully ring-fencing part of its ultimate value for your heirs. When you pass away or move into long-term care, your home is sold, and the sale proceeds are used to pay the lender after which the balance will be distributed among your beneficiaries.

But wait, there’s more!

If the value of your home increases by the time it’s sold, you (or your estate) will benefit from the appreciation in your share of the home.

Moreover, you’ll know the exact percentage of your home’s value that your beneficiaries will inherit after you pass on.

Are Equity Release Schemes Risk Free?

In case you’ve been wondering “Is equity release safe?“, here is an extended answer.

Currently, not only are providers and advisers governed, registered, and regulated by the FCA (Financial Authority), but the financial products themselves come with built-in safety measures.

Providers must sign up to be members of the Equity Release Council and abide by its codes – inclusive of the ‘no negative equity guarantee’. This guarantee makes it impossible for your estate to owe more than the value of your home. In addition, you may transfer your plan to another home without incurring any penalties.

Be sure always to check the ERC register to ensure your provider is listed, and that they’re therefore regulated by the Council, for a secure and smooth process.

How Much Does Equity Release Cost?

It varies.

The typical rates are from 2.5% to about 7%, making them significantly higher than most traditional mortgages.

If you’re not reducing the debt, the interest builds up and keeps building up with time, making your balance increase. The flip side is that you don’t have to make any payments.

So what does this mean for you?

For instance, if you borrow £30,000 at the age of 60, at rates of 5% on a £130,000 house – what you owe doubles roughly every 14 years. So, if you’re lucky enough to survive up to 74, you’ll owe around £60,000. Live until 88, and you’ll owe £120,000.

While this might sound like a lot, bear in mind that you haven’t had to make any payments in 28 years and the risk has all been carried by the provider.

Most likely it will cost the pension company and not you – isn’t that interesting?

Please read this BBC article online and find out more information: ’Home Equity Release May Cost Pension Firms Billions’.

If you review this BBC article, you’ll notice that you can stand to benefit more than the pension firm.

What the image above shows, is that if you live more than 2 decades and house prices keep rising, you’ll stand to benefit more than anyone!

In addition to the actual interest, you’ll also have to think about the arrangement fees. They can include legal expenses, home surveyor costs, valuation fees, and stamp duty.

These fees can tally from about £1,500 to £3,000, subject to the type of plan you opt for.

9 Things to Consider When Taking Out an Equity Release Scheme

There are a host of considerations that you need to pay attention to before you take out a lifetime mortgage or opt for a home reversion.

However, these factors are by no means exhaustive.

Here’s a compilation of some of the most important ones:

#1. How Much Do You Want to Release?

How much you can (and should) release is dependent on your age (you must be at least 55), your home’s value, and any lifestyle or health conditions you may have.

If you have any health-related issues and are eligible for the enhanced lifetime mortgage, you get the chance to borrow more money and enjoy a lower interest. In both cases, your life expectancy is used to calculate the money you can release and your interest rate.

You can get a good idea of how much you could release with this equity release calculator.

#2. The Interest Rate

Unlike most traditional mortgages, the interest tends to be higher, although the majority of the plans have the security of a fixed price for life. The interest rates on equity release are ‘rolled up’ (or compounded), and it accrues over the lifetime of the loan.

However, you have other options.

Most plans allow you to make flexible payments back to the provider to reduce the amount you will pay a when you pass on or go into permanent care. It is, however, not an obligation – you still have the choice to either reduce the balance with regular payments or repay the full amount when the plan ends (i.e., when you die or go into long-term care).

#3. The Costs Involved

Over and above the interest, there are additional costs involved when opting for equity release and how you navigate these will determine how much you’ll pay in the long-run.

These consist of the cost for the equity release advice you receive before you apply, the lender’s application fees, and your solicitor’s fee.

#4. The Early Repayment Charges

True to its name, a lifetime mortgage is designed to be repaid after its lifetime is complete and not during the course of your life.

If you decide, later on, that you want to sell your home and pay it off, you can. Nonetheless, some can make you pay an early redemption charge (ERC) – and there are two types of penalties for these, either fixed or variable.

If you’re likely to pay back the loan quicker, have a comprehensive discussion about it with your adviser.

Penalties can vary, and what’s perfect for you is dependent on your specific needs and circumstances.

#5. Do You Want a Drawdown, Lump Sum or Income Plan?

With lifetime mortgages, which are the most popular equity release options, you have a choice of receiving a single lump sum, or regular payouts which is referred to as a ‘drawdown.’

A lump sum payout might be perfect for you if you have a significant one-off expense, like major home renovations or if you want to pay an overdue interest-only mortgage.

On the other hand, it may be the wrong option.

If you require more income to top-up your pension and other benefits, then having a fixed, predictable income with a drawdown option will be best.

With a drawdown, amounts and payout frequency is based on what you want the cash for. For instance, you may want to travel on occasion to enjoy your favourite destinations with your loved ones.

If you decide to take a small initial amount, followed by even smaller amounts, a drawdown is an excellent option. In this case, you’ll also benefit from your ability to pay interest on the amount and keep the balance within a predetermined limit.

#6. What About Inheritance?

It is no secret that equity release schemes reduce the value of your estate, which results in a reduced inheritance for your loved ones.

That said, it’s now possible, with the few alterations made, to add an inheritance protection agreement for that much-needed peace of mind. You can then rest assured that your loved ones will receive their inheritance once you’re no longer with them.

If leaving your family some inheritance is vital to you, be sure to consult with your financial adviser and provider. They can guide you on how to secure this without any complications cropping up in the future.

You may feel that you’ve provided enough support to your children, or you may not have anybody you want to leave an inheritance to. In such cases, equity release is ideal. You will receive the cash as per your needs and use it as you deem fit.

#7. The ‘No Negative Guarantee’

Every Equity Release Council member must provide you with advice on plans that come with the no negative guarantee.

This means that when your estate repays the equity release loan, it won’t be required to repay more than the home’s value. Your estate and heirs will never have to pay anything out of pocket.

#8. Your Right to Move to Another Home

You may want to move in the future. It could be because you want to be closer to your loved ones, for a change of scene, for mobility reasons or to downsize.

Since the ERC approves all lifetime mortgages, you may transfer the scheme to the new house if it also meets your provider’s specific terms and conditions.

If there’s a good chance that you’ll move in the near future, please discuss it with your adviser beforehand.

#9. The Right to Continue Living In Your Residence

In addition to the right to move home, plans also offer you the option to stay in your home for life, or until you decide to go into residential care. Through this protection, you get the peace of mind you deserve, knowing that your house cannot be repossessed.

Got Questions? Check These First

In Conclusion

Equity release is, in a nutshell, one of the best financial decisions you can make – when done correctly. It has its pitfalls and can cost you money.

However, if your pension and other businesses cannot help you maintain your lifestyle, then it’s an excellent option for you. You won’t be limited to how you can use the money and will not have to worry about making repayments or losing your home. Just make sure you also know about all the types of equity release.

What could be better than that?

So, if you want to accomplish those lifelong dreams of touring the world or improving your home, contact your financial adviser today and get going!