Wondering how equity release works and why people say it’s so simple and effective? We’ll explain everything you need to know right here.
Should I Release Equity?
The question you need to ask yourself is this: am I struggling to find extra cash? Another good question is: how old am I?
If you’re older than 55 and struggling to find the cash you need, then equity release is a good option for you. You might also be considering equity release as a means to a more comfortable or luxurious retirement. However, as with anything in life, it’s always good to view the full scope of things before making rash decisions.
Adverts may be selling equity release as the next best thing, however, it’s not for everybody. Let’s run through everything you need to know about equity release, including how it works to help you decide whether it’s for you or not.
Is It A Good Idea?
As mentioned before, it’s a good idea if you’re over the age of 55, need some cash, and your current finances allow taking out a loan in this way. It all depends on your circumstances, wants, and needs.
For example, equity release is for you if:
- Your current savings are not enough to sustain you throughout your retirement
- You don’t want to downsize to a smaller home.
- It doesn’t bother you that your heirs will inherit less.
- An expert advised you to take out an equity release plan.
These are different circumstances and instances where equity release is a good idea for you. However, there are always two sides to every story.
For some, it may not be a good idea:
- If you can get extra retirement income elsewhere; maybe you have other assets etc.
- If you have the opportunity to downsize and release extra money in that way.
- If you want to keep the inheritance due to your heirs and preserve as much of your estate as possible.
- An expert has advised you not to take out an equity release plan.
In these instances, it’s not a good idea. Let’s look at some alternatives to equity release.
We’ve mentioned downsizing from your current home to a smaller home as a way to release some extra cash.
So, how about moving to a more affordable home?
Moving to a more affordable home allows you to ‘downsize’ while releasing some money from the sale of your current property. It’s usually the first thing people think about, rather than equity release.
Let me tell you something:
Downsizing is a good option, but it isn’t for everyone. It involves other costs that you need to consider, such as estate agent costs, moving charges and Stamp Duty Land Tax.
If the new property you move to isn’t worth as much, you might lose some property growth potential. So it seems that equity release is still in the running as one of the best options, even when buying a new house. It could be in your favour to get a little boost from a lifetime mortgage because it’s very cost-effective.
Say your children have left for college, leaving you and your partner with all these extra rooms. Downsizing is then totally possible without putting your family under stress. Downsizing in this example will also help decrease your household maintenance if you think about it. It’s a win-win!
And listen to this…
Downsizing had become so popular that 4 million people nearing 55 are planning on moving into a smaller property when they retire. I mean, it just makes sense, doesn’t it?
When Will Downsizing Work?
- When your property starts feeling too big
- When it needs too much maintenance as an older property, and it costs you too much money
- If the house is costing you too much to run
- If you want to immigrate
- If you want to move closer to your family or friends
While moving house is excellent for some homeowners, few could afford to retire by downsizing alone. All the extra costs and emotions that factor into moving house can be very overwhelming.
Other Costs You Should Think About:
- Estate agent charges when selling your home
- Legal charges when transferring ownership of your new home
- Moving your belongings
- Revamping your new home to your liking
- Buying new furniture which fit into your new home more comfortably
- Stamp duty charges
- The emotional and mental toll that you’ll experience as a result of the move
Even though multiple people are taking out equity release plans for some extra vacation or home-renovation cash – it’s not something for everyone. Neither is downsizing for that matter. It all depends on your preference and circumstances.
But let me tell you something:
However nice it might be to have financial freedom, it’s vital to weigh up all your options and assess what’ll be best for your future and the future of your family.
You Can Sell Your Assets
If you have other assets, you could always sell. Which you choose to sell will depend on how much money you need. Maybe you could also release some funds from your assets? Either way, it’s an excellent alternative to equity release on your home. Many assets might be able to raise extra money for you, so you should look into it.
For the most part, a person’s home is their biggest asset. But it doesn’t have to be the only one you can choose to release some money from.
You might also have some personal belongings you no longer use or need. Have you considered selling them? Well, you can! These can be small things in your home that you can quickly sell or more essential items to market online or with the help of specialists.
That being said…
Don’t sell valuable family heirlooms if you don’t have to.
We’ve talked a lot about equity release and whether it’s a good idea or not. But what exactly is equity release?
What Is Equity Release?
Equity release refers to accessing your money tied up in your house. However, you can only gain access once you’re 55 years or older. You can get the capital value of your home as a lump sum or a regular income based on the house’s value. You’ll only need to repay the money you accessed at a later stage.
Ask yourself this:
Have you been struggling to meet your lifestyle needs, or you need some extra money to cater to your lifelong dreams? Are you a UK resident, over 55 years, and own a home worth more than £70,000?
If yes, head on over to your financial adviser and start making plans towards taking out an equity release plan. Equity release allows homeowners to achieve their future financial desires by unlocking the equity tied up in their property.
