A Complete Guide to Equity Release
I think you’ll agree with me when I say…
There’s a lot to learn about equity release.
However, with numerous providers and sites giving you vague information on equity release, trying to wrap your head around this financial product can be difficult.
Lucky for you, with hundreds of hours spent knee-deep in research and more than ten expert consultations, this guide will not only give you an inside look at the world of equity release but also make you informed of what is about to give your retirement a life-changing spin towards financial dream.
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What Is Equity Release?
You’re property rich but cash tight. You have benefitted over the time from the increasing property prices, but without capital, you are severely limited in what you can do.
You’ve got time to do the things you’ve also wanted to do, but you can’t, because all of your money is tied up in your property.
Imagine that you could do that renovation, buy that new car or go on that dream holiday.
There is a way you can have the best of both worlds, and still stay in your property.
It is called equity release, and it is booming in the UK. You have seen it on the TV, heard about it on the radio, and you are not the only one. Every 12 minutes, someone over 55 in the UK is releasing equity from their property. Let’s take a more in-depth look at what it is.
It enables property owners who are 55+ to unlock the value in their estates by turning it into a cash or monthly income.
Unlike traditional mortgages, with equity release, they allow you to continue living in your house until you pass away or move into permanent care. Only then is it customarily paid from the sale of your home.
If you’re over the age of 55 and a property owner, you’re almost certainly eligible to take out an equity release. It is tax-free, and you may spend it on what you want – meaning you get to tour the world, make home improvements, coming up with inheritance to your family and enjoy your golden years.
You have always waited for the moment to do what you want when you want. Now with equity release, you can do that. Is it safe though?
Do You Qualify?
The primary qualification of taking out an equity release is if you are 55+ and own a home in the UK, with little or no mortgage.
However, there are other considerations before you can apply to an equity release.
The criterion is split into several categories, which equity release use to gauge whether you can release money from your property.
Here is an outline of what these rules are:
1. The Location of Your Home
The location of your property is considered – it has to be situated in the UK. Some can impose localised rulings to whether they can encompass the extremes of the UK within their remit.
Like Northern Ireland, for example, it is presently limited to only two providers. Some might insist that their services are limited to the mainland, thus ruling out any islands.
So, before making any decisions, be sure to check with your adviser and understand if your property’s location could be a potential matter of discussion.
2. The Property Criteria
The property value most will accept is usually £70,000. Theoretically, there is no upper property valuation limit. Nevertheless, some imposes an upper amount to guard their them from the risks. Equity release like Aviva, Legal & General, can impose a release limit up to £1 million.
Moreover, the condition of your home is a factor that is taken seriously, and they will expect you to have it properly maintained.
3. The Loan Amount
Like the one above, this determinant is subject to your provider. However, most lenders give minimum of £10,000 and £100,000 for others.
The maximum you can borrow 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.
Before calculating the cash you can unlock, you have first to settle any outstanding mortgages. You can either redeem the lease before the application stage or when you release your equity and use these it to clear your outstanding mortgage amount. When releasing equity, the funds you release will first be used to settle your existing mortgage, and any that remain will be available for you to do with what you want.
Your solicitor will arrange this for you, thus saving you from the hustle of running around looking for ways to pay your mortgage.
4. The Age of the Homeowners
Currently, when taking out a lifetime mortgage, s/he should be at least the age of 55. However, some might require you to over 60. However, the youngest age always forms the foundation of the equity release calculation.
Since the lowest age differs, always check with an adviser to ascertain beforehand if your eligibility might be an issue.
5. Your Credit History
Typically, plans have no repayments required – this means it is more hassle-free than when applying for residential mortgages.
Nonetheless, the possibility of poor credit scores affecting your chances of taking out an equity release depends on the severity of the situation as well as the provider’s terms and conditions.
Some will insist on you being at least age 55 and conduct no credit checks. However, others will insist on checking your credit scores.
So, before taking out any plan, consult your provider and ensure your credit history is fine.
More » Equity Release Criteria
Looking for an alternative? » Equity Release Alternatives
The Attractive Benefits of Equity Release
Equity release is ideal for anyone looking to improve their living standards after retirement, and here are some of the ins and outs.
1. It Offers You Financial Freedom
By taking out an equity release, you can spend it how you want. Whether you need to upgrade that kitchen, make improvements like new double glazing, loft & cavity wall insulation, a world tour, or to help your kids buy their first home, it’s all up to you.
