Equity Release Explained
Starting from the basics to the more advanced tips. Make yourself an expert in this topic.
Equity release basics
Is equity release a good idea?
How equity release works
Transferring to equity release
Equity release types
Equity release calculators
Frequently Asked Questions
Looking for some quick answers? Check our most commonly asked questions.
The use of an equity release scheme will reduce the value of your estate. You should speak to your financial adviser if you are considering using equity release for this purpose.
Before taking out an equity release plan, you should check what the alternatives are. For instance, you may have other investments, savings or assets to draw on, or you may wish to continue some form of paid work. You could downsize to a smaller property or one of lower value – perhaps by moving to a different part of the UK where house prices are cheaper.
Downsizing is likely to give you maximum value from your home, but you may decide that you do not want to leave your home or move away from family and friends and you should consider the cost of moving. You may also want to think about renting a room in your home, or taking a loan from family and/ or friends.
Ultimately you will need to weigh up all the alternatives and, along with help and advice from your financial adviser, decide whether any of these alternatives meet your requirements.
Equity release plans are not right for everyone and it is important that you fully consider your options and receive independent financial advice before making a decision. It is also important that, if you do decide to use an equity release product, you choose one that meets your needs.
Remember that taking an equity release plan is generally a long term option. However, there are flexible plans available that may fit your varying needs and some will allow you to repay in the future without any penalties. A financial adviser can help you to choose the plan that is right for you.
There are two main types of equity release: Lifetime Mortgages and Home Reversion plans. Both types of plan are regulated by the Financial Conduct Authority (FCA). By using an equity release product, a homeowner can draw a lump sum or regular smaller sums from the value of their home, while continuing to live in it.
A Lifetime Mortgage is a type of mortgage where you can choose to extract your funds in a single lump sum or in smaller amounts over time up to the maximum limit agreed with the plan provider. You can also elect to retain some of the value of your property as an inheritance for your family, meaning that you can benefit from releasing equity while ensuring you have something to pass on to your children.
You retain full ownership of your home and interest on the loan can be fixed or rolled up. The loan and the rolled-up interest is repaid by your estate when you either die or move into permanent long term care. If you are part of a couple, the repayment is not made until the last remaining person living in the home either dies or moves into permanent long term care. In other words, both you and your partner are free to live in your home for the rest of your lives. With some plans, you can make monthly interest repayments in part, or in full. That way, you can maintain the debt to the initial amount of the loan before interest. If you choose to make interest repayments, you still have the option to move to a roll-up arrangement at a later date if you wish. There are even some lenders who can offer you the option to pay some capital throughout the plan but always discuss details with your plan provider.
How much can be released is dependent on your age and the value of your property. Some providers may be able to offer larger sums to those with certain past or present medical conditions. Some providers may offer larger sums to those with certain past or present medical conditions, or even ‘lifestyle factors’ such as smoking habit.
Home Reversion Plan
A Home Reversion Plan also allows you to access all or part of the value of your property while retaining the right to remain in it, rent-free. With Home Reversion, the provider will purchase all or a part percentage of your house. You know precisely what portion of your property you have parted with and, equally, what has been ring-fenced for later use, possibly to leave in a Will. The percentage you retain in your property 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.
Again, depending on your age and medical conditions, you may be able to access more funds. You will be provided with a tax-free cash lump sum (or regular payments) and a lifetime lease, guaranteeing you the right to stay in your property rent-free for the rest of your life. There is no day to day interference and no restrictions in treating the house exactly as before; as a private home to live in.
Equity release is a way of releasing the wealth tied up in your property without having to sell it and move to another home. You can either borrow against the value of your home or sell all or part of it in exchange for a lump sum or a regular monthly income. Some plans give you the option to “drawdown” further equity (cash) at a later date, based on your requirements.
Equity release is designed to help older customers who either own their property outright or have relatively small mortgages left to pay. They may decide to “release equity” in their property – that is, take out a loan or sell part of the value of the property – knowing that they will not actually pay that money back to the lender (or reversion provider, in the case of a home reversion plan). The loan or reversion sum will be repaid at a future date when the property is sold.
No. Unless the lender agrees to leave the trust in place (and we are not currently aware of any lenders who will), the trust will have to be wound up prior to the equity release completing. The lender will require a first legal charge over the property, which is incompatible with the concept of a trust, where an agreement has been made to pass the equity in the property to the beneficiaries under the trust. Due to the nature of an equity release mortgage, lenders require properties to be free from encumbrances such as trusts and secured loans before you can complete. If your property has a trust on it and you want to arrange for this to be wound up, we strongly suggest that you seek independent financial and legal advice before doing so. The beneficiaries under the trust would usually also require separate, independent legal advice from you.
An equity release loan is a long-term contract and there are some aspects which a provider (lender) may need to review from time to time. Your adviser should explain to you when you take out an equity release plan that circumstances which apply at the time you take the plan out may not necessarily be the same some years down the line, and that you need to be aware of this. There are three specific areas which lenders may need to keep under review: they are portability, ability to make further withdrawals and the ability to make capital repayments. Looking at each one in turn:
- Portability: it is an Equity Release Council rule that you must be allowed to transfer (“port”) your plan to another property, should you wish to move. But you will need to make sure that your provider is satisfied that the property you wish to move to will represent adequate security for your loan. Providers need to keep their lending criteria under regular review – which means that a property which might have been acceptable at one point in time may not always be acceptable. So it’s important that you discuss the acceptability if any alternative property with your provider before committing yourself to buy it. If you don’t do this, you might find that your options are limited, and you could end up having to repay your loan, which could result in your having to pay substantial Early Repayment Charges.
- Cash Withdrawals/Further Advances: some providers allow further advances or cash withdrawals under a flexible ‘drawdown’ Lifetime Mortgage at their discretion. This means that future access to further cash sums is not absolutely certain. If your provider declines a request for further cash sums, and you wish to switch to a different provider in order to obtain more money, you will have to repay your original loan. As mentioned above, this could result in your having to pay substantial Early Repayment Charges.
- Capital Repayments: the option for customers to make ad-hoc capital repayments is fast becoming a popular feature of certain rolled-up interest Lifetime Mortgages. It’s up to each provider to decide whether it is able to accept such payments and, if so, how often and how large each payment might be. If you think you might wish to make capital repayments during the life of your equity release plan, you should discuss this with your adviser. In particular, you may wish to find out more about –
- whether your provider reserves the right to cancel the option of making capital repayments;
- whether your provider might restrict access to any Drawdown Cash Reserve for a stated period following receipt of a capital repayment; and
- how any capital repayment would be applied to your loan account if it has several constituent parts (i.e. an initial loan with further cash withdrawals, which may all have different interest rates).
To qualify for a Lifetime Mortgage you need to be aged 55 and over. If you are taking out the plan with your partner, then the age of the youngest borrower must be at least 55. For a Home Reversion Plan, you must be a minimum of 60 years old.
Timescales will vary from provider to provider. However, it usually takes 8-12 weeks from the day your application is received by the provider to the day your money is received by your solicitor.
If you still have an outstanding mortgage on your property you will need to pay it off in full, either by using some of the proceeds from the equity you release or from other funds. Once that is done, the rest of the money you release can be spent as you wish.