What's an Equity Release Mortgage & How Does It Work?

How Does Equity Release Work in Jan 2022?

Contributors: Nicola Date, Katherine Read. Edited by Rachel Wait & Reviewed by Francis Hui

Equity Release Refers to a Range of Products Letting You Access the Equity (Cash) Tied up in Your Home. You Can Take the Money You Release as a Lump Sum, in Several Smaller Amounts or as a Combination of Both.

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What’s Equity Release & How Does It Work?

Don’t miss out on the hottest UK retirement financial opportunity in Jan 2022!

With over £3.46bn being unlocked through equity release mortgages in 2021 alone, there’s no wonder that everyone’s talking about these exciting later-life mortgage products.

Could you be the next new equity release customer to unlock the value of your property?

Through this article, we’ll help you learn:

  • What’s an equity release mortgage?
  • How does it work when you release money?
  • Equity release plan qualification criteria.
  • What’s the difference between a lifetime mortgage and a home reversion plan.
  • How an equity release loan works compared to a regular mortgage.
  • What is the minimum age for equity release?

And so much more.

At EveryInvestor, we’re committed to bringing you the latest equity release advice available in Jan 2022, to help you with your financial situation in retirement. Therefore, we’ve spent hours deep in research, constantly keeping this page up-to-date and on-trend.

Are you wondering what equity release news that we’ve found? Find out right now!

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What is Equity Release?

Equity release is a term used for a series of later-life mortgages that allow you to unlock the cash tied into the value of your home, while still being granted the opportunity to live there until you die or move into a long-term care home. From the minimum age of 55, you can unlock the tax-free cash in a lump sum, drawdown, a combination of both, or by receiving a monthly salary.

The 2 main types of these products are a lifetime mortgage and a home reversion plan. No monthly payments are required when you release equity. Instead, the loan, and accrued compound interest, are eventually repaid, usually from the sale of your property.

How Does an Equity Release Work?

Equity release mortgages work by being a loan secured against your primary residence. These plans are intended to last throughout the remainder of your life, and the lender only receives their share of the value of your home at the end of the loan period. You could incur an early repayment charge if you wish to end your lifetime mortgage equity release product early. If you want to release equity, you’ll need to use some of the cash to pay off your existing mortgage.

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What Are the Main Types of Equity Release?

The main ways to release equity are with a lifetime mortgage and a home reversion scheme, with lifetime mortgages being the most popular of the two. An independent financial adviser will help you determine the types of equity release that may be best for you to use to unlock the value of your home. It’s best to seek financial advice on a lifetime mortgage and a home reversion.

What is a Lifetime Mortgage?

A lifetime mortgage is the most common form of equity release plan that allows you to unlock the equity tied into your property through a lump sum, drawdown, both, or a monthly salary if you’re aged 55 or older. With a lifetime mortgage, you release cash, while retaining ownership of your property. While some lifetime mortgages allow you to pay back the interest and some of the loan, both are usually repaid from the sale of your home when you die or move to long-term care. There are a number of reputable lenders that offer lifetime mortgages in the UK.

Full Article: What’s a Lifetime Mortgage & How Does It Work in Jan 2022?

What is a Home Reversion Scheme?

With a home reversion plan, you’ll sell all or a portion of your home to your lender below market value, in exchange for unlocking tax-free cash from your home. You’ll do so while still living in your home, rent-free until you pass away or go to long-term care. When your home is sold, your lender will receive the income from their percentage of the property. These plans are usually available for homeowners aged 60 and older.

Discover more: What’s a home reversion scheme?

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Are Equity Release Products Flexible?

Yes, equity release products are flexible. As years have gone by, products have become better and better.

Multiple Options

You can choose to unlock your cash in one lump sum, which is one big amount, a drawdown facility, where you only pay interest on the money you release, and regular payments, which serve as a retirement income.

Release More Cash

If there’s still cash tied into your property, you can unlock further cash with some equity release products.

