Equity release is a scheme that enables older homeowners to unlock some of the money (equity) within the value of their home. Read our guide to see if it’s suitable for you.
You must be over the age of 55 and be a homeowner to be eligible for an equity release scheme. Many people take out equity release schemes to unlock money to cover the cost of living in later life or use it to pay for home improvements, repay debt or help their children onto the property ladder. An equity release scheme will allow you to remain in your existing home rather than having to downsize to a smaller property in later life.
Equity release schemes are flexible and what you spend the money on is entirely down to you. Schemes have improved in recent years, with all of them now offering a guarantee of ‘no negative equity’. This means the amount you owe will never be more than the value of your home. When the time comes for your plan to be repaid, if your house is worth less than the amount you owe, your family members won’t have to repay the difference to the lender.
There are two main types of equity release schemes – the most common type is called a Lifetime Mortgage which is a loan secured against your home. This isn’t normally paid back until the last living borrower dies or moves into long-term residential care. It’s up to you whether you make regular interest payments on the loan, or don’t pay anything at all, which means the interest is ‘rolled up’ until the total loan is repaid when your home is sold.
The second scheme is called a Home Reversion Plan which is less common. You don’t pay any interest on this scheme. You will receive a cash sum for selling part or all of your home to the equity provider. You are granted a lease which means you can remain in your home rent-free or for a small monthly rent for the rest of your life. When the property is sold (again usually after the last living borrower dies or moves into long-term residential care), the equity release provider receives all or some of the proceeds from the sale, depending on what percentage of your home you sold.
A big decision
Taking out an equity release scheme is a big decision and shouldn’t be taken lightly. Lifetime Mortgages where the interest is ‘rolled up’ can grow in size in terms of what you owe fairly quickly. With the Home Reversion Plan, the size of your estate can be reduced significantly.
Downsizing to a smaller property may be a more suitable option for you than equity release. However, it may not appeal to you if you have lived in the same home for years and feel very attached to your home and community.
A company selling an equity release scheme must offer you advice first. They should be a member of the Equity Release Council and arrange for you to have a personal meeting with a solicitor, who can offer you advice to suit your situation. It’s also important to check that the firm selling you an equity release scheme is authorised by the Financial Conduct Authority (FCA).
Who is eligible for equity release?
• You must be over 55 for a Lifetime Mortgage and usually over 65 for a Home Reversion Plan.
• You must own your home and it must be worth a minimum of £70,000.
• There is normally a minimum amount you need to borrow – usually at least £10,000.
• There is also a maximum amount you can borrow or sell which varies depending on your age.
• You must clear other debts secured against the property.
The pros and cons of equity release
There are advantages and disadvantages to taking out an equity release scheme.
• You will obtain access to extra funds but still get to remain in and own your property.
• You can use the equity in your property to boost your retirement income. The amount you receive can be spent on whatever you wish – either to use in one go or to draw regular amounts to help with the cost of living.
• You can use the money to help your children buy their first home or move to a larger property.
• You can use the funds to pay for a wedding or take the holiday of a lifetime.
• You can use the funds to pay for household repairs or for improving your home such as installing a new kitchen.
• You can use the funds to remain in your own home rather than having to downsize and have more cash at your disposal.
• If you are considering taking out a Lifetime Mortgage equity release scheme, be aware that they are not designed to be repaid during your lifetime. They can incur early repayment charges.
• Equity release reduces the value of your estate so your loved ones will inherit less when you die. It may cut Inheritance Tax, but your estate will be reduced so it’s important to discuss this with your children before you go ahead.
• The money you receive from an equity release scheme can affect your entitlement to means-tested benefits, such as Pension Credit.
• There are costs associated with equity release schemes. You may have to pay an arrangement fee to cover administration costs, a valuation fee to assess how much your home is worth and a solicitor’s fee for work they carry out on your property. A financial adviser may charge you a one-off fee as well as receiving a commission. They should be clear about what you will have to pay before you proceed.
• If you are considering moving in the longer-term future, it’s reassuring to know that most equity release plans will let you move your mortgage to a new property. However, the lender must approve the property first.
Key points about equity release
If you take out an equity release scheme, you are expected to maintain your property in good condition – you are responsible for repairs to the property.
If you decide to move in the future, most equity release providers will allow you to transfer your product to another property. However, they will want to be sure the new property is acceptable in terms of value. They may not approve of you moving to a leasehold retirement flat.
If you are unable to transfer the product, you will be expected to pay off the whole amount owed from the proceeds of selling your home.
The older you are, the larger the amount of money you will be likely to be able to receive because your life expectancy is lower.
If you think you might need to move into residential care at some stage in the future, you will need to repay equity release if you move into a care home.
A popular choice for many
Equity release schemes are currently very popular, with the number of new plans agreed between July and September this year up by 41 per cent from the previous quarter. People are living longer, and retirement finances are being squeezed due to pension changes. Accessing property wealth is a good way to support your living standards in later life. Interest rates on equity release schemes are much more competitive these days. Rates have typically been around five per cent, but average interest rates have plummeted to historic lows, with some plans offering rates below three per cent – some even as low as 2.25 per cent.
Get in touch
For advice on equity release schemes and whether or not one is right for you, please give one of our friendly, experienced advisers a call. We will be happy to explain the options available to you.