What is equity release?
Equity release is the process of releasing the equity in your home. This means the part of your property you own. You can only do this if you are over 55 years of age. You will be able to get a lump sum payment or you can take out little amounts as you wish or you can do a combination of both.
With equity release you don’t have to sell your property or move homes. It is targeted at older people who own a large or significant portion of their home and need access to funds or a regular income. You will not have to give the money back to the equity release mortgage lender but rather they will recover it by selling your home upon your death.
In this brief guide we will talk briefly about if an equity release is suitable for you and if not what alternatives you have.
How does equity release work?
Equity release comes in two versions
A home reversion is where a home reversion company buys some or all of your home in exchange of a large lump sum or an annual income or both. You will continue to live in the home on a lifetime lease rent free. You will have to ensure your home is kept in a good shape as part of it is now owned by someone else. With a home reversion scheme you can ring fence the remaining shares you have in your property to pass on to your kids as an inheritance.
Upon your death or when you move into a care home, you property will be sold by the home reversion company and they will take their share of the proceeds and give the rest to your family. Your family can also simply buy out the share of the home reversion company if they decide they want to continue living in the property beyond your death.
- You don’t have to sell all of your home, You can sell some or all of it.
- You don’t get the full market value of your home but usually between 20% to 30%.
- This is the reason why most people choose to go with the lifetime mortgage.
- You can remain in the property until you die or are moved to long term care providing it is your main residence
- You can get one large sum or regular payments. Check with the provider to be sure they offer both options.
- You will usually need to be above 60 years before you will be considered for a home reversion plan.
- You can move homes as long as your home reversion company approves of your new home.
- Home reversion plans can also have a no negative equity guarantee. This means that upon your death and the end of the mortgage term the home reversion provider can only take whatever proceeds are derived from the property sale rather than go after your family if the property price has fallen and you now owe more than your property is worth.
- You will be expected to keep your home up to a good standard. You should check with the home reversion provider to understand what this means and budget accordingly.
The lifetime mortgage is a mortgage you take out which is secured on your property. With this mortgage you can either take it out on all of your property or just some. This means you can ring fence away some inheritance for your family upon your death. With the lifetime mortgage) you get a large lump sum and you will be charged interest on the capital borrowed. You can either choose to pay this interest on a monthly basis or you can roll it up till the end of the mortgage term which means you don’t make any monthly repayments. The mortgage term ends when you die or move into long term care, at which point the mortgage lender will sell your home to recover the capital plus interest borrowed.
Lifetime mortgages aren’t the only option when considering taking out a large lump sum. You can also consider the retirement interest only mortgage
- Lifetime mortgages can be very risk as the debt increases when the interest is rolled up to the end of the mortgage term. This means that your family can end up struggling to repaying the mortgage if the debt owed on the mortgage is more than the property is worth. This is known as negative equity .
- You can request a maximum cap if you have a variable rate on your lifetime mortgage. This is known as the no negative equity guarantee . This means your variable rate can only rise to a certain amount similar to the capped rate mortgages.
- The no negative equity guarantee means that when your property is sold, if the sales price does not satisfy the mortgage owed the lender will forgive this.
- Some lifetime mortgages allow you to make ad hoc capital and interest repayments with no early repayment fees.
- Lifetime mortgages are usually not available to people below the age of 55
- Lifetime mortgages have a maximum amount you can borrow and this is usually 60% although your age and the value of your property will also be considered and the older you are, the more you will be allowed to borrow.
- If you have an existing medical condition then you will be offered more
- You can move properties as long as your equity release provider approves of the property.
- You can either be on a fixed rate, a variable rate with a capped rate and the no negative equity guarantee.
- You can remain in your property as long as it remains your main residence until you die or are moved into long term care.
- You can be tax efficient by withdrawing money in smaller sums every year rather than one large sum. This will also mean you are only paying interest for a shorter time on smaller amounts.
- The lifetime mortgage provider will still check if you can afford the mortgage regardless of which repayment route you take.
What you should consider with both equity release schemes?✔
If you find yourself weighing one option over the other then these are the things you should consider.
If you are confused contact the step change charity for impartial equity release advice.
- Equity release is a good option if you are over 55, want a large sum of money or regular income but don’t want to move house
- Interest rates for both a home reversion plan and a lifetime mortgage are much more higher than those charged for a normal mortgage
- Home reversion plans offer less value for money as they give you less than your property is worth. Usually over 50% less.
- You should always seek independent financial advice before committing to an equity release.
- Your independent financial adviser must be qualified to advise on equity schemes
- Your adviser should advice you on the range of products they can search, if it is the whole of market or just a few.
- Your adviser should also advice you on what fees you will likely have to pay such as the legal fees, home valuation fee and the product arrangement fee which can reach up to £3000.
- Your adviser(likely a digital mortgage broker) should check the whole market to ensure they can find you a suitable product. You shOuld check that any lender recommended or any financial adviser is registered with the FCA.
- They equity release provider should also be a member of the equity release council which means they have to abide by strict rules and guidelines.
- Once you release money from your home this might be your last big pot of savings so any huge future costs such as health care may require you to be insured.
- If you decide to move homes and downsize to a smaller home you might not have enough equity in your home to do this with ether the home reversion of lifetime mortgage.
- Lifetime mortgages have no fixed term. They continue until you die or move into long term care.
- Lifetime mortgages have a fixed rate interest except you take in additional borrowing and move into a higher loan to value.
- Any money you receive from both of these schemes can affect your tax position and the benefits you receive.
- There might be early repayment charges attached with both the lifetime mortgage and the home reversion plan
If you need financial advice and you live in the UK then you could contact the Money Advice service over the phone or via chat for impartial advice.You can also contact the debt charity “Step Change” if you are in debt and need help.