What is Equity Release?
If you’re a homeowner aged 55 or over, equity release could be the key to unlocking the value tied up in your home without having to sell.
Discover how it works and if it’s the right financial solution for you.
If you’re a homeowner in the UK aged 55 or over, equity release offers a way to unlock some of the money tied up in your home.
It’s essentially a type of mortgage which is secured against your property, allowing you to receive a lump sum or regular income without having to sell and move.
This page is designed to help you understand everything about equity release.
We’ll explain how it works, the different types available, and the factors to consider before making a decision. By the end, you’ll have a clearer picture of whether equity release could be a suitable option for you.
Please Note: The content on this page is designed to be a helpful starting point for understanding equity release. It explores the concept, different plan types, and the general process involved. However, equity release is a complex financial decision with significant implications for your long-term financial security. To determine if equity release is the right option for you, it’s essential to consult with a qualified financial adviser who specialises in equity release products.
What exactly is equity release?
Think of equity as the portion of your home’s value that you own outright.
For example, if your home is worth £300,000 and you have no remaining mortgage, your equity is £300,000.
Or if you have a mortgage of £50,000 your equity would be £250,000.
Equity release lets you tap into a portion of that equity.
Instead of needing to sell your home, you borrow money against its value. The loan, plus interest, is eventually repaid when you sell the house or pass away.
Importantly, you still own your home and can choose to remain there for life.
How it works in practice:
- The Lender Assesses: An equity release provider evaluates your home’s value and calculates how much you might be eligible to borrow based on your age and other factors.
- You Choose the Release Type: You select whether you want the money as a lump sum, smaller regular payments, or a combination of both.
- The Interest Builds Up: Unlike a traditional mortgage, you don’t typically make monthly repayments with equity release. Instead, the interest on the loan rolls up over time and is added to the total amount owed.
Loan-to-Value (LTV)
The loan-to-value ratio (LTV) is important in equity release. It’s the percentage of your home’s value that you are borrowing.
For example, if your home is worth £300,000 and you release £60,000, your LTV would be 20%. Your age and property value generally determine the maximum LTV you’ll be offered.
Eligibility Criteria
Equity release is generally available to homeowners in the UK who are aged 55 or over.
Equity release is most commonly available for freehold properties (houses you own outright) and leasehold properties with a long remaining lease term (typically over 70 years).
Some lenders may also consider bungalows or flats under certain circumstances.
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Types of Equity Release
There are two primary ways to access equity in your home:
Lifetime Mortgages
This is the most popular type of equity release. Here’s how it works:
- You take out a loan secured against your home, similar to a traditional mortgage, but it’s designed for those 55+.
- You’re not obliged to make monthly repayments with a lifetime mortgage. The interest compounds over time.
- You retain full ownership of your home and can live there until you pass away or move into long-term care.
- The loan and accrued interest are repaid from the sale of your property after your lifetime.
Home Reversion Schemes
This option involves selling a portion (or all) of your home to a home reversion company:
- In exchange for selling part of your home, you receive a cash lump sum.
- You get a lifetime lease guaranteeing the right to live in your home rent-free for the rest of your life.
- After you pass away or move into long-term care, the home reversion company sells the property and keeps a share of the sale proceeds based on the percentage you initially sold.
How is the Equity Release Mortgage Paid Back?
Unlike a traditional mortgage where you make regular monthly payments to pay down the loan principal and interest, equity release mortgages have a different repayment structure.
Here’s how it works:
Deferred Repayment:
With an equity release mortgage, you generally don’t make any monthly repayments during your lifetime in the property. The loan amount, along with the accrued interest, grows over time due to compounding.
There are typically two main events that trigger the repayment of the equity release loan:
Selling Your Property:
When you decide to sell your property, the proceeds from the sale are used to settle the outstanding loan amount and any accrued interest.
Any remaining equity after the loan repayment goes to you or your estate.
Moving into Long-Term Care:
Some equity release plans allow you to move into long-term care and defer repayment until the property is eventually sold.
However, the specific terms will vary depending on the chosen plan, so it’s crucial to check the details beforehand.
Important Points:
- Impact on Inheritance: Since the loan and interest are repaid from the property’s sale proceeds, the amount of inheritance your beneficiaries receive will be reduced compared to if you hadn’t taken out equity release.
- Planning for Repayment: It’s wise to discuss potential future scenarios with your financial advisor. For instance, if you plan to move into long-term care, ensure your chosen plan allows for that option without immediate repayment.
Getting the right advice
Before you commit to an equity release plan, it is essential to seek professional and impartial financial advice.
A qualified adviser can provide you with a comprehensive assessment of your financial situation, clearly explain all available options, and help you determine if equity release is the most suitable choice for you and your family.
Here’s how a qualified financial adviser can assist you:
Assessing Your Financial Situation: An adviser will thoroughly review your income, expenses, assets, and liabilities to gain a clear understanding of your financial circumstances
Exploring Alternatives: They will evaluate various alternatives to equity release, such as downsizing, using savings, or considering other financial products.
Explaining Equity Release Options: The adviser will provide a comprehensive explanation of different equity release products, including their features, benefits, and potential risks.
Suitability Assessment: They will assess whether equity release is the most suitable option for your circumstances, considering your age, health, and future plans.
Cashflow Planning: The adviser will help you create a cashflow plan to ensure that you have sufficient income to meet your living expenses after releasing equity.
Inheritance Planning: They will discuss the potential impact of equity release on your estate planning and inheritance goals.
Tax Implications: The adviser will explain the tax implications of equity release and how it may affect your entitlement to state benefits.
Protection and Safeguards: They will ensure that you understand the safeguards in place to protect homeowners from financial hardship.
Legal and Regulatory Compliance: The adviser will ensure that the proposed equity release plan complies with all relevant legal and regulatory requirements.
Ongoing Support: They will provide ongoing support and guidance throughout the process and monitor your financial situation to ensure that it continues to be suitable.
By working with a qualified and experienced financial adviser, you can make an informed decision regarding equity release and any potential alternatives.
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