Home & Mortgages- Equity Release
Halfway through the fifth floor (over 55), just retired, strapped for cash for the gentrification of your home or help you check out those boxes on your ‘places to visit list’, but you still own your home? Well, according to experts, the easiest solution is to take out an equity release.
In fact, as per Britain’s largest equity release firms, the market hit a new record in 2018, after the seventh year of growth, with retired homeowners withdrawing over £2.1 billion of property wealth the previous year via some 29,600 plans. The market for traditional equity release on residential property is booming, and with the rapid and continuous increase in property value, this trend is projected to continue.
It seems very straightforward, right? Well, as it is with lots of things in life, it is not as easy as it looks. In your bid to take out an equity release, you will undoubtedly read and hear some conflicting reports about equity release products, making this hugely significant financial resolution even more complex and intricate – at a time when it is vital, you make the right choice for your situation. Bearing that in mind, here is an unbiased guide to aid you in this golden part of your life.
Equity Release Explained
Equity release, in a nutshell, is a way of releasing the wealth tied up in your property without having to move or selling it out, which you can do via series of dogmata that allow you to access – or ‘drawdown’ equity (cash) at a later date, based on your necessities, and if you are over 55.
You also know that you need not have ultimately paid off your mortgage to do this.
As a rule, however, you are allowed to take the money you release in one lump sum, in some smaller amounts on which you will pay interest, or as a combination of both. The “catch” though, is that one has to repay the income-provider at a later stage, which is, at most times, when the homeowner dies. Therefore, equity release is, mostly, beneficial to the elderly who do have no intention of, or are cannot leave a large estate for their heirs when they die.
How Does Equity Release Work?
The most prevalent form of equity release is one where you do not have to pay the cash-owed until you die. So, if you have no heir, it serves as the most decent, although costly, way to get some cash for your long overdue ‘to-do list.’
If you, however, have heirs, then for you, equity release typically means there will be less for them to inherit. Then again, it is your money, so you need to prioritize your lifestyle.
Types of Equity Release
In the UK Equity Release market, there are two popular forms of equity release plans. These are:
#01.Lifetime Mortgages
It is the most popular and for those aged 55+.
In this equity release plan, you can choose whether to take out your funds in a single lump sum or a series of small amounts within a specified period up to the maximum limit settled on with the plan provider.
You can also opt to keep some of the value of your residential property as an inheritance for your family. It means you have the advantage of enjoying releasing equity while also making sure your children have something reserved for the future. Isn’t it incredibly amazing?
Well, there is more.
So, in this plan you retain total ownership of your home and the interest on the loan can either be fixed or rolled up. The credit taken, the fixed loan and the rolled up interest is reimbursed by your residency when you either die or permanently move into long-term care.
If you, however, are part of a couple, the reimbursement is not made until the last person living in the estate either dies or permanent moves into long-term care. In other words, you and your life partner are free to live in your home as long as you can without conditions.
With some plans though, you can opt to make monthly interest repayments either in part or in full. By doing so, you get to retain the debt to the preliminary amount of the loan before interest.
If you choose to make interest reimbursements, however, you can still decide to move to a roll-up arrangement at a later date. You can even get lenders who offer you the choice to pay some capital throughout the plan, but you should always deliberate on the details with your plan provider.
Therefore, when you are considering taking a lifetime mortgage, it is essential to know:
- The least age at which you can take out a lifetime mortgage is 55, and with the current upgrades in our standards of living, the earlier you start, the more it is likely to cost in the long run.
- The maximum percentage you can borrow is up to 60% of the value of your property. However, the amount to be released depends on your age and your property’s. The percentage characteristically upsurges according to your age (when you take out the lifetime mortgage) and some lenders might even opt to offer more substantial sums to those with a, particularly exciting past or a present medical condition.
- The interest rates should be on a fixed basis or, if they are flexible, there must be a “cap” (upper limit) which is secure for the life of the loan (Equity Release Council standard).
- You are allowed and have the right to remain in your estate for life or until you feel the urge to re-locate into long-term care, on condition that the estate remains as your principal residence and you stick to the stipulated terms and circumstances of your contract to the letter (Equity Release Council standard).
- The product has a “no negative equity guarantee”, meaning when they sell your estate, and they pay the agents’ and advocates’ fees, even though the amount left is not adequate to pay off the outstanding loan to your provider, neither you nor your residency will be accountable to pay further (Equity Release Council standard).
- You have the right, and can move into another property, subject to the new manor being satisfactory to your plan provider as continuing security for your equity release loan (Equity Release Council standard). It is debatable though since various lifetime mortgage providers have different thresholds.