As we’ve said before, it’s a secure way to release money that you’ll pay when you pass away or move into residential care. Its process is also straightforward and easy to understand. That said, here’s a comprehensive guide on the equity release application process.
What you can expect:
Typically, the equity release process can take between 4 and 6 weeks. However, there have been cases completed in just 18 days. This affords you peace of mind and the ability to use your equity release funds sooner.
How Does It Work?
Want to know more details? There are two kinds of equity release options for you to choose from.
1. Lifetime Mortgage
The first type of equity release is a lifetime mortgage. This type lets you take out a mortgage on your home if it’s your primary residence. However, you’ll remain the owner. You’ll also have the option to ringfence part of your property for your family to inherit.
You can also make repayments or let the interest build up over time. Better yet, if there’s any loan amount or any accrued interest, it’ll be paid back when you pass away or need long-term medical care.
2. Home Reversion
The second type is a home reversion, which means you sell some of your property or your whole property. You can sell it to someone like a home reversion provider, and they’ll pay you a lump sum for it, but they can also pay you in regular instalments. It’s your choice.
The bottom line:
Certain factors will ultimately affect the time scale of your equity release process, placing a delay on your application and hindering a timorous release of funds.
What Are The Core Factors In Equity Release Process?
Naturally, you’ll want to allow your application to progress as quickly as possible. What factors will ensure your application for equity release moves as fast as possible?
The core factors that will affect the equity release process are:
1. Type Of Property
Some equity release providers or lenders have specifications about your property. Some might deny an equity release plan if your property has a flat roof, for example, or if it’s in a high-flood area.
Some might even have a problem with where the property is situated, for example, if it’s close to a commercial property or construction not built according to the right standards. If your property is also not made according to regulations, you might find your application being rejected.
2. The Lender Involved
As mentioned before, lenders differ from one another. You’ll need to research the different lenders out there to determine their requirements, terms, and conditions before deciding on one. Some lenders don’t offer any negative equity guarantee, which is quite essential, for example.
What that all about?
This guarantee protects you so that you don’t pay more than the value of your property to your equity release provider. However, when your lifetime mortgage plan comes to an end, the lender will sell your house and settle the loan amount plus any interest.
If the estate market value decreases and the sale proceeds can’t repay your loan, the lender won’t request the balance to be repaid from your estate or by your heirs. Since you’ll be protected by the ‘no negative equity guarantee’, they aren’t permitted to do so. Therefore, consider only equity release firms that will offer you this protection.
3. The Efficiency Of Your Solicitor
Ensure that your solicitor1 is a professional that is familiar with the equity release process. A solicitor that has experience with the equity release process will ensure that it moves along faster.
You might be wondering why we’re mentioning these three factors…
Being aware of these core factors is essential. Your equity release adviser, alongside a case management team, expertly coordinates all the parties involved to ensure your equity release process runs as fast and seamlessly as possible.
With the introduction of online case management, timescales to complete an equity release process have shrunk considerably. The industry has progressed to the point that there is less paperwork, post, and even your signature is only required on a few documents.
Due to this progression, a more competitive market has evolved, and to navigate this successfully, it’s now within the lender’s best interests to become more efficient and keep up with the changing times.
How Much Does Equity Release Cost?
At this point, you might be wondering about all the costs involved in equity release. Well, the good news is that, they’re at an all-time low, below 3%. Some providers even offer rates as low as 2.25%! That’s incredible!
Let me tell you something:
You’ll end up paying more if you don’t pay off your loan, of course, or if you’re choosing to compound interest monthly. Wondering what equity release costs you’ll have to pay? If you’ve ever taken out a mortgage on your home, it’ll be similar to those costs.
However, there may be a few extra fees you’ll need to pay. You’ll be paying for advice and application services, which are both mandatory. The initial costs you need to pay to access your equity release is dependent on your provider and the product/plan you choose.
Let’s pose the question again: “What are the fees involved in taking out an equity release plan?” The answer depends on your financial adviser, lender, and solicitor.
Let’s look at each of these individually:
1. Surveyor’s Valuation or Property Valuation Fees
Depending on your plan, you’ll be required to pay for a survey of your property. It’s one of the non-negotiable costs of equity release. This happens even before you are approved for equity release.
What does this mean for you?
The surveyor will come and look at your property to determine its value. The surveyor will send the valuation report to your lender. It’s then your choice if you want to accept the offer made by the lender based on that specific valuation.
2. Solicitors’ Fees
The Equity Release Council (ERC1) has specific that all providers equity release must follow. Their rules state that your solicitor needs to be independent of the lender’s solicitor. You also need to have a minimum of one face-to-face meeting with that solicitor.
3. Lender’s Application Fees
Once again, similar to a regular mortgage, you might need to pay an “application” or “admin” fee to the lender.
These fees generally cover legal and set-up costs. Depending on the lender and your recommended plan, the prices usually range between £0 to £695. Remember, that if you add it to your loan, it will accumulate compound interest.
What’s the Total Cost?
