Equity release mortgages give older people the opportunity to borrow money against the property they have paid into over many years. This gives people over the age of 55 the chance to boost their retirement income.

This guide will explain how the different aspects of equity release work and what you should consider before applying.

What is Equity Release?

Equity release is where existing homeowners can release the money they have already paid into their mortgage to use for whatever they wish, whilst still retaining the right to live in their home.

There are two main methods for releasing equity from your home, these include Lifetime Mortgages and Home Reversion Plans. These products allow people to release money in two ways, as a cash lump-sum or as regular, smaller payments. 

Am I Eligible for Equity Release?

• You may have to be over 55 and own a property in the United Kingdom, which is your main place of residence.
• You will need to have paid off all of your mortgage. If there is still some to pay, the money you release through equity release must be used to clear this debt, in the first instance.
• The amount of money you may borrow through equity release will be based on your age and health condition, as well as the value of your home. The older you are when you apply, the more money you can potentially borrow.
• Your property must be worth at least £70,000 at valuation, in most cases, and be in a reasonable state of repair.
• It is highly advised that you seek specialised equity release advice before taking out a plan with a reputable equity release provider.
• You may not be eligible for equity release if there are dependents still living at the property. You may need to find out if this is permitted, with your provider.

How Does Equity Release Work?

There are two main types of equity release schemes;

Home Reversion Plans– These plans allow you to release all, or partial funds, from the mortgage you have already paid into over many years, whilst still preserving you and your partner’s right to live in the property, rent free.  If you opt for a partial home reversion plan, the remaining equity in the property can be accessed at a later date, should you need to release additional funds in the future. The remaining equity in the home can also be reserved for your family’s inheritance. Home reversion plans end when you and your partner die, or go into long-term care. The property is then sold and the reaming funds are split between the lender and benefactors of your will. Money released in a home reversion plan is also tax-free.

Lifetime Mortgages – A lifetime mortgage is where you can choose to release money from your home as a lump sum, or in smaller amounts over time. Under this agreement, the homeowner also reserves the right to live in their property until death or entry into long-term care.

In both types of equity release, there are very few/no restrictions in what you choose to do with the property after you have taken out an equity release product. Further, the funds are provided tax-free and reputable companies offering Home Reversion Plans and Lifetime Mortgages will be compliant with the Financial Conduct Authority (FCA) and Equity Release Council, to safeguard their customers.

What’s a Safe Home Income Plan?

As equity release is a complicated financial product, the Equity Release Council has established a ‘code of conduct’ called the Safe Home Income Plans (SHIP) scheme. Financial companies wishing to sell equity release products must maintain standards such as the homeowner reserving the right to live in their property for life, as well as having the freedom to move to other properties in the future, without incurring a penalty.

Under this code of conduct, the borrower is also permitted to go a solicitor of their choice, to review the Key Facts Illustration documents, before securing an offer. Further, negative equity cannot be factored into this kind of agreement. This means that your family are not required to pay any additional debt upon your death.

If you would like to find out more about negative equity, take a look at this guide.

How is Equity Release Repaid?

There are a few options with equity release in how the interest is paid;

Lifetime Mortgage – With a lifetime mortgage, you can choose to pay the interest off every month or you can opt for a ‘rolled up’ interest product. This is where the interest owed is added to the total amount of the mortgage, which is repaid, in full, upon the borrower’s death or entry into long-term care. If you are a couple, then the interest and transfer of property ownership is due when the last living person dies or moves into long-term care. With some plans, you can also retain a percentage of the property value as an inheritance for your family, in your will. Further, you can also switch from paying off interest monthly to rolling it up, provided you get permission from the lender to do this.

Home Reversion Plan – Under these schemes, you are agreeing to sell all or part of your home to the lender, in exchange for a lump sum or regular income. When the house is sold, the company retains their share and the rest of the home’s value can be included in your will.

Please Note: Taking the decision to go forward with an equity release plan requires careful consideration. You must be sure that this is a viable option for you, as the results can be irreversible. Take a look at this guide to the Benefits of Good Financial Advice. 

Let’s Look at an Equity Release Example:

Peter and Julie are 65 years old and own their £200,000 home. They wish to boost their retirement income and are looking into releasing £30,000, as a lump sum payment. They have found a lifetime mortgage deal charging 5% interest per annum, which can be rolled up and paid at the end of the mortgage term. The cost of setting up the mortgage and paying their solicitor comes to around £2,000. After six years both Peter and Julie have died and the total interest payable on the £30,000 loan came to £10,470.53

What are the Benefits of Equity Release?

