What is Equity Release?
Buying a house is the biggest financial commitment many of us will ever make, so it makes sense to free up some of the money tied up in our most valuable asset rather than struggling to get by and missing out. Equity release allows you to do just that, helping you to enjoy the freedom of your later years without having to worry about your finances.
What is equity release?
Equity Release, or a Lifetime Mortgage as it is sometimes known, is a way of releasing a cash lump sum against the value of your home.
Equity Release can be a good option if you want to use some of the wealth in your property for other uses. You will receive the cash lump sum at a fixed interest rate and you are free to spend the money in any way you please.
The loan lasts for the rest of your life or until you go into long-term care and is therefore a significant commitment.
How much can I borrow with an equity release?
The amount you can borrow depends on your age and the value of your property.
If you’re over the age of 55, you can take advantage of a number of different products which allow you to release a lump sum, or several small amounts of equity, without having to move home or downsize. You will still own your home and you can stay in it for as long as you wish.
There are certain criteria you must meet to be eligible for equity release:
- You must own your own home and not having any dependents living with you
- You must be a minimum of 55 years old, although some schemes will not be available until you’re 60
- You must have little or no mortgage left to repay
- Your property must be in good condition and worth more than a certain value
Your home will only be sold when you die or move into long-term care and the amount you owe is paid back from the proceeds of the sale. You won’t have to make any repayments until then, when the loan and the interest that has accumulated has to be repaid.
Some schemes allow you the flexibility to repay interest during the term of the loan if you prefer.
What release options are available?
There are two different types of equity release products available in the UK. This includes:
- Lifetime mortgage – This is a mortgage, like a conventional mortgage, that is secured against your property. However, unlike a conventional mortgage, you are not usually expected to make any repayments while you’re alive. Instead, interest is added to the loan as it would normally accrue, and is paid back, along with the sum of the initial loan, either when you die or move house. However, you can choose to pay back all or some of the interest to make the mortgage less expensive. The maximum amount you can typically borrow is 60 percent of the property’s value.
- Home reversion – In this type of scheme, you sell part or all of your home, to a home reversion provider. In return, you normally receive between 20 and 60 percent of the market value of your home as a lump sum, or in regular payments. You are able to continue living in the property until you die, as long as you agree to maintain and insure it.
What is negative equity?
We only recommend schemes with a ‘no negative equity guarantee’ which means that even if the value of the house is less than you owe, you and your family will never have to pay back more. If there is money left over once your loan and interest is repaid, then it will be handed over to you or your estate.
If you want to leave a guaranteed percentage of the value of your home to your family, some schemes offer this option no matter how much loan is outstanding and the value of your house when you die.
You will need to consider your health when doing an equity release, as some companies offer higher loan amounts if your life expectancy is reduced. If the value of your house permits, you can often borrow further amounts in the future, although this is not guaranteed.
You can move house as long as your loan provider accepts that your new property provides suitable security and if it is cheaper than your existing property, but you may also have to repay some of the loan.
Things to consider with an equity release
As with any financial product, an equity release does have it drawbacks, so it’s important to discuss these considerations so you can make an informed decision.
- Releasing equity is generally not considered to be particularly cost effective. For example, if you take out a lifetime mortgage, you will generally be charged higher interest rates than you would on a conventional mortgage. The debt can also grow quickly if you let the interest accrue.
- Failure to adhere to the full mortgage terms and conditions could result in the forced sale of your property and the loss of the right to inheritance protection if this has been chosen. The full mortgage terms and conditions are sent to you and your solicitor.
- If you release too much equity from your property at an early stage, you might not have the money you need later on in your retirement.
- The costs of taking out Equity Release might be considered relatively high if you were to die within a short time after the scheme has started.
- An equity release scheme can make it difficult to move to home, so think carefully about any plans to downsize or relocate before you agree to this type of product.
- The money you receive from a release scheme could leave you liable for more tax, so take tax considerations into account when making your decision.
- There will be set up and/or arrangement fees to pay on an equity release scheme, so think carefully about the fees when shopping around for the best deal.
- There will be less for you to pass onto family members when you die.
- It can be difficult to ‘undo’ an equity release scheme if you change your mind.
- Early repayment charges can apply (depending on your deal), which can make the whole process more expensive.
How can The Mortgage Centre help?
Choosing to release equity from your property is a serious decision, and one you should consider carefully. If you are thinking about an equity release scheme, you should contact an adviser who can discuss your circumstances with you and help you determine whether equity release is right for you.
Please contact The Mortgage Centres today if you have any questions or would like to discuss your options with one of our experienced brokers. And, if you decide to go ahead, we will canvass the whole of the market, including high street and smaller specialist providers, to find the very best deal for you.
We are regulated by the Financial Conduct Authority and we always ensure that we act in the best interests of our customers and treat them fairly. We will give you a personalised illustration and a suitability report once we have discussed your circumstances in detail and you are happy with our advice.
You will also need to seek independent legal advice when taking out Equity Release and if you do not have a solicitor who is qualified to deal with this type of scheme, we are happy to recommend one to you and also to liaise with them where necessary.