Equity release allows homeowners to unlock some of the capital tied up in the value of your home. It is available for people over the age of 55 and the money can be released as a lump sum or taken in instalments. There is more than one plan for unlocking this capital – it involves either taking out a loan that is secured against your property or selling part/all of it. The most popular option is to take out a lifetime mortgage, but you can choose to go for a home reversion scheme.
There are all sorts of reasons why people look into the option of equity release. It could be that you want to undertake some home improvements, help a family member with a gift of cash, or perhaps simply boost your income for a comfortable retirement.
What is equity?
The equity in your property is defined as the market value minus any outstanding mortgage or other debt that is secured against it. With most standard mortgage types, the equity in your home will increase over time as your regular payments build up and your property increases in value.
Property prices in the UK have risen fairly consistently over the years. This means that if some time has passed since you bought your home, the amount of equity you have now could be quite substantial. Consider the following examples:
- If the value of your home is £400,000 and you have completely paid off your mortgage, your equity would be £400,000.
- If your home is valued at £350,000 and you have £50,000 mortgage outstanding, you have £300,000 equity.
- If your home is worth £175,000 and you have £20,000 mortgage outstanding plus an additional secured loan from your lender of £5,000, your equity would be £150,000.
The precise amount of equity you will be able to release depends on your age and your circumstances.
How does equity release work?
To qualify for an equity release plan, you will need to own an eligible property and be aged 55+. Depending on the plan you go for, the capital can be released as a single lump sum or in s number of smaller instalments. You are free to spend it as you wish.
If you have any mortgage outstanding, the money will need to be used to pay this off first. The rest is all yours and can be spent on whatever you want, for example to take the holiday of your dreams or fund a home improvements project. The sum is tax-free and it’s yours to do with as you please.
Once you’ve had the money released you will not be required to make monthly repayments. Some plans offer the option to pay off the interest in monthly instalments, but there will be plenty of options where this is not necessary. With lifetime mortgages – the most popular form of equity release – the outstanding loan plus interest will be repaid when your house is sold. This usually occurs when you move into permanent residential care or pass away.
How long does equity release take?
On average, it takes around 8-12 weeks for the equity release process to be completed. With the help of a dependable equity release broker, you can ensure the process happens smoothly to get the money released as soon as possible.
Take note of this timeframe if you have plans to make any purchases.
What is the process of equity release?
The actual process of releasing equity varies between people and different providers. Here’s a rough idea of what usually happens:
- First, you meet with a provider to discuss eligibility
- You consult with an equity release adviser like the experts at Think Plutus
- A follow-up meeting takes place to discuss the advice and your thoughts
- Submit an application, overseen by your adviser
- Get independent legal advice from a solicitor
- If everything is approved, you receive your money
Types of equity release scheme
Generally speaking, there are two main forms of equity release scheme. You will probably take up one of these two options if you wish to access the equity in your home without selling it.
- Lifetime mortgages: as we’ve said, this is the most popular option. It involves you borrowing money that is secured against the value of your home.
- Home reversion schemes: with this option, you sell all or part of your home to unlock the equity.
Speak to the experts at Think Plutus to get trustworthy advice on which type of equity release scheme will be a good fit for you. We can also give you an idea of the amount of money that might be available to you.
A lifetime mortgage is a tax-free loan of a predetermined amount which is secured against your property. UK homeowners aged 55+ have this option available to them. You retain full ownership of your home and are not required to make monthly repayments.
Instead, the sum you borrow and the interest accrued are paid back either when you move into permanent residential care or you die. The debt is repaid through the sale of your property, and any money left over goes into your estate.
Types of lifetime mortgage
There are various forms of lifetime mortgage, each with different features that will suit different circumstances. The options include:
We have more detailed information about different types of lifetime mortgages elsewhere on our website.
Things to consider with lifetime mortgages
Lifetime mortgages typically have a fixed interest rate, though there are some products where the rate is variable. However, the interest on lifetime mortgages is compound, meaning it is ‘rolled up’ annually. This means that the interest owed is calculated on the basis of the loan amount plus previous interest accrued, rather than on just the original loan amount.
If you don’t want your interest to build up excessively, you could choose a lifetime mortgage that lets you pay off the interest each month.
