by John Lavery
A client asked me the other day about the options for equity release – with the help of our panel of professional advisors and the Money Advice Service we can offer the following observations.
What does it mean by Equity Release?
Equity release refers to a range of products letting you access the equity (cash) tied up in your home if you are over the age of 55. You can take the money you release as a lump sum or, in several smaller amounts or as a combination of both.
There are two equity release options:
- Lifetime mortgage: you take out a mortgage secured on your property provided it is your main residence, while retaining ownership. You can choose to protect some of the value of your property as an inheritance for your family. You can choose to make repayments or let the interest roll-up. The loan amount and any accrued interest is paid back when you die or when you move into long-term care.
- Home reversion: you sell part or all of your home to a home reversion provider in return for a lump sum or regular payments. You have the right to continue living in the property until you die, rent free, but you have to agree to maintain and insure it. Again you can ring-fence a percentage of your property for later use, possibly for inheritance. The percentage you retain will always remain the same regardless of the change in property values, unless you decide to take further cash releases. At the end of the plan your property is sold and the sale proceeds are shared according to the remaining proportions of ownership.
Let’s look a little more closely at these options
Most people who take out equity release use a lifetime mortgage.
Usually you don’t have to make any repayments while you’re alive, interest ‘rolls up’ (unpaid interest is added to the loan). This means the debt can increase quite quickly over a period of time. However, some lifetime mortgages do now offer you the option to pay all or some of the interest, and some let you pay off the interest and capital.
In the same way ordinary mortgages vary from lender to lender, so do lifetime mortgages.
When considering a lifetime mortgage, it’s useful to know:
- The minimum age at which you can take out a lifetime mortgage.
- Usually it’s 55. We’re all living longer so the earlier you start the more it is likely to cost in the long run.
- The maximum percentage you can borrow.
- You can normally borrow up to 60% of the value of your property. How much can be released is dependent on your age and the value of your property. The percentage typically increases according to your age when you take out the lifetime mortgage, while some providers might offer larger sums to those with certain past or present medical conditions.
- Interest rates must be fixed or, if they are variable, there must be a “cap” (upper limit) which is fixed for the life of the loan.
- You have the right to remain in your property for life or until you need to move into long-term care, provided the property remains your main residence and you abide by the terms and conditions of your contract.
- The product has a “no negative equity guarantee”. This means when your property is sold, and agents’ and solicitors’ fees have been paid, even if the amount left is not enough to repay the outstanding loan to your provider, neither you nor your estate will be liable to pay any more.
- You have the right to move to another property subject to the new property being acceptable to your product provider as continuing security for your equity release loan. Just remembers different lifetime mortgage providers might have slightly different thresholds.
- If you can make repayments against interest charges, the mortgage will be less costly. However, with a lifetime mortgage where you can make monthly payments, the amount you can repay might be based on your income. Providers will have to check you can afford these regular payments.
Also find out whether you can withdraw the equity you’re releasing in small amounts as and when you need it or whether you have to take it as one lump sum - the advantage of being able to take money out in smaller amounts is you only pay the interest on the amount you’ve withdrawn.
Home reversion allows you sell some, or all, of your home to a home reversion provider and in return you’ll get a lump sum or regular payments.
You’ll normally get between 20% and 60% of the market value of your home (or the part you sell).
When considering a home reversion plan, you should check:
- Whether or not you can release equity in several payments or in one lump sum.
- The minimum age at which you can take out a home reversion plan. Some home reversion providers insist you’re at least 60 or 65 before you can apply.
- The percentage of the market value you will receive. This will increase the older you are when you take out the plan but might vary from provider to provider.
- You have the right to remain in your property for life or until you need to move to long-term care, provided the property remains your main residence and you abide by the terms and conditions of your contract
- You have the right to move to another property subject to the new property being acceptable to your product provider as continuing security for your equity release loan
- Again this system has a “no negative equity guarantee”. This means when your property is sold, and agents’ and solicitors’ fees have been paid, even if the amount left is not enough to repay the outstanding loan to your provider, neither you nor your estate will be liable to pay any more.
However if exploring this option also find out what level of maintenance you’ll be expected to carry out and how often your property will be inspected (this could be every few years).
Things you need to know about equity release
Equity release might seem like a good option if you want some extra money and don’t want to move house. However, there are important considerations:
- Equity release can be more expensive in comparison to an ordinary mortgage. If you take out a lifetime mortgage you will normally be charged a higher rate of interest than you would on an ordinary mortgage and your debt can grow quickly if the interest is rolled up. Your plan provider needs to factor in the safeguards they are providing you with (such as the no negative equity guarantee and a fixed interest rate for the life of the plan) in their calculations and can, therefore lend you at a different interest rate to an ordinary mortgage.
- For lifetime mortgages, there is no fixed “term” or date by which you’re expected to repay your loan. The rate of interest of a lifetime mortgage will not change during the life of your contract, unless you take any additional borrowing and it will only be applicable to that cycle of extra borrowing.
- Home reversion plans are unlikely to give you anything near to the true market value of your home when compared to selling your property on the open market.
- If you release equity from your home, you might not be able to rely on your property for money you need later in your retirement. For instance, if you need to pay for long-term care.
- Although you can move home and take your lifetime mortgage with you, if you decide you want to downsize later on you might not have enough equity in your home to do this.
- The money you receive from equity release might affect your entitlement to state benefits.
- You will have to pay arrangement fees, which can reach approx. £1,500-£3,000 in total.
- If you undertake equity release it will have an effect on inheritance issues
- These schemes can be complicated to unravel if you change your mind and may include such things as early repayment charges if you do change your position - not applicable if you die or move into long-term care.
IF YOU ARE THINKING OF TAKING ADVANTAGE OF EQUITY RELEASE SCHEMES THEN PLEASE TAKE PROFESSIONAL ADVICE BEFORE TALKING TO AN SCHEME PROVIDER.