The Equity Release Council is the industry body which represents equity release providers, qualified financial advisers, solicitors and intermediaries. Equity release is a growing sector, especially for older homeowners who may have limited access to finance.
While a traditional remortgage can often release equity on a property, the Equity Release Council is more focused on two specific equity release options.
These are known as lifetime mortgages and home reversion plans.
Keep reading to get all the nitty-gritty details about the Equity Release Council.
As with many areas of finance, the regulatory structure regarding equity finance is very fluid and fast-changing. Therefore there is certainly a need for a body such as the Equity Release Council which is able to consider, comment and issue advice on future regulatory changes.
They also encourage members to work in a manner which respects clients and also protects the industry. In years gone by the equity release sector attracted varying degrees of criticism because of charges, interest rates and concerns that many customers did not fully understand the undertakings they were signing up to.
While the Equity Release Council is predominantly there to represent the industry, it is also a very useful place of reference for those looking to secure equity release funding.
What Is Equity Release?
The best way to describe equity release in a property is the element of your home, which is debt-free. For example, you may have a property worth £100,000 with no mortgage; therefore you have £100,000 of equity in your property.
Releasing this equity can be challenging, especially for older homeowners, with the traditional mortgage market less accommodating than you might expect for those aged over 55.
Reasons for Equity Release
The reasons for releasing equity in your property are endless but some of the more common include:-
- Paying off high-interest debts
- Supplementing living expenses in later life
- Dream holiday
- New vehicle
- Investment opportunity
As you see, there are endless ways in which you could use the equity released from your property. It is also interesting to learn that many of us are now living longer and working longer, assisted by the removal of the traditional retirement age.
What Are the Main Equity Release Options?
When looking at older households, there are two main equity release options which are known as lifetime mortgages and home reversion schemes.
They both have one thing in common; there are no regular payments, and there is a set method for the final repayment.
It is fair to compare a lifetime mortgage to a traditional mortgage to a certain extent. However, there are a number of factors to take into consideration:-
Repayment of Mortgage
Lifetime mortgages are structured in such a fashion as to allow the borrower to live rent-free for the rest of their life or when they move out into full-time care.
At this point the property would be sold, the lifetime mortgage repaid and any surplus returned to the individual or their estate in death. There are no regular monthly payments, and therefore no affordability calculation is required.
Loan to Value (LTV) Ratio
The LTV ratio is the ratio of equity you can release from your home compared to the overall value of your property. For example, if you have a mortgage-free property worth £100,000 and you are looking to release £50,000 in equity, this is an LTV of 50%.
What you tend to find is that the LTV ratio is directly linked to the age of homeowners – the older the applicant, the higher the potential LTV. This is because statistically, the mortgage will be repaid quicker due to average life expectancy.
Interest on a lifetime mortgage is rolled up and repaid at the end of the mortgage, when the property is sold, together with the initial capital. Depending on the mortgage interest rate and mortgage term, the rolled-up interest element can soon mount up.
The vast majority of lifetime mortgages will be on a fixed rate, but even those on a variable rate will have a maximum cap written into the agreement.
Home Reversion Plans
Home reversion plans are a little more straightforward, but they have attracted their fair share of controversy in years gone by. In effect, you are selling a share of your property in exchange for the release of capital.
There are a number of factors to consider which include:-
As with a lifetime mortgage, the redemption element of a home reversion plan will come into play when the homeowner either moves out and into full-time care or they die.
However, during the period they are living in the property, they will live rent-free, which is a cost that needs to be considered against the terms of a home reversion plan.
The more controversial element of home reversion plans is the fact that home reversion companies will only pay a percentage of the property’s market share.
For example, if you had a mortgage-free property worth £100,000 and were looking to sell a 50% share, then you would normally expect to receive give-of-take some expenses, £50,000.
Unfortunately, home reversion companies will only pay between 20% and 50% of the market value. Therefore you could receive anywhere between £10,000 and £25,000 for a share in your property which has a market value of £50,000.
As you are effectively selling a share in an asset, in this instance, your home, you will receive proceeds which you won’t have to repay. When the homeowner either dies or moves into full-time care, the property will be sold, and the home reversion company receive their share of proceeds.
In the above example, a home reversion company may have paid as little as £10,000 for a 50% stake in your home which would be worth £50,000 if the property was sold and had retained its market value.
If you are looking towards equity release, it is very important that you take professional financial advice so that you can exhaust all of the options and find the best one for your circumstances. It may well be that a lifetime mortgage or home reversion scheme is your best option, but there is no harm considering any alternatives.
Thankfully, the industry is more regulated today than it ever has been, more transparent and becoming more competitive. As competition increases, we would naturally expect average terms to become more competitive, resulting in enhanced long-term benefits for homeowners.
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.