House price fluctuations
House prices are not static, so there’s no way to accurately predict how much, if any, of your property’s value would actually be left in your estate. If you are concerned about this, Think Plutus can point you in the direction of lifetime mortgages that are designed to guarantee an inheritance for your family.
If you decide you want to pay off the loan, you may find that you have to pay early repayment charges. It’s important to establish upfront whether there are penalties for early repayment.
Home reversion plan
With a home reversion plan, you are given a tax-free lump sum or regular income by selling all or part of your home. This type of equity release is available for homeowners aged 65+. The price your provider pays will be below the market value because you retain the right to stay in your home. You are allowed to live there without paying rent until you move out permanently or you pass away.
When that time comes, your property will be sold and the value of your share will be put into your estate. Simply put, this will be the full amount your property sells for minus the portion you sold to your equity release provider. You should check with your plan provider to ascertain whether any additional fees or charges are incurred when the property sells.
This way, you’ll know the exact percentage of your home’s overall value will be left for your beneficiaries to inherit when you pass away.
Please note, Home Reversion schemes are not an area we assist with and is for information purposes only.
Important considerations of home reversion schemes
House price fluctuations
If your house has increased in value by the time it is sold, you or your estate will benefit from the increase in the share of the property that remains in your name.
However, you could also lose out if you move out permanently or die after you take out a home reversion scheme. There are some plans that provide some protection against this eventuality, so be sure to get advice.
What are the key differences between the two schemes?
There are two fundamental differences between taking out a lifetime mortgage and a home reversion scheme:
Ownership of the property
When you choose a lifetime mortgage, the home remains 100% yours as long as you live in it. This is not the case with a home reversion plan, because you are selling all or part of the property.
With lifetime mortgages, the compound interest builds up more and more as the years go by. This means the amount you owe will be greater when it comes to selling the property.
With a home reversion plan, there is no interest in the equation and there are no repayments to be made. The provider accommodates for interest in the amount they pay for the share you sell to them. You get to continue living in your home rent-free.
Please note that all types of equity release product will lower the value of your estate. They may also impact on your eligibility for means-tested state benefits.
Is equity release regulated?
All equity release schemes, providers and advisers are subject to regulations from the Financial Conduct Authority. You will also find assurances within each product that protect what’s important to you. Furthermore, most providers are members of the Equity Release Council, meaning they must abide by its strict principles and standards. One such principle is a ‘no negative equity guarantee’, whereby you will never have to pay back more than the value of your home at the point of sale.
You are advised to check the ERC register to ensure the organisation you are dealing with subscribes to that industry body’s code of practice.
Is equity release the right choice for me?
If there is money tied up in your home and you need to fund anything from home improvements to a more comfortable retirement, equity release may be a good option to boost your finances. It could help supplement your income when you retire, enabling you to live the lifestyle you want when you stop working.
There are certain criteria that you will have to meet to be eligible for an equity release plan. The most important ones are as follows:
- You must be aged 55+ (or 65+ for home reversion schemes)
- You must own a qualifying property in the United Kingdom
- Your property must be worth at least £70,000
Equity release isn’t right for everyone. If you already have sufficient savings or investments to live the lifestyle you want or make any other spending goals, equity release may not be the right way forward. Speak to a specialist adviser at Think Plutus to discuss your circumstances and ascertain whether or not you should consider releasing equity from your home.
What impact does equity release have on benefits?
You need to be aware that equity release can impact your entitlement to certain state benefits, whether you are on them now or hope to be eligible in future. If you currently receive, or may need to apply for, means-tested benefits, you may find that they are reduced or that you are no longer eligible for them. The benefits in question include:
- Universal credit
- Pension credit
- Jobseeker’s Allowance
- Council tax support
- Employment and Support Allowance
- Income support
Our experienced advisers at Think Plutus will be able to advise you of how your entitlement to benefits would be affected if you take out an equity release plan. Let us walk you through the details to help you decide whether equity release is a viable option.
Advice you can depend on
Equity release is a significant financial commitment that relates to your home. As such, it is not a decision that should ever be taken lightly. Your home puts a roof over your head and it’s a very valuable asset that may well form the majority of your estate. There are many things to consider, so you need to get professional advice from genuine experts you can trust.
