The Complete Guide to Equity Release
Our guide to unlocking the cash from your home using an equity release plan.
Tens of thousands of people are already enjoying the benefits of unlocking the cash from their home. However, it’s not suitable for everyone, which is why it’s important to get independent advice before you make a decision.
Whether you need a cash lump sum or would like smaller amounts over time following an initial release, an equity release lifetime mortgage allows you to choose what works for you, putting you in control of your finances.
Equity release is a way of accessing the cash in your home without having to move and this guide will explain the different types, who is eligible and how it works.
The value of your home, minus any outstanding mortgage and any other loans secured against it, is the equity you have in your property. This equity is often passed on as an inheritance, however, an increasing number of people are tapping into some of this wealth to help boost their retirement finances.
After years of working hard to make monthly repayments, your home is likely to be your biggest asset, particularly if you have benefitted from an increase in house prices over the last few decades.
An alternative way to release the equity in your home would be to sell and downsize, however, leaving the family home and neighbourhood can be an emotional upheaval.
With people living longer and pensions not being what they once were, for many, savings have to stretch a lot further to last throughout retirement. That’s where equity release could help.
Table of Contents
- Who is eligible?
- What is equity release?
- Home reversion plan
- Lifetime mortgage
- Advice and protection
- What is a Lifetime Mortgage?
- How does a lifetime mortgage work?
- How would you spend your tax-free cash?
- How much can I release?
- The types of lifetime mortgage
- Who would need a lifetime mortgage?
- The Next Steps
Who is eligible?
Before you continue let’s look at who can apply for an equity release plan.
- You must be a homeowner
- The youngest owner must be at least 55 years old
- Your property should be worth at least £70,000
The property should be your main residence and in good condition. Some lenders will have restrictions on the types of properties they will accept.
Equity release is available if you jointly own your home with someone else.
It’s OK if you still have a mortgage but this will need to be fully repaid from the money you release.
You will find more useful information in our article: Am I Eligible for Equity Release?
What is equity release?
Equity release is a type of mortgage for pensioners, that allows you to access the equity that you have built up in your property and release some of it for you to enjoy. This could be used for home improvements, family gifts or maybe a boost for your retirement income.
Importantly, you do not have to move to do this
There are two main types of equity release.
Home reversion plan
A home reversion plan allows you to sell part or all of your home to a reversion plan company in exchange for a tax-free cash lump sum, with no monthly repayments to make.
You have the absolute right to stay in your home rent-free for as long as you choose which is why you don’t typically receive full market value for the share of the home you sell.
Both you and the reversion plan company share in any increase in your property’s value, providing you have not sold 100% of its value. With home reversion plans you are also able to guarantee an inheritance to your beneficiaries.
When you die and the plan comes to an end, the home reversion provider takes its percentage share of the sale proceeds from your property.
Lifetime mortgage
This is the most popular type of equity release and available to homeowners aged 55 or over. You can release some of the equity in your property by taking out a lifetime mortgage. There’s no need to move home and no requirements for any monthly payments.
You are charged interest, and this is added to your mortgage balance, increasing the amount owed each year.
The loan, plus the interest, is fully repaid from the sale of your home either when you die or move into long-term care. Any excess funds belong to your estate and beneficiaries.
ADVICE AND PROTECTION
Equity release is regulated by the Financial Conduct Authority (FCA), whose primary role is to protect customers and enhance the financial market’s integrity. You must receive expert equity release advice, from an appropriately qualified adviser, before you can apply for an equity release plan. It’s an FCA requirement.
Your specialist adviser will be able to guide you through all of the options available and find a plan to suit your needs.
The advisers we use will only recommend plans which have been approved by the Equity Release Council. The Equity Release Council represents the equity release sector and exists to promote high standards of conduct and practice in the provision of and advice on equity release which have consumer safeguards at its heart.
