Are you a homeowner aged over 55 based in the UK? If so, it is likely that you will have heard of the term “Equity Release”. But what is it, and how could it affect you? Whether or not you have paid back your mortgage, this could be a helpful financial option for you to consider. We’re going to explore that here with you in this article.
What is Equity Release?
Equity release is the unlocked value of the property you own (even if you have not entirely paid off the mortgage on the property), which you can take out as a loan, for any purpose. You may want to use the loan to help a family member with buying their own property for the first time, or you may want to use the money for something for yourself, perhaps as part of your retirement plan. You will still be able to keep and live in your property while taking out this loan, but it’s important to note that only homeowners aged over 55 are allowed equity release.
How Does Equity Release Work?
There are two types of equity release that you can get: a lifetime mortgage and a home reversion plan.
What is a Lifetime mortgage?
Lifetime mortgages are more common and may work particularly well if you have no one to leave your assets to. This mortgage has interest rates that are fixed for the rest of your life. You can pay it back in monthly instalments if you want to, however, if you do not, then the amount you owe will increase over time – it’s possible for the debt to end up being greater than the value of your home. This could impact the people who you have selected to inherit your assets after you die, as the assets values may have significantly decreased over time, so you need to consider this option carefully.
You and the lender will also need to be sure that everyone applying for the mortgage can afford to repay it from their own individual income – so if you’re applying jointly with a partner and you chose to pay the interest payments as you go along, you will individually need to demonstrate that you can make the full payment each month
A Lifetime mortgage may also offer you the flexibility to take the money you’ve borrowed gradually over time as a top-up to your retirement income instead of taking one big lump sum at the start.
What is a Home Reversion Plan?
A home reversion plan gives you tax-free money by selling some or all of your home to a home reversion provider. The home reversion provider will receive their share of the proceeds in this sale when your property is sold, either after you die or when you enter a long-term care facility.
If you sell part of your home, this means that you will no longer be the sole owner of your property, entering into a shared ownership agreement. In exchange for selling part of your property, you will receive a portion of money, which you can receive either in a single, large instalment or in several smaller installments. If you chose to sell all of your home, you will no longer own any part of it but you will still be allowed to live there until you die or enter into long-term care.
A common misunderstanding about home reversion plans is that you can continue to live in your home without paying rent. Some plans do allow you to live there rent-free but others charge either a monthly or annual rent. In some cases, the rent amount is not fixed and can rise over time. You should make sure you understand all the long-term implications of any equity release plan before signing up.
Many people want to maintain full ownership of their property when pursuing equity release, which is a key reason why many people prefer to choose a lifetime mortgage as their option.
How Much Equity Can I Release?
If you want to consider equity release, your property must be worth at least £75,000, although some providers may set a higher value. Additionally, you must want to borrow at least £15,000 to get equity release. If you do not want to borrow this much money, then read the section below to find alternative ways to get financial help.
With equity release, you would never receive more money than your mortgage amount, which will be a percentage of your property’s value. In most cases, you’ll be offered somewhere between 20% and 60% of the current value of your home. This means you can hand over ownership of your property for a cash sum that is a lot less than its market value. Equity release lenders will never give you the full value of your home, mainly because their investment is locked away for what might be years or even decades.
There are equity release calculators available online, which may help to give you an idea of what you could receive, but be aware that you are legally required to speak with a financial advisor (who is qualified and experienced with equity release) before taking it out. From this discussion, you should have a better understanding of how much equity you can and want to release, as well as what you want to use it for. You should also make sure you’ve considered other ways to raise the money you need before taking out any form of equity release.
How to Release Equity From Your Home
To get equity release, you need to visit a financial advisor first, who can explore the options offered to you. The advisor will take the time to ensure that you are eligible for equity release, as well as whether it is the right option for you to pursue. They will advise you on your options based on your financial position, as well as what you want or need the equity for. They will then give a recommendation of what they think you should do, based on your options and goals.
If they decide that you are eligible to move forward with this, then you will need to find a solicitor who specialises in equity release to act on your behalf. They can also give you legal advice relating to this, throughout the process. Meanwhile, your financial advisor will help you work on and submit your application to your chosen lender, which could be an insurance company or mortgage lender.
The lender will contact you upon receiving your application, asking to arrange a valuation. This will tell the lender if the house is suitable for securing the loan – some types of property won’t work but a good adviser can guide you through this. The valuation will also give both you and the lender proof of the value of the property, giving you both an idea of how much money you should receive from the equity release. After the application has been approved and the valuation has been completed, the lender will send their offer, along with its terms and conditions, to your solicitor.
When you sign on for equity release, make sure that it has a “no negative equity” guarantee, which means that if there isn’t enough to pay back your loan after selling your property, then your estate won’t have to pay.
Can You Pay Back Equity Release Early?
This only applies if you chose to take out a lifetime mortgage for your equity release. While it is possible to pay back equity release early, the loan is designed to be fully repaid after you or anyone you may share a joint mortgage with have passed away, or have been placed in long-term care. Check the terms and conditions of the equity release agreement you plan to pursue for further detail.
However, you may want to pay your loan back early so that those you have chosen to inherit your assets will not have less to receive. If you wish to repay your loan in full, then repayment charges will apply, and the charge may be higher if you try to repay it soon after taking out the loan. The company you have chosen to receive your equity release from will have a fixed percentage and gilt-linked early repayment charge. Gilts are government bonds, which are favoured by equity release providers who are seeking a long-term investment, to work out the cost of early repayment charges.
It will be up to you to choose one of the offered options from your selected company when you set up a lifetime mortgage agreement with them.
The Risks of Equity Release
There are some things to consider before you take out a lifetime mortgage or a home reversion plan to get equity release, as this may not suit everyone. Equity release can impact inheritance, potentially decreasing the value you are leaving behind for loved ones to receive. Some people may use equity release to help their loved ones while they are still alive and able to do so, meaning that the desire for them to receive an inheritance on top of that may be decreased, as you have already contributed a large sum of money to them. However, if you have gifted some of the money to a loved one, they may still have to pay inheritance tax on it after you have passed away.
A higher rate of interest comes with a lifetime mortgage than a general mortgage, so you need to bear this in mind when you pursue equity release. The interest on this mortgage is calculated daily, which is added up and contributed to the amount you owe them each month. Citizens Advice has a helpful budgeting tool you can use to help assess your finances and options.
Before looking further into equity release, you may want to consider other options, instead of taking out a loan. A popular alternative is downsizing your property. While you may currently live in a valuable property that could lend itself nicely to equity release, downsizing and moving into a smaller property would give you some money from the house sale, which would be yours to keep, unlike a lifetime mortgage loan. Additionally, this may be more practical in the long term, as you may come to struggle with stairs and other accessibility points in your home further into your retirement age.
Additionally, you could consider diving into other savings you may have, or look at where you may be able to cut costs in your current spending so that you can try to save money in other ways, if you haven’t already.
Is Equity Release Right for You?
Although you know more about equity release and what your options are now, it may still seem daunting to take further steps with it. If you still have questions about equity release or would like some advice, please contact us, as we would be happy to chat with you.