#02.Home Reversion Plan
In this equity release plan, you can access all or part of the value of your estate while keeping the right to stay in it, rent-free.
Your plan provider will buy all or a part percentage of your estate. So you will know precisely what portion of your residence you have parted with and, in the same way, what has been ring-fenced for the future (what you can leave in a Will).
The percentage you maintain in your manor will always remain the same regardless of any fluctuations in property values unless you choose to take any additional cash releases. So, with the home reversion plan, when you have reached the end of the disposition, your manor is sold, and the sale proceeds are shared according to the residual proportions of ownership.
Therefore when you are considering the home reversion plan, you need to:
- Know you have the option of releasing equity in a series of payments or one lump sum.
- You should know the least age at which you can take out the home reversion plan. Some plan providers insist that you need to be at least 60 or 65 to take it out.
- The percentage of the market worth you will It will increase as you grow older when you can take out the plan. It might, however, differ from provider to provider.
- You have the right to and can opt to remain in your estate forever or until you have the urge to move to residential care, on condition that the property remains your principal residence and you follow the terms and conditions of your contract to the letter (Equity Release Council standard).
- You can choose to relocate or move into another home subject to the new property being acceptable to your plan provider as continuing security for your home reversion loan (Equity Release Council standard).
- The level of maintenance they will require you to carry out, and how often you will, you’re your property inspected (this could be every few years).
- The plan has a “no negative equity guarantee”, meaning when they sell your estate, and they pay the agents’ and lawyers’ fees, even though the amount left is not adequate to pay off the outstanding loan to your provider, neither you nor your residency will be accountable to continue with the payments (Equity Release Council standard).
Who Can Get Equity Release?
For you to take out equity release there are conditions you need to meet:
- If you want a lifetime mortgage you, (or if you are a couple and are borrowing jointly) you need to need to be at least 55 years old.
- If you want the home reversion to plan you, (or if you are a couple and are taking out a plan jointly) you need to be at least 65 years old.
- You MUST own property in the UK, and the said property should be your primary
- Your estate should be in pristine condition and over an absolute value, and depending on the plan provider; there might be restrictions on the type of property acknowledged.
- If you, at the time, have a mortgage or a secured loan on your residency you may still be eligible for equity release, but it will be contingent to the value of your estate and the amount outstanding on the current mortgage or loan. You will have to pay off any outstanding mortgages or loans secured against your home at the same time as taking equity release.
- Equity release may not be apt if you have dependents living with you. If you have any dependents, they need to take separate legal advice. If the said dependants wish to remain living with you in the estate, then they, depending on your plan provider, may need to sign a waiver confirming they comprehend they have no right to continue living there if you die or permanently move into residential care.
Is It Right For You?
Well, equity release plans, just like most financial plans, are not right for everyone and thus you need to realize that it is imperative for you to fully consider your options and seek independent financial advice before making any rash decisions.
You also need to note that it is vital for you to decide to use an equity release product that will meet all your needs.
However, even when all is said and done, equity release plans have both pros and cons and here are some of them:
| Pros | Cons |
| You can receive a tax-free lump sum and a series of small, regular payments to complement your income, and can continue living in your home until you die or permanently move into residential care | Equity release decreases the value of your property and also the amount that will leave for you named beneficiaries in your Will. Remember, your estate is practically everything you possess, including money, land and residency, possessions and investments |
| You, depending on your pan provider, may continue to enjoy any increment in the value of your estate | With the home reversion plan, the reversion company possesses all or a part-share of your estate |
| You may relocate or move to a suitable alternative property in the future, as equity release is transferable. It will be subject to your new residency being up to standard with the property suitability criteria applicable at the time | When you receive a lump sum or take out extra cash to complement your income, it may, depending on your plan provider, lower your entitlement to means-tested benefits, now or in the future |
| With the lifetime mortgage plan, you have the right to continue living in and keeping ownership of your estate | If you happen to receive care at home, funded entirely or to some extent by the local council, they might charge you or ask you to pay more |
Cost Expectations: Complete Price Guide Breakdown
When you take out the lifetime mortgage equity release, the typical rate is 5.1%, considerably higher than most conventional mortgage options.
The mind-rattling price-tag your property would have to reimburse comes when you opt not to make any monthly repayments to lower the debt, so the interest keeps growing, at an alarming rate.
For example, let’s say you borrow £60,000 aged 60 at 5.1% on a £160,000 estate, and the amount you are obliged to pay doubles roughly every 14 years. So, with the various chemically induced diseases and dangerous circumstances in the world today, you live until 74, and you owe around £120,000 if you happen to be lucky and live until 88 and you owe £240,000.