• You Don’t Have to Move – if you release equity from your home, it means you can afford to stay in your existing property until both you and your partner die. This can be advantageous to people who live in areas of the country where there is a shortage of housing, or if you want to remain close to family and friends in retirement.
• Retirement Income Boost-  Equity release is good for those who have paid off the entire mortgage of a high-value property. The more money you’ve paid in, the more you can release with a scheme, in most instances.
• Consolidate Debts - You can consolidate your debts, pay off credit cards or take a holiday. Or, use the money to help family members purchase a house of their own.
• Fund Home Improvements – If you are looking to stay in your property until you die, then you can use the released funds to adapt your home to make it more comfortable for you as you get older. You may wish to install a stair lift, or re-do the bathroom etc.
• Peace of Mind – Equity release offers peace of mind, knowing that you can pay your bills and remain in the property you love for the rest of your life. Further, you can roll-up the interest owed, so you won’t have to worry about making monthly interest payments.
• FCA Approved – Reputable equity release schemes are regulated by the Financial Conduct Authority (FCA) and Equity Release Council. This means that companies who offer this service must ensure that their customers are aware of the potential risks involved in releasing equity from their homes. 
• Control Over Inheritance- If you choose to pay off the interest in a lifetime mortgage, you can protect your inheritance, by preventing the interest on the loan from compounding. Many schemes also include inheritance protection in the agreement, allowing you to ring-fence some leftover funds for your will beneficiaries.
• Portability – Schemes approved by the ERC allow you to port your mortgage to another property, with permission.

What are the Disadvantages of Equity Release Products?

• High-Risk Product – Equity release schemes carry implications for your tax, benefits entitlement, and inheritance. It is, therefore, vital that those considering releasing equity from their home seeks advice from a financial advisor, before making an application.
• May be Other Costs – Depending on your property, you may still be liable to pay ground rent. This may be due on an annual basis, for some freehold properties. There is also the cost of hiring your solicitor to factor-in and the administration and valuator fees, to be paid to the provider.
• Higher Interest – The interest charged on these schemes is typically higher than a conventional mortgage. This is to reduce the risk to the lender, as these schemes place a No Negative Equity Guarantee on your loan. Further, if you choose to roll-up the interest, interest will be charged on both the loan and the rolled-up interest.
• Inheritance liability – Lifetime mortgages could reduce your inheritance liability, as the amount you will owe will be taken away from the value of your estate, before you tax liability is calculated.

Things to Consider Before Signing up For Equity Release

• Using Accredited Advisors – Reputable companies offering any type of equity release product will be part of the Equity Release Council and will display their logo. These companies are highly recommended because they maintain high standards of financial conduct, offering multiple levels of protection to their customers. These include a detailed advice service, legal advice and safeguards that align with Safe Home Income Plan (SHIP) standards.
• Seek Independent Legal Advice – With equity release applications, it is highly recommended you enlist the help of your solicitor, to ensure that you understand the Key Facts Illustration documentation and are aware of the legal implications for you and your family.
• State Benefits and Taxation – Through independent advice, you should be made aware of how your entitlement to state benefits will be affected by the equity release scheme, as well as the tax band implications. Some means-tested benefits to check with an expert include Jobseeker’s allowance, income support, universal credit, council tax support and care services.
• Informing your Family – Your financial advisor will remind you to inform your family of your decision to release home equity.

What are the Alternatives to Equity Release?

• Downsizing – If you have paid off your mortgage entirely, you could sell your home and use the proceeds to buy a smaller property.
• Check your State Benefits – You may be eligible for help from the state. The Citizen’s Advice Bureau can inform you of your entitlements.
• Borrow From Your Family – If you are struggling to make ends meet in your retirement, there is the option to ask for financial support from your family.
• Rent a Room – If you own a large home, you could consider renting a room to a lodger and supplementing your retirement income.

Equity Release is a complicated financial product and one where it is highly recommended that you seek financial advice for, before making any applications.

Get in touch with and advisor accredited by the Equity Release Council today, they can discuss your circumstances, state benefit and tax implications and offer you a free, no-obligation equity release quote.