What you receive is tax-free, and you can opt to take it as either a lump sum, as an income or in several smaller chunks (‘drawdown’) – for more flexibility.
2. It Does Not Require You 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’
Almost all plans provide you with the benefit of having guarantees throughout your life. Make sure you choose one that is regulated by the Financial Conduct Authority (FCA). For example, the ‘no negative equity guarantee scheme’ ensures that any equity release adheres to the Safe Home Income Plan (SHIP) regulations.
It means that it protects from having the amount you owe is not driven up by house price changes. Therefore, your beneficiaries cannot ever incur any debt over & above the property market value once the mortgage holders die or move into permanent care.
What about the pitfalls?
More » Equity Release Pitfalls
Types of Equity Release Schemes
There are two main ways to unlock the cash tied up in your property without having to move. You can either choose the lifetime mortgage or the home reversion scheme.
More » What is a Home Reversion?
What is a Lifetime Mortgage?
It is the most common equity release option, and you secure it against your main home. It is tailored to run for your lifetime, in which the property remains 100% in your name.
Unlike with the traditional residential mortgages, it has no monthly payments requirements, and you can continue living on the premises. The money you release is repaid plus interest when the your property has been put up for sale, when you breathe your last or go into long-term care.
If there is any cash left after the loan is finished, it goes to your estate.
However, you need to note that with the current economic changes, more and more providers allow making voluntary repayments to aid you in controlling the balance, if needed.
There are several flexible options and the offer the capability to:
- Pay either on an ad-hoc or regularly via the monthly scheme which aid in controlling the mortgage balance.
- Get an element of equity through including an Inheritance Protection Guarantee, which protects a percentage of your residence.
- Take 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 repayments, both assisting in negating the need for ‘early repayment charges.’
- Borrow more or offer a lower interest based on one’s health and lifestyle conditions.
More » What is a Lifetime Mortgage?
What is a Home Reversion Plan?
Open to homeowners in the UK aged 65 and over, a home reversion scheme is different from a lifetime mortgage, in that the home reversion provider purchases a percentage (or all) of your home (at less than market value) for a tax-free equity lump sum.
You then get a lifetime tenancy that allows you to live rent-free in your house for life or till you move into permanent care.
Through selling a percentage of the value of your home, you’re successfully ring-fencing part of its ultimate value for your heirs. When the last surviving homeowner breathes their last or moves into long-term care, the home is sold, and the sale proceeds are divided accordingly between the lender and your beneficiaries.
Note that if the value of your home increases by the time it’s sold, you or your residency will only benefit from the upsurge in your share of the home.
Moreover, if you only want to sell a part of your home, they will know what exact percentage of your home’s value your beneficiaries will inherit on your death.
More » What is a Home Reversion?
More » Types of Equity Release
Is It Risk Free?
Currently, not only are providers and advisers governed by the FCA (Financial Conduct Authority), but the financial products themselves assures you.
It is a law that providers sign up to be members of the Equity Release Council and abide by its ideals and codes – inclusive of the ‘no negative equity guarantee’, which makes it impossible ever to owe more than the value of your home and you may transfer your plan to another home without incurring any penalties.
Be sure always to check the ERC register that your provider and consultant have signed up to this industry body’s code of practice, for a secure and smooth process.
How Much Does Equity Release Cost?
The typical rate is from 3.5% to about 7%, making it significantly higher than most traditional mortgages.
What you have to pay back is greater if you’re not reducing the debt monthly, so the interest builds up and keeps building up with time. The flip side is that you haven’t had to make monthly payments.
For instance, if you borrow £30,000 at the age of 60, at 5% on a £130,000 house, and what you owe doubles roughly every 14 years. So, if you’re lucky enough to live up to 74, you owe around £60,000, live until 88, and you owe £120,000. However, it is important to note that although this sounds like too much, you haven’t had to make any payment in 28 years and the risk has all been on the provider.
What is interesting is that most likely it will cost the pension company and not you.
Please review this BBC article ‘Home Equity Release May Cost Pension Firms Billions’.
If you review this BBC article, you will notice that you can benefit more than the pension firm.
What the image above shows, is that if you live more than 2 decades and house prices have kept rising, the equity release is losing money on you!
