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 offering you vague information on equity release, trying to wrap your mind 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 one of the most informed consumers of the financial product that is about to give your retirement a life-changing spin towards financial freedom.
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What Is Equity Release?
You’re property rich but cash tight. You have benefitted over the years 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’s called equity release, and it’s 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’s a financial product that enables property owners who are 55+ to unlock the value in their estates by turning it into a cash lump sum or monthly income.
Unlike traditional mortgages, with equity release, you don’t have to make any monthly repayments, and they allow you to continue living in your residence until you pass away or move into permanent care. Only then is it customarily repaid from the sale proceeds 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. The capital you release is tax-free, and you have the financial freedom to spend it on what you want – meaning you get to tour the world, make home improvements, give a living 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 have the funds to do that. Is it safe though?
Read More » How Does Equity Release Work?
Read More » The Top Equity Release Companies
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 provider.
The criterion is typically split into several categories, which equity release providers use to gauge whether you can release money from your property.
Here is an outline of what these qualifying rules are:
1. The Location of Your Home
To qualify for an equity release, lenders consider the location of your property – it has to be situated in the UK. You should also bear in mind that specific providers can choose to impose localised rulings to whether they can encompass the extremes of the UK within their remit.
Like Northern Ireland, for example, it’s presently limited to only two providers. Some providers 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 financial adviser and understand if your property’s location could be a potential matter of discussion.
2. The Property Criteria
The minimum property value most providers will accept is usually £70,000. Theoretically, there is no upper property valuation limit. Nevertheless, certain providers impose an upper amount to safeguard their companies from the risks. Equity release companies like Aviva, Legal & General, can impose a release limit up to £1 million.
Moreover, the condition of your home is a factor that lenders take seriously, and they will expect you to have it properly maintained.
3. The Loan Amount
Like the property criteria, this determinant is subject to your provider. However, most lenders offer a minimum amount of £10,000, while others have a minimum of £100,000.
The maximum amount 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.
Keep in mind, though, that before calculating the amount of cash you can unlock, you have first to pay back any outstanding mortgages. You can either choose to redeem the lease before the application stage or when you release your equity and use these funds to clear your outstanding mortgage amount. When releasing equity, the funds you release will first be used to pay back 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 provider.
4. The Age of the Homeowners
Currently, when taking out a lifetime mortgage, the youngest homeowner should be at least the age of 55. However, some providers might require you to over 60 years. However, the age of the youngest homeowner always forms the foundation of the equity release calculation.
Since the minimum age differs from lender to lender, you should always ensure that you 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 that the lending criteria can be more hassle-free than when applying for residential mortgages.
Nonetheless, the issue of whether poor credit scores can affect 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 lenders will insist on you being at least 55 years of age and conduct no credit checks. However, others will insist on checking your credit scores.
So, to be on the safe side, before taking out any plan, consult your provider and ensure your credit history is not an issue.
Read More » Equity Release Criteria
Looking for an alternative? » Equity Release Alternatives
The Attractive Benefits of Equity Release
Equity release is an ideal option 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 choose to spend your capital as 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.
The amount 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’) – thus giving you 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’ that the plans offer you, 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?
Read 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.
Read More » What is a Home Reversion?
What is a Lifetime Mortgage?
It’s the most common equity release option, and you secure it against your main home. It’s 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 provider puts up your property for sale, which is typically when you breathe your last or go into long-term care.
If there is any cash left after you pay back the loan, it goes to your estate.
However, you need to note that with the current economic changes, more and more providers are offering you with the option of making voluntary repayments to aid you in controlling the balance, if needed.
There are several flexible options and the offer the capability to:
- Make repayments either on an ad-hoc via voluntary, or regularly via the monthly repayment scheme which aid in controlling the future mortgage balance.
- Safeguard an element of equity through including an Inheritance Protection Guarantee, which protects a percentage of your residence.
- Take future tax-free equity withdrawals on a drawdown basis, following the establishment of an initial cash reserve facility.
