What Is Equity Release?
Equity release is an increasingly popular way for homeowners over the age of 55 to release tax-free cash from their homes, without having to move or sell their property. For homeowners in, or approaching retirement, the schemes allow you to boost your ﬁnances with either a tax-free lump sum or a staged payment approach. Some of the key requirements are:
• You can release cash, tax-free, that is tied up in your home
• The schemes are available to homeowners aged 55 and over
• You have to take expert advice to access equity release schemes
In simple terms, equity release allows you to borrow a percentage of your home's value, with the interest charged on the loan 'rolled up' over the period of the loan and nothing usually has to be paid back until you die or sell your home.
However, also bear in mind that the number of mortgage products accessible to the older population is increasing, so equity release may not be the only option available for you. If you own your home outright you may find that you are still able to take out a mortgage on the property. If you already have an existing mortgage in place, you might be able to raise additional funds by remortgaging to release additional equity from your home.
Mortgage Solutions can help you to determine if equity release or remortgaging is the right solution for your circumstances. Call our Head Office today on 028 9182 8255 or find your local branch. We are always happy to help!
Why use equity release?
Historically, equity release had a poor perception as a ‘financial product of last resort’, used only by those people who had got themselves into financial difficulty. However, this is no longer the case and equity release has very much become a lifestyle choice. With the average person living longer and in better health, many people are looking to enjoy their retirement and equity release can be a great choice to help them achieve this.
There is less of a requirement to adhere to the traditional expectation of leaving the family home to children and other beneficiaries and an increased desire to have a higher standard of living throughout retirement. The money can be used for medical expenses, nursing care costs or home improvements or adaptations. Alternatively, buy a second retirement home, a new car or caravan or treat yourself, family and friends to a holiday of a lifetime!
Of course, if you do have children and want to help them out, you can also use the money to help them out by gifting money to them when they need it. Help them pay for university fees or to get on the property ladder themselves.
Figures from the Equity Release Council show that between July and September 2019, there was a sharp increase in the number of over 55-year-olds releasing equity from their property. During this period, there was an 8% rise in equity release activity, with £11m of property equity unlocked every day throughout the three months.
How does equity release work?
The Lifetime mortgage is the most popular equity release choice. With a lifetime mortgage you take out a mortgage that is secured against your home whilst you still retain ownership. You can choose to make repayments, similar to a normal mortgage, or let the interest roll-up. The loan amount plus any rolled-up interest is then paid back when you die or move into long-term care.
- Lump-sum life mortgage - a lump sum lifetime mortgage is a loan secured against your home, giving you access to a one-off pot of cash and you’ll still own your own property.
- Drawdown lifetime mortgage - a drawdown lifetime mortgage lets you draw down cash in stages after an initial lump sum, and you only pay interest on the money released.
One of the potential benefits of the lifetime mortgage is that some schemes allow you to choose whether to pay the interest monthly, or effectively have no monthly payments to make. But the interest will be added to the loan amount and will need to be repaid from your estate at the end of the plan. Typically, your home will be sold and the repayment made from the sale proceeds, whilst the remainder goes to your family or your estate.
Just like normal mortgages differ from lender to lender, different equity release schemes and providers can offer you varying options. So make sure you talk through all the choices available to find the right scheme for you.
Is it safe to use equity release schemes?
Equity release is regulated by the Financial Conduct Authority (FCA) whose primary role is to protect customers and enhance the financial market’s integrity. FCA regulations aim to ensure all members’ processes and recommendations are clear, fair and not misleading to customers.
You should also look for membership of the Equity Release Council who represent the equity release sector to promote high standards of conduct and practice, with consumer safeguards at its heart. Most importantly, their members must promise a 'no negative equity' guarantee, so your estate will never owe more than your home is worth.
Some schemes will offer you the freedom to move to another property, say if you wanted to downsize your home in the future, though there are often criteria associated with this.
Our seven ‘top tips’ on equity release:
If you've read this guide and are thinking of exploring equity release further, here are our three top tips to consider before committing to a scheme.
1) Get advice before you commit to anything. Contact your local .
2) You may find you have more than one choice, so weigh up the pros and cons of all alternative options. As well as equity release and remortgaging, could you downsize to a smaller home in another location for example.
4) If you have children, involve them in the process and explain what you are looking to achieve. It’s your money at the end of the day, but it can affect their future as well.
3) If possible, only borrow what you need when you need it. Interest is charged on the amount you borrow, starting from the time you draw the money down. So the sooner you borrow the money, the sooner the interest starts and the more expensive it will be.
4) Consider whether you can afford to make monthly payments. Anything you can do to make full or partial monthly payments will reduce the amount of interest being rolled up and the final payment you will need to make.
5) If appropriate, explore schemes that include Inheritance Protection. Inheritance protection allows to you ring-fence (create a barrier around allocated funds) a portion of your home's value to secure an inheritance for your family or beneficiaries.
6) Equity release can potentially affect any benefits you are receiving. You have effectively exchanged equity in your property for cash, so if you are claiming the likes of pension credit, and/or universal credit, for example, your change in circumstances could impact your eligibility for these benefits.
Frequently Asked Questions:
How much equity can I release?
The amount of equity that you can release from your home is based on a number of factors, mostly your age, your health and the value of your property. We can help you work through the details to gain a clearer understanding of the likely amount you can borrow.
How much does equity release cost?
Again, similar to normal mortgages, fees and interest rates vary from lender to lender and between the different schemes they offer. There are fees associated with equity release schemes in the same way there are for mortgages, namely surveyor's valuation fees, solicitors' fees and lender's application fees.
Will I still own my home?
Yes, with the equity release plans we work with, you will still own your home and can stay in it for as long as you like. (One of the standards from the Equity Release Council).
Could I get into negative equity?
No, all of the plans we work with are approved by the Equity Release Council and come with the no-negative-equity guarantee. This means you will never owe more than your home’s value.
Can I still move home?
Yes. With all Equity Release Council approved schemes, your plan can be transferred to a new home, subject to criteria.
Who handles the legal side of the process?
You'll need to appoint an independent solicitor to handle the legal side of the process to give you peace of mind. Your local Mortgage Solutions branch often work with trusted local solicitors and may be able to make a recommendation.
Are there any restrictions on what I can do with the money released?
You can use the money gained through equity release schemes in a wide variety of ways, but think carefully and only borrow what you need to.
Can I still leave an inheritance for my family?
Yes, with the equity release plans we work with, you can. Some plans guarantee a set percentage of your home’s value, at the time your plan ends, will be retained.
Can I do equity release if I still have a mortgage?
Yes, but you will need to repay the mortgage using some of the money released. Any remaining funds left over then belong to you.
What happens when I pass away?
Your home will be sold once you and your partner have died. The sale proceeds will be used to repay the amount you owe and any money left will go to your estate.
How is my home's value assessed?
Your property will be valued by an independent RICS registered surveyor so you can be confident of an unbiased opinion of your property’s worth.
In 2019, Mortgage Solutions completed over 4000 mortgages totalling over £400 million in lending for our customers. We also protected over 2300 customers with the right protection & insurance policy to give them peace of mind. Our experienced Mortgage Advisers take care of everything, explaining all your options in a way that’s easy to understand.
To discuss equity release or alternative options, call your local branch or contact our Head Office on 028 9182 8255. We are always happy to help!
You will need to take legal advice before releasing equity from your home as Lifetime Mortgages and Home Reversion plans are not right for everyone. This is a referral service.