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Equity release mortgages

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What is equity release?

Equity release is a way of taking some of your homes value as tax-free cash, without having to sell it. This may even be possible if you’re still repaying your existing mortgage, although you will need to be fifty-five or older to qualify.

This can be beneficial for some older homeowners, especially if the value of their home has increased significantly since they bought it. The cash released can be used for any purpose, but common uses are; to help fund retirement, to help family members to get onto the property ladder, to repay the capital on an interest-only mortgage, or for the provision of later life care.

Releasing equity is an expensive way to borrow money, however, and it reduces the value of your estate. This is because the value you take from your home (equity) will need to be repaid to the lender when your home is sold - after you pass away, or go into long-term care.

Consider carefully whether equity release will affect any inheritance you intend to leave, and how it will impact any means-tested benefits you currently receive. It’s important to receive clear and thorough financial advice from an equity release advisor registered with the ERC (Equity Release Council) before making a decision about whether it's the right move for you!

What is equity?

Equity is simply the portion of your home that you own outright - so any deposit you put down at the beginning of the mortgage, and whatever you have repaid of the loan, compared to the current value of your home. You can also gain more equity when your home increases in market value.

An easy way to calculate your equity is to find out how much your home is currently worth and deduct your remaining mortgage balance from that.

For example:

If your home is now worth £250,000, but you only have £50,000 left to repay, then you have £200,000 in equity.

How does equity release work?

Equity release involves borrowing some of the monetary value locked up in your home, which will not need to be repaid until you no longer need to live there, so either when you pass on, or go into long-term care. It’s way more complex than that, but every equity release option works on this premise.

What is an equity release mortgage?

There are two types of equity release product – lifetime mortgages and home reversion. When people reference an equity release mortgage, they are most likely talking about lifetime mortgages, which are far more popular due to being more flexible than home reversion plans.

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What equity release options are available?

Lifetime mortgages

With a lifetime mortgage you borrow some of the equity held in your home, which you will not then have to repay during your lifetime. You won't need to move out of your home at any point throughout the lifetime mortgage term, unless you want to. 

You are charged interest on the loan for the full mortgage term, but this can be added to your loan and repaid from the proceeds when your home is eventually sold on. 

Although you're under no obligation to repay the interest, there is usually an option to pay or partially repay it if you would prefer. Most lifetime mortgage providers also allow you to repay up to 10% of the loan amount each year. Any payments made towards a lifetime mortgage reduce the amount the lender will take when your home is sold, meaning there will be more left for any beneficiaries.

Payout options

You can choose how to receive the funds you release. One option is a one-off lump sum of cash or you can choose the draw down option. This involves taking a smaller lump sum and holding a reserve of cash to be drawn down in installments as and when you need it. Both methods are entirely tax-free.

As you only pay interest on the amount of the loan that you have taken (or drawn down) the draw down payout can be a more economical option.

Can I move home?

Yes, you can move home with a lifetime mortgage, although the process will be slightly more complicated as the equity release provider will need to approve your new property.

Home reversion plan

Home reversion plans are less popular than they once were, but are still available from some equity release providers. This product is considered slightly more risky, as it involves selling some or all of your home to a home reversion company. This way you access the monetary value you would get from selling up, but without having to actually leave your home.

You’ll need to be a little older to access this type of product, most providers have a minimum age requirement of sixty-five and over.

The home reversion company buys your home (or a percentage of it) and gives you the money straight away, but it will never need to be repaid. They sell your home either after you die, or when you go into permanent care to make their money back. You will have a rent-free lease, allowing you to stay in your home for the rest of your life.

It’s important to note that you will not receive full market value for your home when you sell it through home reversion - typically you would be offered between 20-60% of it's actual value.

The amount you're offered for your home will depend on a number of factors, including the market value of the property, your age, and your current health. Those applicants who are older, or who have life limiting illnesses are likely to benefit from higher offers than younger, healthier people.

Payout options

Similarly to lifetime mortgages, you can choose to take the money as one tax-free lump sum, or as smaller increments of the total amount (sale price) you agree upon. 

Can I move home?

No, not with a home reversion plan - which is why it’s only suitable for those who know that they will definitely remain in their homes for the rest of their lives. If you want to leave the plan early, you have to buy back your home (or the share of it you sold) from the home reversion provider at full market value, even though they bought it for much less.

Is releasing equity the right option for you?

Equity release can be helpful for a variety of purposes, and typically, you can use the money for whatever you choose. It's important that you weigh up all of the risks and benefits, however, to see whether this is the right move for you.

Some common examples of why people use equity release are:

  • Clearing an existing mortgage - whether this is repaying the capital on an interest-only mortgage or the remaining balance on your repayment mortgage (be careful of any early repayment charges that may apply to the latter)

  • Gifting an early inheritance - some parents and grandparents like to see their loved ones enjoy their inheritance whilst they are still around

  • Making home improvements - this could be adding that library you’ve always wanted or adaptations you might need in your older years

  • Increasing disposable income - if your pension payments don’t afford you the lifestyle you’re accustomed to or had hoped to have in your later years, this can be a good way to top them up

  • Funding big purchases - those dream ‘one day’ purchases like holidays, cars or holiday homes

This is a very costly way to borrow money and not without its risks, so it’s important to fully understand every aspect of your chosen plan before you commit to anything. Equity release brokers have specialist training and knowledge, so make sure you get the right level of advice for your needs.

Am I eligible for equity release?

