August, 2022
Equity release refers to a range of products letting you access the equity (cash) tied up in your home if you are older. You can take the money you release as a lump sum or, in several smaller amounts or as a combination of both.
There are two equity release options which are:
You take out a mortgage secured on your property provided it’s your main residence, while retaining ownership. You might be able to ring-fence some of the value of your property as an inheritance for your family. You can choose to make repayments or let the interest roll-up. The loan amount and any built-up interest is paid back by selling the property when the last borrower dies or when they move into long-term care.
Most people who take out equity release use a lifetime mortgage.
Usually you don’t have to make any repayments while you’re alive. Instead, interest is ‘rolled up’, which means the unpaid interest is added to the loan. This means the debt can increase quite quickly over a period of time.
However, some lifetime mortgages do now offer you the option to pay all or some of the interest, and some let you pay off the interest and capital.
In the same way ordinary mortgages vary from lender to lender, so do lifetime mortgages.
Ensure you have the right to move to another property subject to the new property being acceptable to your product provider as continuing security for your equity release loan (Equity Release Council standard). Different lifetime mortgage providers might have slightly different policies.
With a lifetime mortgage where you can make monthly payments, the amount you can repay might be based on your income. Providers will have to check you can afford these regular payments.
Whether you can withdraw the equity you’re releasing in small amounts as and when you need it or whether you have to take it as one lump sum. The advantage of being able to take money out in smaller amounts is you only pay the interest on the amount you’ve withdrawn. If you can take smaller lump sums, make sure you check if there’s a minimum amount.
Home reversion allows you to sell some or all of your home to a home reversion provider.
The provider effectively co-owns your home, unless you've sold the whole property, but you keep the right to live there for the rest of your life, potentially rent-free.
In return you’ll get a lump sum or regular payments.
You’ll normally get between 20% and 60% of the market value of your home (or of the part you sell).
When considering a home reversion plan, you should check:
Equity release might seem like a good option if you want some extra money and don’t want to move house.
But, there are some reasons why equity release might not be the best fit for you.
Equity release can be more expensive in comparison to an ordinary mortgage. If you take out a lifetime mortgage you will normally be charged a higher rate of interest than you would on an ordinary mortgage and your debt can grow quickly if the interest is rolled up.
For lifetime mortgages, there is usually no fixed “term” or date by which you’re expected to repay your loan. The rate of interest of a lifetime mortgage will not change during the life of your contract, unless it's a variable rate. The interest rate you pay on any drawdowns will be determined at the time of drawdown and not at the time the contract is entered into so this may be different to the previous rate. If you take any additional borrowing the interest rate you pay may be different and it will only be applicable to that cycle of extra borrowing.
Home reversion plans will not give you the true market value of your home when compared to selling your property on the open market due to the fact you're allowed to live in the property for the rest of your life, which you could not do so if you sold the property on the open market.
If you release equity from your home, you might not be able to rely on your property for money you might need later in your retirement. For instance, if you need to pay for long-term care.
Although you can move home and take your lifetime mortgage with you, if you decide you want to downsize later on you might not have enough equity in your home to do this. This means you might need to repay some of your mortgage.
The money you receive from equity release might affect your entitlement to state benefits.
You will have to pay arrangement fees, which can reach approx. £1,500 - £3,000 in total, depending on the plan being arranged.
If you’ve taken out an interest roll-up lifetime mortgage, there will be less for you to pass onto your family as an inheritance.
These schemes can be complicated to unravel if you change your mind.
There might be early repayment charges if you change your mind, which could be expensive, although they are not applicable if you die or move into long-term care.
These schemes can impact the inheritance you pass down to family members. It's important to discuss your plans with your family in order to avoid potential conflicts and complications later on.
Speak to an independent mortgage advisor for more help.
It’s worth noting that all advisers recommending equity release schemes must have a specialist qualification.
Check your adviser:
searches the whole of market, so they can find the right plan for you
is on the Financial Conduct Authority register (search by the firm’s name) – a firm on the FCA register is regulated and must sign up to the Financial Ombudsman Service, which is a free-to-use complaints service if you’re unhappy with the service you receive
is a member of and on the Equity Release Council member directory so you can be sure they abide by the trade body’s strict Rules and Standards which go beyond the basic regulatory requirements.
Before you decide whether or not to take out an equity release product, ask the adviser:
what their fees are
what type of equity release products they can offer
what other fees you’ll have to pay (eg. legal, valuation, set up costs).
