Equity release refers to the various options that let you access equity (cash) tied up in your home when you are older. You can access the cash you release in an unintentional lump sum or in several smaller amounts or in combination of both.
Options for equity release
There are two equity release options.
Lifetime mortgage: You can take out a loan secured on the property you own, as long as it’s your main residence while you retain ownership. You might be able to protect a portion of the value of your home as an inheritance to your family. You can choose to pay back the loan and let interest accrue. The amount of the loan and any built-up interest is paid back by selling your home when the last borrower passes away or when they become a resident in long-term health care.
Home reversion is when you sell the entirety or a portion of your home to a provider of home reversion in return in exchange for a lump sum or regular payments. You have the right to remain in the home until you die, but you have to agree to keep it in good condition and ensure it. You can secure a certain percentage of your home for future use, possibly for inheritance by selling only a part of the property. The proportion you hold remains the same regardless of the fluctuation in property values or if you decide to take further cash releases. If the borrower who was last in line dies or enters long-term care, your property will be sold and the sale proceeds are divided according to the remaining proportions of ownership.
Lifetime mortgages
A majority of people who opt for an equity release use a lifetime mortgage.
Usually , you don’t have to make any payments when you’re alive. Instead, interest gets rolled up’. This means that the interest not paid can be added on to the loans. This means that the loan can get quite high over the course of a time.
Some permanent mortgages offer you the option to pay all or a portion of interest, and some allow you to repay the interest and capital.
The same way that ordinary mortgages vary from the lender’s perspective, the same is true for lifetime mortgages.
Find the answers to these concerns when you’re considering taking out a mortgage that lasts for a lifetime
What’s the minimum age you must be to get a lifetime mortgage? Usually, it’s 55. We’re all living longer so the earlier you start the more expensive it will be in the long run especially in the event you don’t pay any interest over the duration of your lifetime mortgage.
What’s the highest percentage that you can take out? You can borrow a fraction of the worth of your property, however this will depend on a variety of factors such as your age and the value of your home. The amount typically rises in proportion to your age at the time you take out the lifetime mortgage. Some lenders might provide higher sums to those with certain past or present medical conditions.
Can the interest rate be fixed? Yes, however, for those loans that are variable There must be a “cap” (upper upper limit) that will not change during the duration of the loan (Equity Release Council standard).
Be sure that the product comes with the phrase “no zero-equity guarantee”. This means when your property is soldand your agents and solicitors’ charges have been paid and the balance left is not enough to repay the loan outstanding to your provider, neither you nor your estate will be liable to pay any more (Equity Release Council standard).
Check that you have the authority to move to another property subject to the new property being acceptable to your product provider as a continual collateral for the Equity release loan (Equity Release Council standard). Different lenders offering lifetime mortgages may have slightly different policies.
Whether you can pay none or just a portion or all. If you’re able to repay in the future, this will lower the amount of interest payable after the property is sold. If you have a life-time mortgage, where you are able to pay monthly in addition to the principal amount, the amount you pay back could be contingent on your earnings. Providers need to verify whether you are able to afford these monthly payments.
The decision is whether you can take the equity in small amounts as and when you need it or if you must take it as one lump amount. The advantage of taking the money in smaller amounts is that you only have to pay interest for the amount you’ve withdrawn. If you’re able to take smaller lump sums, you must make sure you’re aware of an amount that is minimum.
Home reversion
Home reversion lets you sell some or all of your home to a service that offers home reversion.
The provider co-owns your home until you’ve sold the whole property, but you’ll be able to reside there for the remainder of your life, possibly without rent.
You’ll be rewarded with either a lump sum, or regular payments.
You’ll typically get between 20% to 60% of the market value of your home (or of the portion that you’re selling).
When considering a home Reversion Plan, look at:
The question is whether you are able to make equity release payments in multiple installments or in one lump amount.
The minimum age is the age at which you’re eligible to take out a home reversion plan. Certain home reversion companies require you’re between 60 and 65 to be eligible for the plan.
The percentage of market value you’ll receive. The higher the percentage, the more old you are when taking off the plan. It could vary from provider to provider.
What level of maintenance you’ll be expected to do and the frequency at which your property will be inspected (this may be once every few years).
Things you should be aware of about equity release
The equity release might be the best option if need a little extra cash and don’t want to move house.
But, there are reasons why equity release might not be the best fit for you.
Equity release could be more costly than a standard mortgage. If you take out a lifetime mortgage you will generally be charged a greater amount of interest that you would on a standard mortgage, and your balance could increase rapidly if interest is taken into account when you roll it up.
For life-time mortgages, there’s usually no fixed “term” or date by which you’re expected to pay off your loan. The rate of interest for a lifetime mortgage is not likely to alter over the duration of your contract, unless it’s an adjustable rate. The interest rate that you pay on any drawdowns will be calculated at the time of drawdown not at the point the contract is concluded, so this may be different to the previous rate. If you are taking any additional borrowing the interest rate you pay may be different and it will only apply to the cycle of additional borrowing.
Home reversion plans won’t give you the true market value of your house when you compare it to selling your home on the open market because you’re allowed to live in the home for the rest of your life, which is not possible even if you had sold the property on the open market.
If you take equity out of your house, it may not be able on your home to earn the funds that you will require later in your retirement. For instance, if need to pay for long-term health care.
While you are able to move and bring your mortgage with you, should you decide to reduce your home’s size in the future, you may be unable to get enough equity from your house to be able to do this. That means you may have to repay some of your mortgage.
The funds you earn through equity release could alter your eligibility for state benefits.
If you’ve taken out an interest roll-up mortgage for your lifetime it will leave less for you to pass onto your family as an inheritance.
The schemes aren’t easy to unravel , especially if you decide to change your thoughts.
There could be early repayment costs if you change your mind. This can be costly, however they’re not applicable if you die or are placed in long-term care.
These plans can affect the inheritance you leave to your family members. It’s important that you discuss the plans of your loved ones in order to avoid conflict and difficulties later on.
Do you think that releasing equity is the best option for you?
Whether equity release is the best option for you will depend on the circumstances you face, such as:
Your age
your income
How much you’d like to earn to release
Your plans for the future.
In the process of releasing equity it is tempting to focus on the immediate benefit that you’ll gain from the cash you earn but it’s important to look at how it will impact your choices in the future and finances in the years to come.
Get in touch with the team at Equity Release Wise to learn whether this option is right for you.
Needing assistance
If you’re thinking of taking out an equity release option, you must seek financial advice from an independent financial adviser. They’ll be able to recommend an appropriate plan to meet your needs after examining all the products in the market.
All advisers recommending equity release plans must possess the appropriate qualification.
Check your adviser:
Explores all of the market, so they can find the right plan for you
It is on it’s Financial Conduct Authority register (search by name of the company) The company that is listed that is on the FCA register is regulated , and is required to sign up with the Financial Ombudsman Service, which is a free-to-use complaints service if you’re unhappy with the service you receive
is a member of and listed on the Equity Release Council member directory therefore you can rest assured they adhere to the firm’s strict Rules and Standards which go beyond the standard regulatory requirements.
Prior to deciding on whether to get an equity release product, ask your advisor:
what their fees are
what kind of equity release products can provide
the other costs you’ll need in addition to the fees you’ll have to incur (eg. value, legal or or set up costs).