Our Guide to How Equity Release Works

Equity Tree How does equity release work?
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Equity release allows homeowners over 55 years old to release the money tied up in their home without having to sell up and move. An equity release scheme is a loan, secured against your home that gets paid back when you die or move into long term care.

It is most suited to people who need a boost in retirement income but aren’t ready to downsize.

What is Equity?
Equity is simply the difference between the amount you still owe on your mortgage (or other debts secured against your home) and your property’s value. It is the value of the portion of your home that you own outright.
Example
A £75, 000 mortgage on a £200, 000 home = £125, 000 equity

Equity Release: How Does It Work

There are two types of equity release scheme available in the UK: lifetime mortgages and home reversion plans. The minimum age for a lifetime mortgage is 55, and 65 years old for a home reversion plan.

Equity Release: Lifetime Mortgage

A lifetime mortgage is a loan with a fixed interest rate which is secured against your home. Unlike a regular mortgage, you don’t make any repayments. Instead, interest is added to the money you borrowed, which is paid back in full when you die or move into long-term care using funds from the sale of your house.

When you take out a lifetime mortgage, you can choose to withdraw all the equity at once in a lump sum, or withdraw smaller amounts as you need them, in a ‘drawdown’ plan.

Equity Release: Home Reversion Plan

In a home reversion plan, a lender buys a share in your property at a below-market price, while you continue to live in your home as normal. When you die or move into long-term care, the equity release lender recovers its investment through the sale of your home.

You can choose whether to release the equity in one lump sum or to receive a regular stream of smaller payouts from your lender. 

Equity Release in the UK
In 2019, homeowners unlocked an average of £11m per day in equity release
Half of UK homeowners aged 45+ are counting property wealth to fund part of their retirement
Property wealth accounts for 40p in every £1 owned by the over 65s and 47p of every £1 for the over 70s
Source: Equity Release Council

What Do People Do With Equity Release?

Home Improvement64%
Holiday32%
Debts30%
Clear Oustanding Mortgage23%
Help Family & Friends22%
Help with Bills12%
Switch from another equity release provider4%
Top up an existing equity release plan1%
Source: Key Advice 2017 Report

Equity Release: How Much Can You Borrow?

How much you can borrow depends mostly on your age and the equity in your property. Other factors such as your health may also have an influence on how much you can borrow- people with certain chronic health conditions might be able to borrow more.

As a rule of thumb, you will never be able to borrow more than 50% of your home’s total equity in a lifetime mortgage. The older you are, the more you will be able to borrow- so if you’re just 55, you may only be able to borrow a small portion of your home’s total equity. The average age for equity release in the UK is 71 years old.

Equity Release: How Much Does It Cost?

Both lifetime mortgages and home reversion plans can be expensive ways to borrow money. That does not mean they are necessarily a bad idea, but it is important to understand the costs and benefits to decide whether equity release is right for you.

In a lifetime mortgage, you don’t make any repayments on your loan while you are alive. This means that the interest on the loan compounds on an ever-increasing total, and so mounts up very quickly compared to a repayment loan.

For example, £60,000 in equity borrowed over 10 years at 5% would result in a lump sum of £98, 820 to be repaid from your estate when you die.

Equity Release: How Can I Reduce the Cost of Equity Release?

This debt roll-up is one of the major drawbacks of equity release. However, it is possible to minimize the impact of compound interest: making payments on the loan interest while you are still alive or reducing the amount you borrow are a couple of ways to avoid this debt roll-up.

A ‘retirement interest-only mortgage’ is similar to a lifetime mortgage scheme but allows you to pay off the interest of your loan each month. This ensures that the interest on your loan never has time to build up, so at the end of the term, the lender only claims back what you originally borrowed.

To take out a retirement interest-only mortgage you’ll need a regular source of income (such as a pension or savings) to ensure you can afford repayments. Because the loan is secured against your home, your property could be at risk if you fall behind.

Many lifetime mortgage customers opt for a drawdown plan to help minimize their debt- and subsequently the interest- on their account. With a drawdown plan, you release small amounts of equity as you need it. This helps to keep your loan balance lower for longer, which in turn reduces the time that interest has to build upon the full amount.

Equity Release by Region

RegionAverage AgeAverage Equity Released
East Anglia72£74,705
East Midlands72£58,345
London72£157,750
North72£53,527
North West72£55,058
Northern Ireland72£50,814
Scotland71£51,884
South East72£97,879
South West71£77,201
Wales72£53,826
West Midlands72£60,345
Yorkshire & Humberside72£77,745
Source: KeyAdvice

Equity Release: Is It Safe?

When you’re shopping for an equity release plan, look for a provider who is a member of the Equity Release Council. ERC members are obliged to offer a “no negative equity” guarantee, which means that you can never owe more than the value of your home.

It is also very important to discuss your equity release plans with any family members or lodgers who live with you, as at the end of the term they will not have the right to remain in the property.

Equity Release: Can I Save Protect Inheritance?

Some lenders may let you ring-fence a portion of your home’s value to ensure that you have an inheritance to leave to your family. No matter how large your debt becomes, this share of your property won’t be used to pay off the lender.

However, this is not a facility offered by all lenders and it could reduce the amount of equity you have access to.

Equity Release: What Happens if I Change My Mind?

Once you have taken out an equity release plan, it can be very expensive to pay off your loan early. Many lenders charge early repayment fees as high as 25%. For this reason, it is very important to consider equity release carefully before signing up to a scheme.

How Can Equity Tree Help?

Here at Equity Tree, we have partnered with some of the UK’s leading Equity Release broker companies.

They have already helped thousands of people release equity already, and they can do the same for you.

Choosing an independent adviser means they won’t recommend a scheme unless they are sure it is in your best interests. Their advice is also regulated by the FCA, which gives you an additional layer of protection.

If you would like to speak to one of these equity release companies, click on the below and answer the questions.

Len Burgess
Len Burgess
Len Burgess is a successful digital entrepreneur and founder of LBLK Publishing which specialises in Financial content. Len has been writing professionally on financial and business topics for 5 years before starting Equity Tree.
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