The estimated total cost is roughly £1,850. However, each application will be different. For example, some plans don’t require you to pay a lender’s application fee or a survey fee. It’s vital to speak to an expert equity release adviser so that you know beforehand what you’ll be paying.
Is Equity Release Safe?
It has become safer and safer over the years, thanks to the ERC and the FCA2 and the protocols they put in place to protect you.
You get instant cash when you need it at all-time low interest rates. You might also have had an increase in your home value that will give you more money to retire or cover all your long-term medical care costs.
The main downside is that you won’t be able to get your property’s full market value. Another pitfall is that you’ll have a decreased estate for your heirs to inherit.
The risks of a lifetime mortgage include owing more than you borrowed due to the compound interest applied. You can, however, choose to end your plan earlier. This will cost you early repayment charges.
The risks of home reversion include only receiving 60% of your home’s market value. Some people only receive 30% back. Another risk is that your equity release provider won’t allow you to move house once you’ve taken out a plan on your current property. To avoid such difficult situations, make sure you enquire with your provider before making a decision.
6 Tips On Equity Release
- Don’t loan the full amount at once, borrow in stages. It’s more cost-effective.
- Choose a company that’s a member of the ERC, i.e. an accredited company.
- Ask for professional advice, preferably from an independent financial adviser.
- Look out for the effects it will have on your benefits. You might lose some with equity release.
- Look at alternative options that would help you with some extra cash other than equity release.
- Keep your family in mind. Go with an equity plan that’s best for you and your heirs.
Do I Have Protection When Releasing Equity?
Yes, thanks to the ERC. To keep your finances safe and secure, the Equity Release Council has set up a code of conduct so that you can have peace of mind.
Who are they?
They’re an industry body taking care of everything equity release-related. It’s a self-regulated, non-profit organization. Starting as SHIP (or Safe Home Income Plans), they relaunched and redesigned themselves as the Equity Release Council in 2012.
Now, let’s look at their role in equity release:
- Their job is to tell you everything you need to know about equity release and all the products you can choose from.
- They’re there to protect and safeguard you throughout the process, and they also protect your finances.
- They spread the word about equity release being a form of income once you retire.
- They represent hundreds of firms and members within the equity release industry. These include advisers, lenders, solicitors, and surveyors.
Are you still asking yourself if equity release is safe? Well, to be honest, it’s much safer now than it used to be. Thanks to the Equity Release Council, you’re safer than ever. Their policies are specifically designed to protect and safeguard you.
The ERC also requires providers to adopt a No Negative Equity Guarantee, which is excellent! Why? This guarantee ensures that the mortgage amount plus accumulated interest will never be more than the value of your property. In other words, the homeowner is protected when the property market takes a turn for the worst as well as protects your estate and heirs from having to balance your loan after you’re gone.
Let me tell you something…
You’re also protected if your house depreciates or when your loan is more than what the property would sell for when the time comes to repay the loan.
But wait, there’s more.
The FCA is also there to protect you. Their job is to ensure your provider and advisor follow the rules to the T. So, you don’t have to worry. You’re in good hands when it comes to equity release.
The Equity Release Council Protect You From…
The Equity Release Council is there to help you see and avoid these equity release providers:
- Plan providers who don’t have a ‘no negative equity guarantee.’
- Lenders who aren’t members of the ERC.
- Providers who charge high-interest rates.
- Lenders who charge high repayments and who charge them early.
- Equity release firms that approve you or give you large loan amounts before they even analyze your circumstances.
All in all, you’re in safe hands.
How To Find Expert Advice?
Look for experts or professionals who are unbiased, independent, and experienced in the field of equity release. Advisers who are under the rules and regulations of the FCA are always the best choice. The FCA provides extra protection for you and your finances.
You’ll have to repay what you borrowed when you pass away or need permanent medical care.
Yes, you do need to repay your loan, plus any interest you’ve compounded. Usually, at the end of your mortgage, it’s also a good idea to make monthly repayments.
I think you’ll agree with me when I say that it’s REALLY hard to choose the best ABC with all the choices available.
After hundreds of hours of testing & reviewing, we have strong opinions about what makes the best ABC.
We highlight the pros, cons & features of the ABC.
The simple answer is yes. You can be refused to release equity from your property or house by a company or a provider. Even though providers have different criteria, most of them will agree on this.
There are a few reasons that this could happen to you, most of which has to do with the property or residence itself, and not the owner. Let’s take a look:
- A flat roof
- Proximity to a commercial property
- Non-standard construction
- Flood risk
- Single skin construction
- Ex-local authority
- Clutter inside the house
- Proximity to electricity
- Spray foam under the roof
Equity release is better than it used to be both in terms of regulations and costs. After reading about what equity release is, how it works, and how much it costs, you should have a better idea if it’s the right thing for you or not. However safe it may be to take out a plan; it might not necessarily be in your best interest. Make sure you do your research and feel free to ask us any further questions.