Are you considering equity release? Find out how to tap into the hidden wealth in your home using our equity release guide. This equity release guide delves into the intricacies of releasing home equity and will help you decide if it’s the right option for you.
If you’ve recently retired or are aiming to do so in the next few years, you may be short on the cash you need to make your dream retirement a reality. From kitchen and bathroom upgrades to family commitments and holidays, equity release can deliver the cold-hard-cash you need to make things happen.
But What Is Equity Release?
Equity release refers to the action of unlocking the wealth tied up in your home. You’ll take out a long-term property-based loan (also called a later life loan) that’ll be repaid in full once you pass away or move into a long-term care facility.
Tip: With any equity release scheme, you don’t need to worry about what will happen to your partner once you’re no longer around. In the case of a couple, the property will only be sold once the last person passes on or goes into long-term care.
And there’s more:
Whether in the form of a lump-sum or smaller instalments (referred to as a drawdown), the cash that you unlock will be tax-free. This is because when you release equity, there’s no capital gain (which would have to be above the set threshold). After all, you’re borrowing money against your home.
Tip: Should you invest your money, any interest earned may be subject to tax so always be clear about your intentions when speaking to an advisor or solicitor.
Also, most equity release products will not require you to make any instalments during your lifetime.
An Equity Release Can Be Used To:
- Consolidate your debts
- Overcome pension shortfalls
- Purchase expensive items such as caravans and vehicles
- Increase your standard of living during retirement
- Fund holidays and other leisure activities
- Make home improvements
- Assist a loved one financially
- Provide an early inheritance to your loved ones
- Repay your interest-only mortgage
Equity Release Products
There are two primary equity release products available, both of which will be further tailored to suit your specific circumstances and needs.
Let’s take a look at these options:
1. Releasing Home Equity with A Lifetime Mortgage
Lifetime mortgages offer you a large loan of up to 60% of the value of your home. Since it’s secured against your home, it’s similar to a regular mortgage. Interest will be added to the capital loan amount every month. Lifetime mortgages are the most common type of equity release in the UK as they include a no negative guarantee and a host of additional benefits.
What does this mean?
It means that you (or your estate) won’t owe a total that exceeds the value of your property. A no negative guarantee ensures your estate, and therefore, your loved ones will not incur any debt.
Want to know the best part?
You don’t need to make any instalments towards the loan (unless you choose a specific drawdown plan that allows this!) and you retain full ownership of your home. You can also stay-on in your home for as long as you want to or until you go into long-term care.
The Standard Equity Release Criteria Is:
To be eligible for this type of equity release the property must be your primary residence, you must be 55+ years and have no outstanding mortgages on the property.
Tip: Consider opting for a drawdown so that you’re only charged interest on the amount that you’ve used.
2. Home Reversion Schemes
This product allows you to determine how much of the value of your property you want to release. A provider will purchase a set share of your property (which will usually be far below its actual value) of up to 100%.
And there’s more:
You’ll then be offered a lifetime lease to live on the property and can live in it until you pass on, go into long-term care or move out. Home reversion schemes are only available to people aged 65 and older.
Tip: If you’re living with a medical condition that’ll likely decrease your life expectancy, you may be able to access options with much more favourable terms.
Optional Equity Release Safety Features
Since equity release can pose risks to you and your estate, the provider has a couple of optional safety features. One of these is inheritance protection that allows you to ring-fence a portion of your home’s value to make sure that it’ll be available to your beneficiaries.
But, be careful:
Another option is to opt for a product that includes downsizing protection. Downsizing protection1 will allow you to sell your home and pay off the loan without penalties if you want to downsize.
Tip: In addition to considering your current financial circumstances and immediate needs, you must consider your possible future needs.
To summarise, the benefits of equity release include:
- Access to a large sum of cash
- You can remain in your home for the remainder of your life or until you go into long-term care
- You can move to a new home should you so wish to
- You can safeguard a portion of the value of your property if you want to ensure your beneficiaries receive a particular inheritance
- You can choose to receive the loan in one large lump-sum or a small pay-out followed by regular pay-outs made from your cash reserve
- No monthly repayments are required
- The interest rate is fixed
- With a no negative guarantee, you don’t have to worry that your estate will incur any debt exceeding the value of the property
While there are many benefits to equity release, there are some risks that you need to consider. These include leaving behind a smaller inheritance and a reduction in the welfare benefits2 you’ll be entitled to.
Here’s a summary of the disadvantages of equity release:
- Leaving behind no or a reduced inheritance to your loves ones
- With interest being compounded, the amount your estate will owe to the provider will build up quickly (and substantially).
- A small advance on your home’s value will require you to sell a large share of your property to the provider (in the case of home reversion schemes).
- The interest rates will be higher than those you’d access by taking out a traditional mortgage.
- Once you’ve taken on a loan, it will be costly to back out, with some providers charging you up to 25% for early repayment.
- If you opt for a home reversion scheme and the value of your property increases, it’s the provider that will benefit from the rise in its share of your property. Your estate will, therefore, not receive the full market value for the percentage sold.
- Your estate may be affected by negative inflation in property prices
Tip: To ensure that equity release is the right option for you, seek financial advice from an independent provider.
Risks of Equity Release
In addition to the above disadvantages, there are also risks involved with equity release. This includes receiving far less for your home than its market value and owing double the capital loan amount (assuming an interest of 5% over 15 years).
Let me tell you something:
Equity release may also affect your right to receive benefits (precisely benefits that require a means test). If you decide to move house, later on, you may struggle to do so if your provider disapproves of the new residence. If you want to pull out of the agreement, you may be liable to pay cancellation fees.
How Much Will Equity Release Cost?