- Include innovative elements like downsizing protection and compassionate early repayments, both assisting in negating the need to pay ‘early repayment charges.’
- Borrow more capital, or offer a lower interest rate based on one’s health and lifestyle conditions.
Read 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) and in return gives you a tax-free equity lump sum.
You then get a lifetime tenancy that allows you to live rent-free in your residence for the rest of your 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.
It’s, however, vital to 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 decide 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.
Read More » What is a Home Reversion?
Read More » Types of Equity Release
Is It Safe?
Currently, not only are providers, and financial advisers governed by the FCA (Financial Conduct Authority), but the financial products themselves offer assurances to you as a consumer.
It’s 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 the freedom to transfer your plan to another home without incurring any penalties.
Be sure always to check the ERC register, to ensure that your provider and financial consultant have signed up to this industry body’s code of practice, for a secure and smooth process.
Read More » Is Equity Release a Good Idea?
How Much Does Equity Release Cost?
It differs from provider to provider.
The typical rate is from 3.5% to about 7%, making it significantly higher than most traditional mortgages.
The amount you have to pay back is higher if you’re not making monthly repayments to lower the debt, 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 the amount you owe doubles roughly every 14 years. So, if you’re lucky enough to live up to 74 years of age you owe around £60,000, live until 88, and you owe £120,000. However, it’s important to note that although this sounds like a lot, you haven’t had to make a single payment in 28 years and the risk has all been on the provider.
What’s interesting is that in many situations 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 20 years and house prices have kept rising, the equity release lender is losing money on you!
In addition to the actual cost of the interest, you will also have to pay arrangement fees. These fees can typically 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 valuation/surveyor & fees, and lastly the stamp duty.
Read More » Equity Release Costs Explained
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 most vital aspects of that you need to know.
However, bear in mind that 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’s dependent on your age (which is at a minimum of 55) your home’s value (you have to be a UK homeowner) 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 rate. In both cases, your life expectancy is used to calculate the total amount of money you can release and what your lower interest rate will be.
See how much equity you could release now.
Use This Free » Equity Release Calculator
2. The Interest Rates
Unlike most traditional mortgages, the interest tends to be higher, although the majority of the plans offer you 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, voluntary 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’s, 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).
Read 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 financial advice you receive before taking out an equity release, the lender’s application, and property valuation, and lastly your solicitor’s fee. You can read more on this by checking 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 repaid pre-emptively.
So, if you decide, later on, that you want to sell your home and pay it off, you can. Nonetheless, some providers 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, then ensure that you have a comprehensive discussion about it with your financial adviser.
Penalties can vary, and the perfect option for you is dependent on your situation.
5. Do You Want a Drawdown, Lump Sum or Income Plan?
A single lump sum might be the perfect option 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 some additional revenue to top-up your pension and other benefits, then having a fixed, predictable income will be your best option.
With a ‘drawdown, it all depends 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 in the future, then this is your best option – it’s because it also allows you only to pay interest on the amount borrowed.
Read More » Types of Lifetime Mortgage Schemes
6. What About Inheritance?
It’s 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 guarantee to offer you the much-needed peace of mind.
The inheritance protection guarantee 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 children and family some inheritance is vital to you, be sure to consult with your financial adviser and provider so that they can give you the right guidance to how you can do that without any complications cropping up in the future.
For many, they feel they have already 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 the rest of your life and disburse it how you wish.
7. The ‘No Negative Guarantee’
Every Equity Release Council member can offer 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 children or you need the scenery change or just for mobility reasons or to downsize.
Since the ERC, approves all lifetime mortgages, it means you have the freedom to transfer your new residence if it also meets your provider’s specific terms and conditions.
If this is likely, please discuss it with your adviser beforehand. Read 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 the freedom 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.
Read More » Common Equity Release Questions
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 quite a sum of money. However, if your pension and other businesses cannot help you maintain your lifestyle, then it’s the best option 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, don’t 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.