Unlimited Uses

Futhermore, equity release enables you to use the money in any way you wish.

Despite all this flexibility, you must still weigh up your options before deciding if equity release is right for your circumstances.

Who Qualifies for Equity Release & Lifetime Mortgages?

To qualify for an equity release plan, you and your partner (if you opt for a joint plan) must be aged 55 or older, and you’ll need to own a home in the UK that’s valued at least at £70,000 or more. Finally, you can only have a small or no mortgage left to pay on your home. If there is a remaining mortgage, you’ll need to use some of the cash you unlock to cover this expense. Seek financial advice before you consider unlocking a lump sum of cash.

How Do You Get the Best Equity Release Advice?

To get the best equity release scheme advice, opt for a whole market financial adviser. A whole market equity release adviser has access to all plans available in the industry, helping you find the best possible equity release options for you and your family. Furthermore, your adviser will talk you through your alternatives as equity release might not be your best option.

Every type of equity release mustn’t be taken lightly as it’s intended for life. If you end your plan early, you usually have to cover an early repayment charge.

Take note: It’s compulsory to get financial advice if you’re opting for one of these plans. In addition, you will receive independent legal advice through the process.

The scoop: Getting the Best Equity Release Advice in Jan 2022

Setting Up A Power of Attorney – What You Need to Know

What Are the Costs Involved with Equity Release?

The costs involved with equity release include your compounded interest, arrangement fees, and completion fees, advice fees, solicitor fees, and the cost of a detailed home valuation. Some lenders offer free valuations, advice, and zero application and completion fees, with the industry becoming more competitive than ever before.

Here’s more: The Costs of Releasing Equity Explained in Jan 2022

Is Equity Release Safe?

Yes, equity release is safe as the industry is fully regulated by the Equity Release Council2 and Financial Conduct Authority (FCA).3 A decent equity release provider will be on the financial services register. While the FCA oversees the entire financial industry in the UK, the Equity Release Council was specifically created to focus on this industry, ridding it of unfair practices and corrupt lenders. Equity Release Council members must abide by a strict set of rules and code of conduct. Both a lifetime mortgage and a home reversion plan are overseen by the Council.

Learn now: What is the Equity Release Council’s Role?

What's the Pension Age

Can I Still Pass On an Inheritance after Receiving an Equity Release Tax-Free Lump Sum?

Yes, you can still pass on an inheritance after releasing equity from your estate. While your inheritance will be reduced, through the Equity Release Council’s inheritance protection guarantee, you can set aside a portion of your estate that’s kept for your heirs. That way, the lender can’t touch that portion of income, even if your loan and interest exceed the amount of remaining equity that’s tied into your property.

How Do I Determine How Much Equity Is Available through an Equity Release Product?

When releasing equity, your lifetime mortgage and home reversion equity release product provider will consider your age, the value of your property, and if you opt for an enhanced lifetime mortgage, the condition of your health.

Pension Management Charges

How Long Does the Equity Release Process Take?

The equity release process will usually take between 4 and 12 weeks. This period will depend on the lender’s criteria and the complication of your case. Your financial adviser will assist you throughout the entire process.

Equity Release Uses

Great news! You can use your equity release loan in any way you wish. You can even opt to climb the property ladder by buying a new property while releasing equity from your main residents. Furthermore, you can make home improvements, buy a dream property, or hire help to avoid long-term care. Before making any future plans, speak to an equity release adviser

Are Investment ISAs Protected by the Financial Services Compensation Scheme

What Are the Advantages & Disadvantages of Equity Release?

The biggest advantage of equity release is that you’ll have the opportunity to unlock tax-free cash from your main residence. The biggest disadvantage of equity release is that you’ll reduce the amount of inheritance that you leave for your heirs.

Here are further details!

Equity Release Advantages

  • You can supplement your income in retirement.
  • The cash you unlock is tax-free.
  • You can use the equity in any way you wish.
  • You can live in your property, rent-free, for the rest of your life.
  • Interest rates are currently lower than ever.
  • Your family can’t go into negative equity with the ‘no negative equity guarantee’.

