Equity release could help you boost your retirement income or give you a cash injection by freeing up the capital ‘tied up’ in your home.
What Is Equity Release?
Equity release allows you to access a lump sum of cash or a steady stream of income, using the value of your home as security.
The loan and any interest is generally paid off when you die or move into long-term care. You must be at least 55 years old to apply for equity release in the UK.
Different Types of Equity Release
Equity Release: Lifetime Mortgages
Lifetime mortgages are the most popular form of equity release in the UK.
The lender will value your property and offer you up to 50% of its value in either a lump sum or ‘drawdown’ payments, allowing you to withdraw funds as you need them.
You don’t make any repayments on your equity for the duration of the mortgage.
When you die or move into long-term care, the money from the sale of your home is used to pay off your equity and accrued interest.
Because you are not making repayments, the balance you owe does not steadily decrease over the years, which means there is often a lot of interest attached to the equity by the end of the mortgage term.
Equity Release: Home Reversion Plans
In a home reversion plan, a lender buys a share in your home at below market value. In exchange, they provide you with a tax-free lump sum or steady stream of income.
You continue to live in your property rent-free. When you die or move into long-term care, the lender received their share of the profits from the sale of your home.
Home reversion plans can be slower to arrange than lifetime mortgages.
Who Can Apply for Equity Release?
If you are a homeowner aged 55+ years living in the UK, you can apply for a lifetime mortgage or retirement investment-only mortgage. You normally need to be at least 65 years old to apply for a home reversion plan.
If you own multiple properties, you can only release equity on your main residence. Your home should be in good condition and worth at least £100, 000.
How Much Can I Borrow Through Equity Release?
How much you can borrow depends on the value of your home as well as your age, health, lifestyle factors (such as smoking).
Generally, the upper borrowing limit will increase with age. You may also be able to borrow more if you are affected by certain health conditions.
The maximum you can borrow through a lifetime mortgage is 50% of the value of your home, and the minimum is £10,000.
Home reversion plans also offer you higher lump sums the older you get. With home reversion plans, the higher your payout, the larger the share of your home you should expect to offer in exchange.
Equity Release: How Am I Paid?
You will usually be paid a cash lump sum. Some lifetime mortgage providers offer a ‘drawdown’ option, which can be cheaper in the long run. This allows to withdraw funds as you need them, and can help to reduce interest costs.
Home reversion plan providers may pay you a lump sum or regular installments.
Equity Release: What Are the Costs of Equity Release?
Equity Release: Set Up
Equity release can be costly to set up. To enter into a lifetime mortgage, you will usually need to pay for:
- An initial consultation fee
- Buildings Insurance
- Valuation and legal fees
- A completion fee (to the lender)
This could cost from £1500-£3000. If you decide to pay off your mortgage early, there are often early repayment fees to consider.
These help the lender recoup some of the interest they would have earned if you had borrowed the equity over a longer-term.
Equity Release: Interest
The highest cost of a lifetime mortgage is the interest paid on your equity. Look for a fixed interest rate to help manage this.
Similarly, you will hand over a good portion of your home’s market value to the lender when you opt for a home reversion plan. If housing prices rise, they may end up making back a lot of money for their investment.
Because equity release can be expensive, it is important you understand all of the terms and obligations before moving ahead with a plan.
Equity Release: Can I Choose to Leave Part of My Home as an Inheritance?
Yes. Most equity release schemes have an option for you to ringfence part of your estate for inheritance.
This will be deducted from the valuation of your home when calculating how much equity can be released.
How Does Equity Get Repaid?
The equity is repaid from the sale of your home when you die or move into long-term care. Unless you have been making regular interest payments (few lifetime mortgages have this option), any interest is paid off at the same time.
The interest can be very high on a lifetime mortgage because you make no payments on your equity until the house is sold. This means that the amount you must pay interest does not decrease over the years.
Usually, there will be enough money from the sale of your house to cover the cost of the equity and the interest.
If there is not enough money to cover both, your beneficiaries could be asked to pay back what is left over. To make sure this doesn’t happen, look for a provider who offers a ‘No Negative Equity Guarantee’ or is a member of the Equity Release Council.
If you have signed up to a home reversion plan, the lender will claim their share of the sale profits after the house has been sold.
It is important that you read your agreement carefully and make sure you and your family understand your obligations at the end of the mortgage term; many home reversion plans will ask that your home is vacated within 30 days.
If you share your home with lodgers or other family members, it is important to discuss this with them.
Does Equity Release Affect Pension or Benefits?
Your state pension will not be affected by equity release. However, any means-tested benefits you get could be affected if you receive money through an equity release plan.
If you get benefits, it is important to check with the relevant authorities how these could be affected before signing up to an equity release plan.
Can I Move House After Releasing Equity on My Property?
Yes, although there are some things you will need to consider. As the legal owner of the property, you still have the right to sell up and move house. However, you will need to consider your obligations as a debtor when doing so.
If your new home is worth less than your total debt, your lending provider could ask you to repay part of your debt early.
The lender makes money by loaning you their money and charging you interest; if you move to a house which is worthless, they may not be able to make their money back.
Likewise, if you have signed up to a home reversion plan and your new home is worth less than your total debt, you will need to increase the proportion of the property promised to the lender, so that it matches the money they would have received upon the sale of the old home.
For example, if the lender was originally promised 10% on a your property worth £300 000, they expect earnings of at least £30 000. If you moved to a property worth £200 000, they could ask for their share to be increased to 15%, to make sure they still earn at least £30,000.
You should also be aware that most providers will not cover homes in sheltered accommodation. If you would like to move into sheltered accommodation, you could be asked to repay your equity first.
Summary: Pros and Cons of Equity Release
Equity Release: Pros
- Reliable source of retirement income
- Provides a substantial cash boost
- Could help children or beneficiaries to benefit from their inheritance early
- No monthly repayments
Equity Release: Cons
- Might affect means-tested benefits
- Associated costs and fees of lifetime mortgage are high (interest, early repayment)
- May reduce beneficiaries’ inheritance
- Could lose out on housing boom with home reversion plan
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.