Equity release is a form of borrowing designed for borrowers over the age of 55 who want to tap into some of the equity they hold in their property without having to sell up and downsize.
Reasons people release equity
There are all sorts of reasons why borrowers might want to get their hands on the money tied up in their home.
For some, it will be a way to supplement their existing pension savings to enjoy a more comfortable retirement. Others might want to carry out home renovations, perhaps to make their home more suitable for their needs as they get older, and need the funds to carry out that work.
» MORE: What is house equity?
Another popular use for equity release is so that people can provide their loved ones with a cash gift, effectively an early inheritance. For example, some older people use these loans to help their children or grandchildren buy their own home.
Equity release is also an option for people with an interest-only mortgage, but who have no real plan in place for paying off the capital they have borrowed when the mortgage comes to an end, short of selling the property itself. By releasing equity through an equity release deal, these borrowers can use that money to clear the capital they owe and stay in their own home.
How does equity release work?
If you are 55 or over and either own your home outright or have some outstanding mortgage, you can use an equity release scheme to unlock some of the equity built up in it over the years. Unlike conventional loans, you don’t have to make regular monthly repayments and instead only repay the money when the property is sold – usually on death or following a move into care.
Exactly how the process works depends on the type of scheme you choose.
Equity release schemes
There are two main ways to access house equity through equity release.
The most popular type of equity release is a lifetime mortgage and they are usually available from age 55. Here you borrow against the value of your property, but unlike a traditional mortgage you don’t have to make monthly repayments.
This money may be released as a single lump sum, or you can have a ‘drawdown’ facility open to you, allowing you to dip into that money as and when you need it.
The loan is paid off after you pass away or move into full-time care and the property is sold. However, interest is still charged on the sum borrowed and rolls up over the course of the loan.
This means that the longer the loan lasts, the greater the interest charges will be, and the less you will have to pass on as an inheritance.
To help reduce interest charges, some lifetime mortgage deals allow you to make some repayments over the course of the loan. This means that there is less to pay once you die or move into care.
Some plans also allow you to ‘ringfence’ some of the property’s value so it can be passed on as an inheritance to loved ones.
» MORE: What is a lifetime mortgage?
Home reversion plan
The second – and much less common – option is a home reversion plan. Rather than borrowing against your property’s equity, you sell all or a portion of your property at below market rate to the provider. You carry on living in your home, rent free, and when the property is sold, they reclaim their portion.
This means that if you surrender 50% of your property’s value at outset, the provider will get 50% of the sale price when it’s eventually sold. So how much you ultimately pay to release equity in this way is dependent on house price growth, and if house prices spiral it could end up being incredibly expensive.
To use a home reversion plan you usually need to be aged 65 or over.
The money raised can be paid as a lump sum or as income.
Also, even though you may not technically own all (or even any) of your home after taking out a home reversion plan, you remain responsible for its upkeep.
How much equity can I release?
This will vary according to the lender, the value of your property, your age at outset and the type of equity release plan you go for.
The size of the lifetime mortgage you can take out will be calculated as a percentage of the value of your property, which is known as the loan-to-value (LTV).
Different lenders have different rules covering the largest LTV they are willing to offer. In some cases, the age of the borrower will affect the maximum LTV lenders will consider, so while you may only be able to borrow 30% or so when you are in your 60s, you could borrow as much as 50%, possibly more, once you are in your 80s.
If you go for a home reversion plan you can sell as much as 100% of your home to the provider. However, you will not get that much money back. How much the lender offers you for its stake will depend on your age. The younger you are, the less you will get for the trade, so while a 65-year-old may only get 25% of the portion’s market value, a 90-year-old could get closer to 60%.
Is equity release safe?
The Financial Conduct Authority regulates equity release, so it is a legitimate form of borrowing.
There are other safeguards in place to protect people considering this type of loan. Firstly, most lenders only allow you to take out a product through an independent adviser who will consider your circumstances and guide you on whether equity release is a good idea and which lender and product is right for you.
What’s more, many lifetime mortgages provide a ‘no negative equity’ guarantee. This is really important as it means that your loan will be entirely paid off by the proceeds of the sale of your home after you die or head into care, even if the property has dramatically fallen in value. That should serve as some comfort as it means your loved ones won’t be pursued to pay off any outstanding debt from the equity release plan after you die.
In the case of home reversion plans you should get a lifetime lease to ensure you will never be forced out of your home.
Can I sell my house if I have an equity release product?
If your lender is a member of the Equity Release Council a lifetime mortgage should be portable, which means you can still move house. However, it can be complicated if you don’t have enough equity left in your existing home to fund the new purchase.
Your new property may also have to meet certain lender criteria – for example, not have a thatched roof.
If you repay a lifetime mortgage when you move home, you may have to pay an early repayment charge.
A home reversion plan should also be portable, however you may need to repay some of the money if you downsize to a cheaper property.
» MORE: How to sell with equity release
Can I take out an equity release product while I still have a mortgage?
Again, different lenders will approach this in different ways. Some lenders make clear that they will only offer an equity release product to those with little to no mortgage outstanding, but other lenders may be happy to consider you if you still have a decent portion of your mortgage left to repay. However, whether you are using a lifetime mortgage or home reversion plan, it is likely to ask you to use the equity you release to repay your mortgage.
How else can I release equity from my home?
Equity release may not be your only option when it comes to unlocking some of the value of your property.
For example, you could remortgage for a higher amount than you currently owe. For example, if your property is worth £200,000 and you still have £50,000 left on the mortgage, then you might be able to remortgage for £100,000. This would mean you have essentially unlocked £50,000 of the equity you own in the property to use as you see fit.
Be warned, this will mean that your monthly mortgage repayments are higher, while you might also have to borrow at a higher interest rate, which will make your borrowing more costly. It’s also important to consider that some older borrowers find it difficult to pass the affordability tests lenders have in place for remortgage deals.
Another option is to sell your home and downsize to a cheaper property, though of course this does involve the upheaval of a house move. The costs of moving and finding a property that still meets your needs may also mean you don’t get to release as much as you expect.
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