In addition to the actual interest, you will also have to think of the arrangement fees. These fees can tally from about £1,500-£3,000 in total, subject to the type of plan being planned.
They can include such expenses as legal, home surveyor & fees, and lastly the stamp duty.
Things to Consider When Taking Out an Equity Release Scheme
There are a host of considerations that you need to carefully evaluate before you opt to take out a lifetime mortgage or home reversion. Here is a compilation of some of the aspects of that you need to know.
However, these factors are by no means exhaustive and if you need to learn more about this, you should click here to see how much equity you can release and chat with an expert for free.
1. How Much Do You Want to Release?
It is dependent on your age (which is at a minimum of 55) your home’s value and any lifestyle or health conditions that 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 get a lower interest. In both cases, your life expectancy is used to calculate the money you can release and what your lower interest rate will be.
See how much equity you could release now.
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2. The Interest Rate
Unlike most traditional mortgages, the interest tends to be larger, although the majority of the plans has the security of a fixed price for life.
The interest is ‘rolled up’ (or compounded), and it accrues over the lifetime of the loan. However, with the various changes today, most of the plans allow you to make flexible payments back to the provider to reduce the amount you will pay a when you breathe your last breath or move into permanent care. It is, however, not an obligation – you still have the choice to make your payments when the plan ends (i.e., when you die or go into long-term care).
More » Equity Release Rates
3. The Costs Involved
Other than the interest, there are additional costs involved when taking out equity release and how you navigate through them determines how much you will pay in the long-run.
These consist of the cost for the advice you receive before taking out an equity release, the lender’s application and your solicitor’s fee. You can check out ‘Equity Release Fees & Costs.’
4.The Early Repayment Charges
True to its name, a lifetime mortgage is designed to be repaid after its lifetime is complete and not pre-emptively.
If you, 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. It can be either fixed or variable.
If you’re likely to pay back it quicker, have a comprehensive discussion about it with your adviser.
Penalties can vary, and what’s perfect for you is dependent on you.
5. Do You Want a Drawdown, Lump Sum or Income Plan?
One lump sum might be perfect for you if you have a significant one-off expense, like having major home renovations or if you want to pay an overdue interest-only mortgage.
If however, you require more revenue to top-up your pension and other benefits, then having a fixed, predictable income will be best.
With a ‘drawdown, it is based on what you want the cash for. Perhaps you want to travel to your favourite destinations occasionally. If you decide to take a small initial amount, then followed by even smaller amounts, then this is best – it is because it also allows you only to pay interest on the amount borrowed.
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 is now possible, with the few alterations made, to add an inheritance protection guarantee for the much-needed peace of mind. This ensures that even after you take out your equity release, you can always assure your family that they will have some part of the property when you pass away.
Therefore, if leaving your family some inheritance is vital to you, be sure to consult with your financial adviser and provider so that they can guide to how you can do that without any complications cropping up in the future.
For many, they feel they have provided enough support to their children, and others might not have anybody they want to leave an inheritance. In these scenarios, ’ equity release is trendy since you will receive the cash for life and disburse it how you wish.
7. The ‘No Negative Guarantee’
Every Equity Release Council member provides you advice on plans that come with the no negative equity guarantee. It means that when your heirs repay your scheme, they will not be subjected to repay more than the home’s value and therefore they will never be 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 move closer to your loved ones or you need the scenery change or just for mobility reasons or to downsize.
Since the ERC, approves all lifetime mortgages, it means you may transfer to your new house if it also meets your provider’s specific terms and conditions.
If this is likely, please discuss it with your adviser beforehand. See our report on ‘Equity Release Advice‘.
9. The Right to Continue Living In Your Residence
In addition to the right to move home, plans also offer you to stay in your home for life, or until you decide to move into residential care. Through this protection, you get to have the peace of mind of knowing that your property cannot be repossessed and that you will not ever have to worry about being homeless.
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 well for you – and you are not limited to the ways you can use the money. What can be better than that?
So, if you want to accomplish those lifelong dreams of touring the world or improving your home, do not shy away and call up your financial adviser today!
If you also need more information on equity release, click here and see how much equity you are eligible for and chat with an expert for free.
How much money could you release?
An equity release allows you to access the value of your home, tax-free without having to sell up, so that you can have money to spend on whatever you want or need.