Equity release allows you to withdraw either a lump sum or a monthly amount from the value of your property. It shares similarities with a mortgage process.
How does equity release work?
Equity release is a type of lending. Once a lender accepts you, they'll either give you a lump sum or regular installments against the value of your home.
The lender will claim the amount they lent you from the property once you no longer own it. This may be because you've passed away, entered a care facility, or simply sold the home. Interest will be added to the amount taken from the property once it's sold. In some cases, you can pay it monthly.
Lifetime Mortgages vs Home Reversion
There are two main types of equity release plans.
1) Lifetime mortgage.
A lifetime mortgage is the most popular type of equity release product. With a lifetime mortgage, you borrow against your property. This is then paid back when you die or move into long-term care.
The interest ‘rolls up’ so there are no repayments, which can add up quickly. Some providers will let you pay the interest monthly. With monthly interest payments, the amount owed will be cut down when the house is sold.
2) Home reversion scheme.
A home reversion plan is where you sell all or part of your home to a lender. You can receive 20% to 60% of your home's value and still live in it for the rest of your life. This is also true if you sell a portion of the property.
You can receive the money as a lump sum or a regular income. There is no interest because you are essentially selling your property at a lower rate.
What are the main differences between a lifetime mortgage and a home reversion?
In a home reversion, you have effectively sold your property, but are allowed to live there rent-free. You won't benefit from any property value increases over time, or you only will on the portion you haven't sold.
With a lifetime mortgage, you still own your home. If the value goes up, it will still help you or your estate and can be used to pay the mortgage.
There is no interest in a home reversion because you have received less than market value for the property. The lender assumes the cost of buying your property will be have increased when they take possession of it. With a lifetime mortgage, the interest ‘rolls up’ to the total payable amount. This can add up over the years, or in some cases, you can pay off the interest monthly.
Who qualifies for equity release?
You typically have to be over 55 and usually older for home reversion. There may also be limits on what portion of your home you can borrow against.
Bear in mind that the younger you are when you start borrowing, the more debt and interest you could build up. Your property also needs to be your main residence. In some cases, you could use an equity release to pay off the remainder of your mortgage.
What are the risks?
If you borrow money or take a big amount early, you might accumulate a high interest over time. If your released equity and its interest is worth more than the property when you pass away, your family will be left with a large amount to pay off.
Some equity release schemes have a ‘no negative equity’ clause. This will cap the amount of the total value of the property. There are also schemes where you can ringfence a certain portion of the value of your property. This can be done so that your children can inherit it.
There have also been some cases where equity release was started too early, and older couples wanted to move home. Ensuring there was enough equity left in their home to buy a house was harder after using equity release. This left them stuck in that property when family or friends were elsewhere.
What are the advantages?
A great advantage is that you’ll have more money for your retirement and to enjoy your life in old age.
Your home is your biggest asset and you may want a little extra money to supplement your pension. Some use the money for travel and enjoyment. Others use it to give to their children or grandchildren for a deposit for their own property.
It also allows you to enjoy the money you put into your home without having to downsize or go into rented accommodation. You can continue living in your home whilst accessing the money.
Is equity release right for me?
Whether equity release is the right choice for you will depend on a lot of factors, including how old you are. The older you are, the more likely you are to qualify for a generous equity release offer. This is also true if you have any illnesses.
Whilst equity release can be accessible from the age of 55, the likelihood is that you will live a lot longer. Because of this, your interest will build and you may end up costing the lenders more than they would make. This is especially true if there is a no negative equity clause.
Older people who are certain they plan to stay in their property forever fare better with equity release. This is due to the fact that selling the property can be difficult when you have taken equity out.
Equity release can provide a fresh start if you manage your money well and monitor the interest. In doing this, you can avoid paying for funds that you don't use. This is especially true for those who just take out ‘roll down’ cash amounts as and when they need it. Whether that’s making life a little more comfortable, or accessing cash to treat the grandchildren at the weekend.
In the right circumstances equity release can be a great tool.
Similarly, if you don’t have children or family members you are leaving the property to, you could benefit from enjoying the money locked up in your property. The lender will simply take hold of the property later on.
What are the costs?
There are four possible costs when it comes to an equity release application:
- An equity release advisor or financial advisor
- The cost of solicitor fees
- The lender’s application fee
- Valuation
If you are interested in equity release and setting it up, talking to an expert equity release advisor who is familiar with equity release schemes will set you on a path to getting the right scheme for you. When you are ready to go through with the process, a conveyancing solicitor who has experience of equity release will be able to get the ball rolling.
Home reversions can take a little longer than lifetime mortgages to be finalised, but usually, the process can take about 6-8 weeks.
Will it affect my benefits/pension/income tax?
If you are on means-tested benefits, some of these may be affected by drawing down money from an equity release. Things like reduced council tax, income support or other benefits may be reduced. So, it is worth talking to your equity release advisor, as well as the local authority or benefits office to make a choice that works out best for you.
What other options are there?
In some cases, it depends on what you want the money for, as equity release may not be the right option.
If you want a one-off sum, a personal loan may be an easier option.
If you are looking to make changes to your property to make later life or living with a disability easier, there may be grants available.
If you are simply looking to free up some money from your property, downsizing may be a good option. Though, do take into account the other costs associated with moving, including conveyancing, surveying, removals and Stamp Duty. You can use the reallymoving Moving Cost Calculator to give you an idea of what you might expect to pay.