Always look out for the Equity Release Council member endorsement mark when seeking advice on equity release to ensure you are dealing with a Council member. In addition, the Council has set clear guidelines for providers and introduced safeguards. One such safeguard is the no negative equity guarantee which is in place to make sure you’ll never owe more than the value of your home.
The right to move home
You have the freedom to move to another property without financial penalty (subject to provider criteria)
The right to stay in your home for life
You have the right to remain in your home for as long as you choose
Negative equity guarantee
You will never owe more than the value of your home due to the ‘no negative equity’ guarantee
Equity release is a type of lifetime mortgage which is a loan that’s secured against your home. Releasing equity will reduce the value of your estate and may affect your entitlement to means-tested benefits. You should always think carefully before taking out a loan against your property.
Do you need a solicitor for equity release?
Equity release offers a convenient way to access some of the money in your home, providing funds for retirement needs without having to sell up and move. This short guide focuses on whether you need your own solicitor when applying for an equity release plan.
What is a Lifetime Mortgage?
A lifetime mortgage is a type of equity release that allows homeowners to access the equity in their home via a mortgage.
The amount available will depend on your age and the value of your home (which must be your main residence).
Although mortgage interest is charged, this is usually at a fixed interest rate and no monthly payments are expected by the lender.
This type of later life mortgage is highly regulated and you will always need to receive financial advice before being able to release equity.
How does a lifetime mortgage work?
With a lifetime mortgage you borrow money which is secured against the value of your home. The money released is tax-free and you can spend this how you wish. The amount you could release depends on your age, health and the value of your home.
If you already have a mortgage then this must be fully repaid from the proceeds of the lifetime mortgage. The excess money after repayment will be yours.
Like any other mortgage, the lender will charge interest on the mortgage amount raised. Generally the interest rate will be fixed for life providing protection from any future rate rises. Your lender will not require any payments towards the interest. Instead this will be added to the mortgage balance, increasing the debt each year.
Repayment of the mortgage usually happens when you either pass away or move into long-term care. The remaining value of your property, after settling the mortgage, will belong to your estate.
Does this mean that my mortgage keeps getting bigger?
Yes, most people who choose equity release do not pay the interest charged each month.
This is added to the outstanding amount and does mean that the mortgage balance increases each year. You will never owe more than the value of your home due to the ‘no negative equity’ guarantee from Equity Release Council members.
Can you buy a house with a lifetime mortgage?
Yes, this is possible.
While equity release plans are best known for releasing equity without moving, you can use them like a normal mortgage to buy a new house to move to.
You will find more useful information in our article: Buying a house with a lifetime mortgage
How would you spend your tax-free cash?
Some of the most popular reasons for releasing cash include:
Making home improvements
Clearing credit cards and loans
Paying off an existing mortgage
Replacing the car
Going on holiday
Gifting money to family
How much can I release?
| Age | Standard LTV % | Enhanced LTV % |
|---|---|---|
| 55 | 24% | |
| 60 | 31% | |
| 65 | 36.5% | |
| 70 | 41.5% | |
| 75 | 47.5% | |
| 80 | 51% | |
| 85 | 51% | |
| 90+ | 55% |
Standard LTV – Typical maximum amount you could release.
Enhanced LTV – If you have certain pre-existing medical conditions you may be able to release more.
These figures are only an indication, your mortgage adviser will be able to confirm how much you are eligible for.
A working example
| Max cash available | ||
|---|---|---|
| Property value | £400,000 | |
| Age | 70 | |
| Standard LTV % | 41.5% | £166,000 |
These figures are only an indication, your mortgage adviser will be able to confirm how much you are eligible for.
What does LTV mean?
LTV stands for Loan To Value. It is a common term to represent the percentage of a mortgage or secured loan when compared to the property value. For example, a mortgage of £100,000 on a property worth £200,000 would have an LTV of 50%. You can read more about LTV here.
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The types of lifetime mortgage
Equity release has evolved in recent years, with more people needing to borrow into their retirement. It has become increasingly flexible with a wide choice of plans tailored to fit your requirements.