Our specialist advisers at Think Plutus will always go the extra mile to understand your circumstances in order to give you the best advice possible. We are just a phone call away so let us help you make the right choice and find your best option. For expert advice you can put your faith in, Think Plutus.
Equity release glossary of terms you should know
- APR: This stands for Annual Percentage Rate and is sometimes known as Effective APR. It is the annual interest rate payable on your loan.
- Arrangement fee: The money you pay to cover the admin costs your provider accrues through the equity release process.
- Beneficiary: The person/people who receive the proceeds of your estate after you die.
- Compound interest: The interest accrued on a lifetime mortgage that adds to the original loan amount before additional interest is charged ontop. In other words, the interest paid on interest.
- Downsize: Selling your home in order to buy another (usually smaller) one of lesser value.
- Drawdown lifetime mortgage: This is an equity release mortgage that enables you to withdraw money when you need it up to an agreed maximum. Interest will only be charged on the money that you withdraw.
- Early repayment charge: A fee your provider charges for paying off a lifetime mortgage early.
- Equity: The current market value of your house minus the outstanding mortgage and any additional loans secured against it.
- Equity release: A financial arrangement whereby you benefit from the money your home is worth whilst still living in it. This is done by either borrowing against it or selling all/part of it, distributed as a single lump sum or a regular income.
- Equity Release Council (ERC): An industry body representing providers, advisers, solicitors, intermediaries and surveyors who work in equity release. All members are required to adhere to the Council’s Statement of Principles to provide guarantees and safeguards for customers.
- Estate: All your assets (property, possessions and investments) when you die, minus any debts outstanding.
- Financial Conduct Authority (FCA): The independent body that regulates financial services firms in the UK, ensuring the rights of consumers are protected.
- Freehold: Outright ownership of a property plus the land on which it stands.
- Home reversion scheme: A plan that lets you sell all or part of your home to a provider, at a reduced price, to receive a tax-free lump sum. Ownership of the agreed percentage of your property passes to the provider, but you can continue living there rent-free for the rest of your life.
- Impaired life: This is when a provider allows you to release more equity from your home due to health problems.
- Income: Money you receive on a regular basis.
- Inheritance protection guarantee: A feature of some equity release plans that ensures a portion of your home’s value goes to your loved ones when you die.
- Joint plan: A scheme that you enter along with another person who lives with you, such as a spouse. If one of you goes into care or dies, the other can continue living in the property until they go into care or die.
- Key facts illustration: Also known as a personalised illustration, this is a formal quotation regulated by the FCA to help you understand the terms of the deal.
- Leasehold: This means you own the property and the land it stands on for the duration of a lease agreement with the freehold owner. When the lease expires, ownership reverts to the freeholder.
- Lifetime lease: This is the legal authority to remain in your home rent-free until you move out permanently or you pass away.
- Lifetime mortgage: A loan secured against your home which must be repaid, with interest, when you enter permanent residential care of die. You own the property and continue living there.
- Loan to value (LTV): The size of your mortgage relative to the value of the property. Typically, it is displayed as the percentage of the property that is mortgaged alongside the percentage that you own outright.
- Lump sum: Receiving a single cash amount upfront as opposed to having it paid as a regular income.
- Negative equity: When a property’s value is lower than the debts owed on it.
- No negative equity guarantee: Protection for you and your beneficiaries against owing more than the value of your home. This is required of all ERC members.
- Portable/portability: The right to transfer a plan to a new property, as long as the new property is eligible in accordance with the provider’s criteria.
- Secured loan: A way of borrowing money by using an asset, such as a property, as collateral. If you fail to keep up with repayments, the lender may repossess that asset to retrieve their money.
- Solicitor: A certified legal professional who provides independent legal advice to clients. When arranging equity release from a property, a solicitor can review contractual arrangements and prepare legal documents.
- Solicitor’s fees: The money paid to a solicitor for the provision of legal services.
- Tax-free: When you release equity, the money is not subject to capital gains tax or income tax.
- Valuation: A formal assessment of a property’s value based on the current housing market and the property’s condition. This is usually carried out by a surveyor on behalf of the provider.