Therefore, in addition to the actual cost of the interest, you will have to pay arrangement fees. These can archetypally tally £1,000-£3,500 in total, depending on the type of plan you choose. Your plan provider can also include costs such as application fees, legal work, and surveyor fees. You might also have to pay stamp duty.
Considerations before Getting an Equity Release
If you have done your due diligence and seen that equity release is right for you, here some few extra tips you need to look into:
- Make sure that you do not borrow the full amount you need at once. The sooner you borrow, the more costly it is since the interest has a more considerable time to grow. So, ensure that you acquire as little as you need now, and wait as long as you can to do it again.
For instance, if you have sat down and think you may need £60,000 from your home to cover 20 years, make sure that you only take what you need now and wait to take more when you need Drawdown lifetime mortgages are set-up to make this simpler. - Be sure to check your plan provider’s credentials and make sure that they are a member of the Equity Release Council.The ERC’s members must promise a ‘no negative equity’ guarantee so that your estate will never owe more than it is worth.
- Make sure before delving into these plans you seek advice from the professionals. Seek the services of an autonomous mortgage brokeror financial adviser with an equity release qualification to find the most suitable contract for you and one that matches your lifestyle.
- Equity release can affect your benefits. Having liquid cash rather than a property, which is an accruing asset, can have a substantial impact on the benefits you are entitled to. For example pension credit, jobseeker’s allowance, income support universal credit and others may be reduced or lost entirely. So if you are eligible to those, make sure that you evaluate the impact first.
So, for safety purposes, make sure that you always reach out to a specialist equity release adviser that you can trust will be able to rightfully and without bias, advise you accordingly before taking out an equity release plan.
Frequently Asked Questions
Q: Could This Type Of Financial Plan Assist Me in Reducing Any Inheritance Tax?
A: When you seek an equity release scheme it automatically reduces the value of your estate. So, you need to speak to your financial adviser if you are considering using equity release for this purpose.
Q: Are There Any Alternatives to Equity Release?
A: Yes. Therefore, when you are considering taking out an equity release plan, you need to make sure that you check the alternatives you have. You can log onto moneyadviceservice.org.uk/debtfor advice on debt.
For example, you might have other investments, savings or assets you can draw on, seek help from family and friends, decide to take on a lodger or you might wish to continue with some form of paid work or even join your spouse in their restaurant, fashion, tech, or any other business. You may also want to consider downsizing to a smaller home or one of lower value – probably by moving to another part of the UK, where house prices are more pocket-friendly.
Downsizing will most likely offer you maximum value from your estate, since you can sell up and move on to a containable home, and live off the excess cash you have made. It also allows you to find a property that will be more suitable as you age – fewer stairs, perhaps. Then again, you may decide that you do not want to leave your generational estate or move away from family and friends and then you need to consider the cost of moving.
You should not underestimate the personal and social effect of moving away if you can only afford to downsize out of the area.
In the long run, you will need to weigh all the substitutions and, along with help and advice from your financial adviser, make a well-thought decision on whether any of these alternatives meet your desires.
Q: How Can You Avoid Risk When Taking Out Equity Release?
A: All firms that offer advice on or sell equity release have to be regulated by the Financial Conduct Authority (FCA). By doing so, it provides you the consumer, protection, security, and access to the Financial Services Compensation Scheme if you ever require it.
You also need to make sure that you select a plan from a company that is a member of the Equity Release Council. It is a trade body, and its members agree to abide by a voluntary code of conduct which may include particular product standards. When these ideals are met it means you:
- May live in your property for life, or until you move into permanent residential care
- May transfer your plan to an alternative property (providing it is acceptable to the equity release product provider)
- You will never owe more than the value of your estate when they sell it after you die or permanently move into long-term care.
However, always ensure that you speak to a specialist equity release adviser and that the FCA allows both the consultant and the equity release plan provider. If something goes wrong with your plan, make sure that you contact your provider first. He/She will have a complaints procedure to follow.
Conclusion
Times are changing, and as the value of money increases and the population grows, the cost of land and property keeps skyrocketing too. With that, people and especially retirees and the elderly keep looking for ways to ensure that they continue enjoying the perks that the world has to offer, and thus the smart invention of the equity release plan.
However, even with the numerous benefits and outstanding features this plan offers, you need to give it a thought and make smart moves.
Dean Marvin, an Equity Release Specialist, keeps advising his clients to speak to a specialist financial adviser, who is a certified member of the ERC so that they can get the right guidance when making this investment decision. Prevention is better than cure!
So, make a smart decision today and get your best equity release plan and enjoy every moment of your golden age in class and style!