Whether you're eligible for a specific equity release scheme will depend on the criteria of the individual equity release provider and product. However, generally, you will need to meet the following requirements:

  • Be aged 55 or over (65 for home reversion) - if applying jointly, both applicants must meet minimum age requirements

  • Own a property in the UK worth £70,000 or more - please note that some lenders only accept mainland UK residents

  • The property will need to be your main residence

  • Intend to release at least £10,000 - £15,000, depending on the lender

  • Some lenders will limit the amount of mortgage you can have left to repay on your current home*

*Having an existing mortgage secured against your home doesn’t necessarily prevent you from releasing equity, so long as you clear it with the funds you release or other savings you may have.

Equity release interest rates and charges

The costs associated with equity release vary depending on whether you opt for a lifetime mortgage or home reversion.

Lifetime mortgage costs

Some lifetime mortgages have an arrangement fee attached to them, which is either a set figure, or a percentage of the value you borrow. Most providers carry out the valuation of your home for free, however there may be a charge. You will also need to organise a solicitor to act on your behalf and charges will vary by provider, but are typically £500-£1000.

Finding the best equity release rates

Interest is the major cost involved with a lifetime mortgage. It can be repaid or partially repaid monthly, but if you choose not to, it will be ‘rolled-up’, meaning it’s added to the figure you've borrowed. Rolled up interest is compounded, so your balance increases very quickly. Compound interest is where interest is charged on previous interest charges as well as the capital.

If you hope to leave an inheritance it's worth making repayments on a lifetime mortgage. Even partially repaying the interest could prevent the debt from wiping out the entire value of your home when it's sold on.

Interest rates vary by lender, as with any financial product, but tend to be higher than traditional mortgage rates. The rates are generally fixed for the lifetime of the mortgage, which means it's even more important to compare the best rates for equity release before you settle on a deal.

Home reversion plan costs

One of the main reasons that people opt for home reversion is that it doesn’t cost anything, you are simply receiving an advanced payment on the sale of your home. In some cases an arrangement fee may apply to setting up the plan, however.

You should also consider that you will not receive market value for your home (20-60% of the current market value is typical), which could be seen as a loss.

How compound interest works

The Equity Release Council (the governing body for all equity release products) has provided this example of how compound interest works, to demonstrate how quickly interest can accumulate if you choose not to make any repayments towards your lifetime mortgage.

This is based on a £50,000 loan taken at a fixed interest rate of 6% and as you can see in the example below, in 5 years, the amount owed has increased by £16,910. However, it’s also worth bearing in mind that an increase in property value will balance some of this out.

Year Loan balance6% Interest chargesTotal owed
1£50,000 £3,000£53,000
2£53,000 £3,180£56,180
3£56,180£3,370£59,550
4£59,550£3,573£63,123
5£63,123£3,787£66,910

Is it possible to reduce the interest on a lifetime mortgage?

There are a few ways you can minimise the accumulation and/or impact of compound interest on a lifetime mortgage:

  • Repay some or all of the interest each month - you may even be able to reduce the balance without early repayment charges, up to a certain amount (typically 10%)

  • Drawdown reserve - if you opt to take a smaller initial lump sum and leave the rest of the money in reserve until you need it, there will be no interest chargeable on the reserved cash until it is drawn down

  • Downsizing protection - this means that if you move to a smaller property, you can repay your loan without early repayment charges or interest - it’s not offered by all lifetime mortgage lenders, but certainly something to look out for

Things to consider before equity release

Impact on inheritance

If you’re hoping to leave an inheritance behind for loved ones, it’s important to understand the impact equity release will have on this. 

Some plans allow you to 'ring fence' some of your home’s value for inheritance purposes. This is known as the ‘inheritance protection guarantee’ and might be a valuable option if leaving an inheritance is important to you.

Claiming benefits

If you receive means-tested benefits from the government, taking a large lump sum payment of any kind can affect your eligibility to them, as you may end up above the savings threshold. Therefore taking a large lump sum during equity release won't be beneficial to everyone.

It may be possible to prevent this by taking a smaller upfront lump sum and split the remaining loan into regular payments. Speak to an equity release expert about your benefits if you are concerned about this.

Negative equity

Negative equity is where you owe more on your mortgage than your home is currently worth. Whilst this is certainly a possibility when it comes to equity release, especially if you choose to roll-up the interest, you will never have to repay more than the value of your home.

The ‘no negative equity guarantee’ applies to all members of the Equity Release Council, so it’s crucial to ensure that the equity release provider you choose belongs to this governing body, sometimes referred to as the ERC.

This will ensure that neither you or your surviving family members will ever have to be out of pocket. The most a lender could possibly take would be 100% of the resale value of your home, beneficiaries could be left with no inheritance, but would never be left in debt.

Alternatives to equity release

Equity release is not suited to everyone, as it can be an expensive and restrictive commitment, so it’s important to consider all of the alternative options that may also be available to you. This could be:

  • Downsizing to a cheaper property

  • Remortgaging your home – many lenders are now happy to lend to older and retired borrowers

  • Taking out a retirement interest-only mortgage (RIO) – this is similar to a lifetime mortgage, but you have to repay the interest each month. They are available from age fifty-five and the loan is only repaid when you die or move into long-term care

  • Renting out a room in your home – you can earn up to £7,500 a year tax-free

  • Making the most of existing savings and investments

Kellie Steed - Mortgage content writer
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The most important consideration of equity release is that you as a customer have a full enough understanding of the products available to make a confident and informed choice. Always seek expert advice.”

Kellie Steed - Mortgage Content Writer

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