Equity release can be a great way for homeowners to access some of the cash tied up in their property to spend as they wish; whether it’s paying off debt, home improvements, holidays or simply enjoying a comfortable retirement.
However, sometimes all of the terminology, jargon and finance lingo can be confusing which makes it hard for people to understand exactly what equity release is and whether it is right for them. At Bower, we have cut out all of the nonsense and created a simple, informative and easy to understand guide to equity release to help answer the key questions that you need answers to.
What Is Equity Release?
Equity release is the term used for a ‘product’ which allows homeowners to unlock tax free cash from the equity they’ve accumulated in their property without the hassle or stress of having to move. The ‘equity’ is based on the amount that the property could sell for, minus any mortgage or debt held against it.
Most equity release schemes offer different options for how the money is released including one lump sum, in regular smaller payments or a combination of the two.
What Types Of Equity Release Are There?
There are two main types of equity release – lifetime mortgages and home reversion plans.
A lifetime mortgage is the most common type of equity release. With this type of mortgage you borrow a lump sum of money secured against your home. You still retain ownership and can continue to live in your home for as long as you wish. As the owner you remain responsible for the property including the upkeep, maintenance, repairs, utility bills and council tax etc. There is no need to make any monthly repayments, the interest compounds as the amount you owe continuously increases. The loan is then repaid from the sale of the property when the last borrower passes away or moves into long-term care.
Home reversion plans aren’t as popular as they used to be but do still occur. They work by the homeowner selling all or part of their home to a home reversion provider, but usually at somewhere between 20% and 60% less than its true market value. In exchange you receive a tax free lump sum or regular payments that can be spent as you wish and you are entitled to remain in the home until you move into permanent residential care or pass away. Once this happens the property is sold and the proceeds split between the beneficiaries and the home reversion providers based on the percentages owned.
Is Equity Release A Good Idea?
Equity release plans incorporate a number of safety measures in order to help protect homeowners such as;
• The homeowners can continue to live rent-free in their property until they die or move into long-term care. This type of security is something that isn’t available with retirement interest-only mortgages (RIOs).
• The “no negative equity” guarantee ensures that the amount you owe will not exceed the value of your property.
• You are encouraged to engage with an independent financial adviser who will offer impartial, unbiased advice on what is best for you.
Equity release isn’t always going to be the perfect solution and whether equity release is right or not will depend on the individual and their circumstances. For those who the following applies to, equity release could be a good option;
• If your current sources of income and savings are not going to be enough to meet your retirement needs.
• You cannot or do not want to downside.
• You either have no beneficiaries or don’t mind reducing the amount of inheritance your family will receive.
• An independent financial adviser has assessed your case and concluded that equity release is a good fit for your needs.
What Are The Pros And Cons?
Advantages of equity release
• You can receive either a tax-free lump sum or smaller, regular payments to spend as you wish.
• You retain ownership and can continue to live in your home until the last borrower passes away or moves into full-time care.
• Depending on the type of plan you could benefit from any rise in the value of the property.
• Equity release is transferable which means that you can still move home in the future if you wish as long as the new home meets the suitability criteria.
Disadvantages of equity release
• The value of your estate is reduced which means that there will be less money left for the beneficiaries in your will.
• If you opt for a home reversion plan, then the reversion company will own all or a share of your property.
• When you receive a lump sum or extra cash to supplement your income then it can affect some means-tested benefits that you are entitled to now or in the future.
• For those who receive care at home that is partially or fully funded by their local council, it can result in them having to charge you or require you to pay more.
Who Is Eligible For Equity Release?
In order to be eligible for equity release there are certain conditions that you must meet including;
• For lifetime mortgages the individual or pair borrowing need to be at least 55 years of age.
• With home reversion plans those borrowing jointly or individually need to be at least 65 years old.
• The property you own must be in the UK and your main residence.
• Your home must be over a certain value and in reasonable condition. With different lenders and plans there can also be restrictions on the type of property that is accepted.
If you have an existing mortgage or secured loan on your property, then you could still qualify for equity release. However, this will depend on the value of your home and the total outstanding on the existing loan or mortgage as you will have to pay them off at the same time as taking equity release.
For those who have dependents living with them then equity release may not be suitable but this can be clarified with independent legal advice. It might be that if the dependants want to continue to live in the property that they need sign a waiver verifying that they understand if the homeowners die or move into permanent residential care, that they no longer have the right to live there.
How Much Can I Release?
The lender will look at a number of factors to help determine how much equity they can release such as;
• The persons age
• How much the property is worth
• The state of the homeowners health
The minimum amount of equity that can be released is £10,000 and the maximum amount will depend on the factors listed above. As mentioned, some equity release plans are medically underwritten which means that you could access additional funds as well as obtain a lower interest rate, if you suffer from any of the lenders listed medical conditions.
If you would like to find out how much tax free cash you could unlock from your home then try our equity release calculator.
Is Equity Release Safe?
Equity release is a big decision, and you should consider it very carefully before you make anything official or sign any paperwork. As well as reading this guide to equity release, it is always recommended to speak to an independent financial advisor first who will be able to offer the best advice, guidance and support of what is the best option for your circumstances and how to proceed with the next steps.
If you are considering equity release then get in touch and one of the friendly, home finance experts at Bower will be happy to answer any of your questions and talk you through your options.