The term equity release refers to the range of financial products that enable homeowners to access equity that is currently tied up in their home. But what exactly does equity release entail, and how does it work? Here, we answer the most commonly asked questions and explore both the advantages and disadvantages of equity release to help you make the right financial decisions for you.
What is equity release?
As we have already touched upon, equity release financial products allow homeowners who are over the age of 55 to access money that is currently tied up in the value of their property. The amount of money that can be released varies depending on your age and the overall value of your property.
There are several different equity release options, some of which will allow you to access your money as a single lump sum. Other equity release products will allow you to access smaller lump sums over a period of time.
How does equity release work?
Broadly speaking, there are two different types of equity release; a lifetime mortgage and a home reversion scheme.
Lifetime equity release mortgage
A lifetime mortgage is currently the most common type of equity release. This option will allow you to take a loan that is secured against your property, which you will continue to own.
You can choose to access the money released from your property as a single lump sum or as a drawdown, which means you will receive smaller sums of money over a period of time. Notably, interest is only charged on the amount of money you have taken and not on the money you are yet to access as part of a drawdown agreement.
Home reversion scheme
With a home reversion scheme, you will sell part or all of your property and can only remain in the property as a tenant, albeit on a rent-free basis. All sales will be for less than the market value of your property at the time.
When the property is eventually sold, the proceeds of that sale will be divided based on the percentage of the property (if any) you still own. So, if the value of your home rises significantly, so will the amount your provider receives.
Home reversion schemes are less popular, and many financial providers do not offer this option.
How much does it cost to release equity from my home?
Just as with regular mortgage products, it is important to factor in the initial costs that will apply when taking out a lifetime loan to access equity from your property.
Also referred to as application fees, your chosen equity release product may incur a one-off fee. Generally, however, these fees are not payable until your money has been released to you, which means you can use this money to cover your fees.
The fees charged by solicitors can vary significantly, so you might want to compare several options to get the best deal. On average, you can expect to pay somewhere in the region of £650.
Lenders will charge interest on the money they lend, with all unpaid interest added to the total cost of the loan on a monthly basis. Interest will then be added to the cost of the original loan plus any already accrued interest, which is known as roll-up or compound interest. Currently, lifetime mortgage equity release interest rates are sitting between 5.5% and 7.5%, which makes equity release an expensive way to access money.
Depending on the lender you choose, you may also be required to pay a property valuation fee and a financial advice fee.
Is equity release a good idea?
Equity release products are highly regulated and provide many people with the opportunity to enjoy the money they have invested in their property, but do use an equity release calculator to determine whether it’s right for you.
All lifetime mortgage products are regulated by the Financial Conduct Authority (FCA), and many responsible lenders are also members of the Equity Release Council. It is only possible to release equity from your property via a qualified financial adviser.
Seeking advice from someone with a wealth of experience in this area will help you to ensure that you are making the right choice for your circumstances.
How does releasing equity with a lifetime mortgage work?
There are several stages to the equity release process, which we have broken down here:
Step 1: Finding a financial adviser
Your first step when making any big financial decision is to seek advice from an experienced and qualified financial adviser. During this process, your adviser will ensure that you are eligible for this type of financial product and determine whether it is the best option for your circumstances. To do this, they will take time to understand your financial position and your personal needs before providing you with their professional opinion.
Step 2: Appointing an equity release solicitor
If you and your financial adviser have determined that equity release with a lifetime mortgage is the right option for you, your next step is to seek the services of an experienced solicitor specialising in equity release. Your solicitor will act on your behalf throughout the equity release process and provide you with independent legal advice at every stage.
Once you have appointed a solicitor, your application can be officially submitted to your chosen lender. On receipt of this application, your lender will arrange for your property to be valued before deciding whether to approve. If the process runs smoothly, your lender will provide your solicitor with the proposed offer and a set of terms and conditions that must be thoroughly understood by all parties involved.
Step 3: Unlocking your equity
If, after taking time to understand the terms of the offer, you are happy to accept the offer from your lender, the money will be released to your solicitor. The money will then be released to you in accordance with the agreement made with your lender, which may be in the form of one lump sum or a number of smaller sums over a pre-determined period of time.
How can I use the money released from my property using equity release?
Importantly, all money released from your property using equity release is tax-free and you can use it however you choose. Some of the most commonly given reasons for using equity release products include helping children to get onto the property ladder, paying off loans, making home improvements, and having a bit of extra cash available to fully enjoy retirement.