Despite all of its significant advantages, equity release does not come cheap. For instance, if you opt for a home reversion scheme and wish to access a mere 20% of your home’s value, you may have to surrender up to 70% of your property.
Lifetime mortgages are more affordable, but since the interest will be rolled over, the total amount owed will increase substantially over time. While typical equity release rates are around 5%, in a bid to outcompete one another, competitors may offer rates as low as 2.55%!
Getting an Equity Release Quote
To find out how much you can release, you can look at the property prices in your area or speak to a real estate agent. You can then use an online equity release calculator to help you determine how much you could release.
This is the most important step to take:
Most calculators only require the value of your property and your age to calculate the maximum and minimum equity release amounts. Another great option is to use a rate comparison site and look at the most competitive equity release rates. If you’d like a formal equity release quote, you should speak to a financial advisor.
What Affects the Interest Rate You’re Offered?
There are many factors that an equity release provider will take into account when calculating the interest you’ll be charged on your equity release. This can include things such as current market standards, your age, and your health.
Let’s take a closer look, shall we?
How your equity release interest rate is determined:
- Current market rates
- The value of your property
- How much you’d like to borrow
- Your age
- Your overall health and whether any conditions will reduce your life expectancy
- The type of equity release product you’re going for
- The features specific to your chosen product
Tip: Since interest rolls up and is compounded, the amount you owe will increase substantially over time.
Here are some additional costs that come along with equity release:
- You’ll have to pay for independent financial advice before releasing equity
- Establishment fees charged by your provider can cost up to £3,000
- Various legal costs to ensure you’re the rightful and sole owner of the property
- Property registry costs for those who purchased their pomes before the 1980s
The 6-Step Equity Release Process
- If you’ve decided you want to go ahead and release equity, you must consult with a financial advisor who will review your finances, needs, circumstances, and alternative options. You can find independent advisors on the Equity Release Council‘s website. While you’re there, you can also select a registered solicitor who you’ll have to appoint to handle the legal aspects of equity release.
- Once you’ve met with the adviser and have determined that equity release is the best option for you, you’ll need to complete an application, and pay specific establishment fees.
- Your equity release company will conduct a valuation and survey of your home, which will be forwarded to your solicitor.
- The provider will then send you a loan offer based on the valuation and survey and your requirements, and you must then review this with your solicitor before signing.
- Finally, the provider will run some Deeds and registry checks before approving the funds’ released by your solicitor.
- Once you’ve been approved, it’ll generally take between 1 and 2 weeks before receiving your equity release pay-out. Any delays in the process will likely be legal or administrative.
Tip: It’s always best to involve your family in the decision-making process to ensure that you end up making the best possible choice for you.
Alternatives to Equity Release
Since equity release can be quite a costly option to access cash, you may want to consider a handful of alternative options. One of the most cost-effective alternatives to releasing equity is trading down or downsizing. Trading down simply means that you sell your home and use the proceeds to pay off your mortgage and purchase a smaller, more affordable property.
If you’re not keen on moving out of your home, you may want to consider other options offered by lenders. This includes retirement interest-only mortgages and remortgaging.
Tip: Other alternatives to equity release are to use your savings or any available pension pay-outs, to apply for benefits or a grant or to ask a family member for help.
What are Retirement Interest-Only Mortgages?
And there are differences you need to take into account:
Unlike with lifetime mortgages and home reversion schemes, you’ll have to make monthly repayments. These repayments will include only interest which means that the capital loan sum remains unchanged.
And here’s the main advantage:
This is an excellent option for you if you want to safeguard an inheritance. This is only an option for those that can make the required repayments on an ongoing basis.
Remortgaging As an Alternative to Equity Release
If you have a stable income, you may want to consider remortgaging. Most traditional mortgages have interest rates lower than those offered by equity release schemes; you’ll likely get a better deal.
Tip: If the value of your property has increased, your equity has too! This means that you can access additional cash over and above what you’ve paid off.
How Equity Release Is Regulated
The Equity Release Council (ERC) currently regulates the industry and ensures that consumers are treated fairly. They’ll make sure you have your needs and individual circumstances (both financial and other) taken into account when receiving advice and equity release services from providers.
They’re a non-profit organisation that set, implement, and enforce rules and principles that’ll protect you when you release equity from your home.
Minimum standards set by the ERC:
- Lifetime mortgage rates must be fixed or capped (if variable)
- Homeowners are entitled to a lifetime lease (rent-free)
- You may move provided that your new residence will meet your provider’s standards
- All equity release products must include a no negative guarantee (discussed above)
Equity Release Advisory Services
All members registered as advisers with the Equity Release Council are required to go through a 24-point checklist4 with you to ensure that you fully understand what equity release is and what its associated benefits and risks are.
Advisers must take a customer-centric approach when aiding you in determining whether or not equity release is the right option for you. This includes determining whether or not you’re eligible for benefits, have a valid will and budget, and that you’ve been screened for any factors that make you more vulnerable such as declining health, a recent divorce or emotional and mental problems.
Let me tell you something else:
All these measures are put in place to ensure your best interests are carefully considered.
Tip: Always choose an adviser registered with the Equity Release Council to benefit from the scores of safety measures built into their screening process.
You’ll have to pay back the money you borrow, but only when you die or need permanent medical care.
It’s a great idea of your financial situation allows it and if you require quick cash at low interest.
Equity release is when you sell part or the whole of your home to a provider who then loans you that value in cash. You’ll need to repay it in the future.
Yes, you need to pay it back because it’s a kind of loan.
Equity release is a great option to get money quickly, while not moving out of your home. With the current low interest rate, it’s a great option. With the ERC there to protect you, it also no longer carries the risks that it once did.
Feel free to contact us for any further questions.