If you own your home and need cash, equity release allows you to access some of the money tied up in your home without moving. It’s an expensive way to borrow, though, so you should make sure it’s right for you before going ahead.
The equity you hold in your home is its value minus any loans secured on it. Given that house prices have grown significantly over the past decades, many older homeowners may find themselves sitting on major assets.
Equity release refers to the process of turning that equity into money you can spend. With the most popular type of equity release product, a lifetime mortgage, you can get a tax-free cash lump sum by borrowing against the value of your home.
There are two types of equity release – a lifetime mortgage and home reversion.
When releasing equity with either type you can stay in your home. The money is repaid by selling the property when the last homeowner dies or moves into long-term residential care.
With a lifetime mortgage you are not required to make any payments towards the loan as with a standard mortgage, although you can usually choose to do so if you wish, which will reduce the overall cost.
The interest usually rolls up and the full amount borrowed and this accrued interest is repaid when the property is sold.
With home reversion you sell a share of your home or all of it to a provider for less than the market value. When the property is sold, the provider gets that share of the proceeds.
You may have a wide variety of goals as you enter or begin to plan for retirement. Funding your long-held dreams can be costly, but accessing a tax-free cash lump sum with equity release can give you the financial freedom to be able to enjoy your retirement as you wish.
Some of the most popular reasons for taking out an equity release product include:
Clearing an existing mortgage
Gifting an early inheritance
Making home improvements
Increasing disposable income
Funding big purchases, such as holidays and new cars
Depending on the equity release provider and product, to be eligible for equity release you must usually:
Be aged 55 or over (65 for home reversion)
Own a property in the UK worth £70,000 or more
Intend to release at least £10,000
Having an existing mortgage secured against your home doesn’t prevent you from releasing equity. Providing you can clear your existing mortgage on completion of your lifetime mortgage, either with the funds you release or other savings you may have, you can still be eligible for equity release.
With a lifetime mortgage, as there is no requirement to make any payments when you release the equity the cost comes from the build up of interest over time. Some products will offer the option to make voluntary payments to reduce this cost, however.
If a 70-year-old homeowner borrowed £50,000 from a home valued at £300,000 with a monthly interest rate fixed at 2.84% for life (an annual equivalent rate of 2.88%), were they to die or enter long-term care 17 years later without having made any payments the total amount repayable would be £80,984. This includes repayment of the initial amount borrowed and £30,984 of rolled up interest.
Interest rate is correct as of 26/11/2021.
This example is for illustrative purposes only and interest rates can increase or decrease over time.
With a home reversion plan, the provider makes its money by paying you less than the market value for the share of your home it buys and then benefitting from any increase in the property’s value by the time it’s sold.
For example, if you sold 40% of your £300,000 property in Greater London to a provider you may be able to get 40% of its value for it (the older you are the more you’ll get), giving you £48,000.
If you died or went into long-term care 17 years later, your home could be worth £631,000 if house prices went up at the same rate as they have over the past 17 years. The provider gets its 40% share of this, giving it £252,400, which means releasing £48,000 has effectively cost £204,400.
The amount the provider gets is less predictable than with a lifetime mortgage as it depends on how much house prices go up by but home reversion plans can often end up being significantly more expensive.
The interest rates charged on lifetime mortgages are higher than for standard mortgages. They are usually fixed and currently start at around 2.88% AER (annual equivalent rate) if you’re borrowing up to 32% of the property’s value but can be as much as 4.85% if you’re borrowing up to 59%.
You can keep costs down by choosing a product that lets you make monthly payments and one that lets you withdraw the money when you need it rather than in one lump sum, known as a drawdown lifetime mortgage. This means you only pay interest on the amount you’ve actually borrowed.
There is no interest to pay with home reversion plans as you are selling part or all of your home to the provider but you could get between 25% and 60% of its market value depending on your age and other circumstances.
You may also have to pay an arrangement fee to the provider, valuation and legal fees, buildings insurance, an adviser fee and a completion fee.
Lifetime mortgages with arrangement fees may have lower interest rates so you should take both into account when deciding which deal is best for you.
The Equity Release Council (ERC) is the voluntary trade body that oversees the equity release sector. It ensures that its members uphold certain values and standards of conduct through several product safeguards aimed at protecting customers.
All financial products come with an element of risk, but lenders that are members of the Equity Release Council are dedicated to promoting safe practice. Therefore, their lifetime mortgage products will include:
A no-negative-equity guarantee, meaning you will never need to pay back more than the value of your home
The guaranteed right to remain in your home for life or until you enter long-term care
The freedom to move home should you wish, providing that your new property continues to meet the lender’s security criteria on your loan
An interest rate that is either fixed, or a variable rate with a fixed upper limit for the life of the loan
If you release equity from your estate today, you will reduce its value in the future. This could impact any inheritance plans you have or the amount of money available if you need it later – to move to a different property for example.
If you’re entitled to any means-tested benefits, releasing equity as a tax-free sum could affect your entitlement to them.
A fully qualified adviser will be able to explain these risks to you, as well as the plans available that could mitigate some of them if you’re concerned.
It is a requirement of the Financial Conduct Authority (FCA) that you receive advice from a fully qualified adviser before going ahead with equity release.
An adviser will be able to provide you with a personalised illustration showing how the interest will accrue over time, offer recommendations of products to suit your individual needs and then handle the application process on your behalf.
There are a lot of plans and features available if you are considering equity release, all of which have their own benefits and risks. An adviser can help you understand what your borrowing will look like over time and decide what the best course of action is in your individual circumstances.
Equity release will not be right for everybody. By seeking impartial advice, not only will you have a well-rounded view of your options, but you’ll also find out if it’s not right for you.
As equity release can be expensive and restrict your options later it’s important to consider alternative ways to raise cash before going ahead. These include:
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 – this is similar to a lifetime mortgage but you pay off the interest each month. The loan is 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
Last updated: 21 December 2021
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