What are the advantages of equity release?
There are a number of little known truths about equity release, including many advantages that can help homeowners to maximise the value of their investment.
Firstly, the money released from your property is not subject to any tax, which can provide optimal levels of financial freedom. Additionally, you will be able to continue living in your home or you can choose to downsize and/or move to a more affordable area.
There are no requirements to repay the lifetime loan before you pass away or before you move out of your property and into care. The best equity release companies offer a selection of flexible repayment options if you want to repay a percentage of your lifetime loan early.
Most lenders will offer a no negative equity guarantee, which means that you will never owe your lender more money than your property is worth when it is sold. It is important to look out for lenders offering this guarantee to ensure that the financial security of you and your loved ones is properly protected.
What are the disadvantages of releasing equity from my property?
As with every financial product, it is vital to carefully think about every aspect of the process to ensure it is the right option for you.
Firstly, and perhaps most obviously, releasing equity from your property means that the inheritance you will leave to your family will be lower than it otherwise would have been. Additionally, Lifetime Mortgage interest is calculated on a daily basis and added to the amount of money you owe each month, which may mean that the outstanding amount owed will increase rapidly over time and further decrease the value of any remaining equity within your property.
Secondly, it is important to recognise that releasing equity from your property may mean that you are no longer entitled to certain means-tested benefits which could make your financial situation less rather than more secure. Carefully thinking about your own and your family’s circumstances is key to making the best decisions for your situation.
If you are planning to give a portion of the money you release from your property to your family as a gift, they may be required to pay Inheritance Tax on that sum in the future if your death occurs within seven years.
Not all lenders will offer flexible repayment options and you may receive an Early Repayment Charge if you choose to pay back some of your loan early.
Is there a minimum and maximum age for releasing equity from my property?
Homeowners will typically need to be aged 55 or over to access equity release products. However, there is some variation amongst lenders. If you want to put in a joint application for equity release, the youngest applicant will need to meet the minimum age limits put in place by the lender.
While there are no official maximum age limits, some lenders do choose to impose an age cut-off. To ensure you are eligible, make sure to discuss your options carefully with a financial adviser and double check the age restrictions set out by your preferred lender.
How long does the equity release process take?
There are many different factors that can come into play and impact the length of time the process takes from start to finish, however, most homeowners typically receive their equity within 12 weeks from submitting their application.
How much does it cost to release equity?
There are associated costs with taking out any mortgage, which you should factor into your decision making process. When releasing equity, these costs will include solicitors’ fees, interest rates, and arrangement fees.
How are equity release mortgages repaid?
Most equity release mortgages are paid back via the sale of your property after you enter long-term care or pass away. Some lenders offer options to repay either some or all of your loan early, however, it is important to be aware that you may incur early repayment charges if you choose to do this.
Some early repayment options include making partial repayments on an ad-hoc basis, making regular monthly repayments on interest incurred, or making monthly payments on both the value of the loan and accrued interest.
I want to protect an inheritance. Is this possible with equity release?
Yes, there are steps that can be taken to ensure that inheritance is protected.
Inheritance Protection is one of the most popular ways to do this, which is a process that allows you to secure a percentage of the net sale value of your property for your estate beneficiaries after your death. The percentage you want to secure will need to be decided upon when submitting your equity release application because it will impact the amount of money you can release as a lifetime loan.
Other options include making loan repayments to minimise the amount of money owed and using a lifetime mortgage to give money as a gift to family members during your lifetime.
What happens if I need to go into long-term care?
If the mortgage on the property is in your name, the property will be sold to pay off the value of the loan and any interest that has been accrued. Any remaining money can go towards your care.
If the mortgage of the property is in more than one name, you and your partner will be able to continue living in the property until the last property owner dies or goes into care on a permanent basis. Only then will the property be sold.
Can I pay for my care using equity release?
Yes. You are free to use the money released from your property as you wish, including using it to pay for either in-home care or care home fees. Equity release can also be used to make various adaptations to your home, such as installing walk-in showers or intelligent alarm systems.
Can I sell my house if I have released equity?
If you have released equity via a lifetime loan, this will be secured against your property and be transferred to your new home. However, your lender will need to approve the new property you want to move to, as many will not secure loans against properties that have a thatched roof, for example.
You can also choose to sell your home and pay back your loan from the proceeds of the sale. However, you may need to pay early repayment charges if you choose this option, which could be substantial.