There are two types of lifetime mortgage:
Lump sum
Lifetime mortgage
A lifetime mortgage is a form of equity release plan where a loan is secured against your property to provide you with a tax-free cash lump sum, with typically no monthly repayments to meet.
Compound interest is added to the lifetime mortgage until the plan comes to an end. The loan plus interest is eventually paid back when the home is sold, usually when you move into long-term care, or when you and your partner die.
You can typically release between 24-55% of the value of your property with a lifetime mortgage, depending on your age, health and lifestyle.
Drawdown
Lifetime mortgage
Drawdown lifetime mortgages work in the same way as lump sum lifetime mortgages but with added flexibility.
Once you know the maximum amount of money you can release, after an initial release amount you can then choose to ‘drawdown’ the cash in stages as and when you want to.
The interest is only added on the amount released so it adds up more slowly than it would if you released the full amount at the outset.
Drawdown plans are a flexible option and can form an essential part of planning your future finances.
Features
A combination of these lifetime mortgage plan features is available to find a plan that works for you.
Downsizing protection
If for any reason you need to move to a smaller home, typically after five years of taking out a lifetime mortgage, you can pay the loan back early without incurring an early repayment charge, subject to lender criteria. If acceptable, you can take the loan to the new property.
This added flexibility gives you the peace of mind that, should your circumstances change for health or family reasons, you’ll be able to adjust your housing plans accordingly
Partial capital repayments
One of the newer features is the option to make voluntary, ad hoc repayments of up to 10–15% depending on the plan, of the initial amount you’ve borrowed each year, without any early repayment charges. This becomes a very useful option if, for example, you receive a windfall from an inheritance.
Paying off some of the debt means you reduce the size of the loan on which interest is charged – and that means a lower monthly accrual of interest.
Inheritance protection
If you want to be able to guarantee an inheritance for your loved ones, you can ring-fence a portion of your property value with a protected lifetime mortgage.
This allows you to guarantee that a percentage of the future value of your home will be left to your family when the property is sold, regardless of how much interest accrues.
EXAMPLE
A couple who are able to release £50,000 and want to ensure their grandchildren are left with an inheritance could take £30,000 (60% of the maximum available) leaving 40% of the property ‘protected’.
Enhanced
If you or your partner have any health conditions or make certain lifestyle choices, you may be able to release more money, get a better interest rate or both.
Health issues such as diabetes, heart problems or high blood pressure are typical examples where you could qualify for an enhanced lifetime mortgage. The same also applies to lifestyle choices such as smoking.
Interest payment
This allows you to choose how much interest (subject to a minimum) you want to pay and how long you want to pay the interest charged each month.
The advantage of this option is by paying some interest payments during the plan term, the amount your provider takes at the end of the plan will be less, as you have already paid off some or all of the interest charged.
Also, if for any reason you are unable to make repayments, the plan can be converted so interest is added as with a standard lifetime mortgage, although charges may apply.
Who would need a lifetime mortgage?
If you have owned your property for a while it is likely that you have built up a considerable amount of equity. If you are retired or approaching retirement then you may be looking for ways to supplement your income or to generate a cash lump sum.
Many homeowners are asset rich but cash poor, their wealth is their home.
There’s a few different types of mortgages for pensioners. A lifetime mortgage can provide a tax-free lump sum or ongoing sums of money that you can spend however you wish, whether that’s on home improvements, luxuries or just day-to-day living costs.
This allows you to enjoy the accumulated equity in your home but without the upheaval of downsizing.
What’s the difference between a remortgage and equity release?
The Next Steps
To really understand your needs, it all starts with speaking with your local equity release adviser – either over the phone or face-to-face. Then, if you decide to proceed, they will search the whole market to find the right equity release plan for you.
Let Respect Mortgages help you take the next step.
We can match you to an award winning equity release specialist, with over 25 years experience helping people just like you. Importantly they’re also members of the Equity Release Council.
Please call us on 0330 030 5050 for more details.
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