Equity Release Disadvantages

  • Equity release will reduce your inheritance.
  • These products can impact your qualification for means-tested benefits.
  • If you end your plan early, you might incur early repayment charges.
  • There are costs involved with equity release.
  • Your family won’t benefit from the full value when the property is sold.

Full article: Is Equity Release a Good Idea in Jan 2022?

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What Are the Alternatives to Equity Release?

The most common alternatives to equity release include downsizing, cutting down costs, or using your savings or income from other investments.

Here’s more information:

  • Downsize – Moving to a smaller or cheaper property will allow you to take full advantage of the sale of your home, and you’ll likely reduce your home and garden maintenance costs.
  • Cut your equity release cost – It’s always wise to review your monthly budget to determine where you might have the opportunity to reduce your monthly costs. Perhaps you have unnecessary subscriptions that you could cancel.  
  • Use your savings – If you have any money in savings or investments, it’s generally wise to use this before unlocking the cash tied into your home. Your best bet is to chat this through with your financial adviser.
  • Get a part-time job – While you may be retired, a part-time job in your local community might be a great way to keep you active during your golden years. However, bear in mind that if your health condition reduces with age, a job might not be a practical long-term solution.
  • Start a business – Have you always wanted to start or invest in a business? While this can be stressful, it can also mean a less hands-on way of supplementing your income, if you have trusted individuals to help you run it.
  • Take out a loan – However, keep in mind that you’ll likely need to make monthly repayments with a loan. Additionally, it would be best to compare the interest rates of the loan with those you can achieve through an equity release mortgage.
  • Ask for help from friends or family – While it may not always be easy to ask, your friends or family may be honoured to help you financially in your retirement year. However, it’s essential to clarify if the money received is a gift or a loan, to avoid awkwardness later.
  • Sell valuable assets – Do you have expensive cars, jewelry, or trinkets? You could make a ton of income by selling these off.
  • Renting out a room4 You can do so through the government’s rent a room scheme, or via popular websites like Airbnb.
  • Local grants or means-tested benefits5If you qualify for grants, means-tested benefits, or a pension pot, this income could be enough to supplement your retirement income, especially if you cut costs.
  • Taking out a retirement interest-only mortgage – Like an equity release mortgage, a retirement interest-only mortgage is designed for older homeowners. It allows you to unlock the cash tied into your estate. The difference is that you’re obligated to repay the interest monthly and can risk foreclosure if you fail to do so.

Discover more: 13 Equity Release Alternatives You Need to Know

editorial integrity

How Does an Equity Release Plan Affect My Benefits?

You may lose access to means-tested state assistance and your public pension credit if you take equity release. It can also influence any money you receive for care services. Your income and savings are used by local authorities and the government to determine whether or not you qualify for means-tested state benefits, and your equity release cash is seen as part of that income.

Got Questions About an Equity Release Mortgage?

Could This Type of Scheme Help Me Reduce Any Inheritance Tax?

Is Equity Release Right for Me?

Are You Able to Take Out an Equity Release Mortgage on a Property That Has a Trust Registered Against It?

How Does Equity Release Get Repaid?

What Can Equity Release Cash Be Used For?

Where Will I Live With an Equity Release Mortgage?

In Conclusion

With equity release being more popular than ever in [SEO-DATE], now’s the best time to unlock one of these plans through a lifetime mortgage or home reversion provider. Your best bet is to get in touch with a whole market financial adviser to guide you through the equity release process. You’ll also require legal advice before unlocking your cash.

Are you wondering how much wealth is tied into your property value? Try out our FREE equity release calculator right now!

How Much Can You Release?

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Editorial Note: This content has been independently collected by the EveryInvestor advisor team and is offered on a non-advised basis. EveryInvestor may earn a commission on sales made from partner links on this page, but that doesn’t affect our editors’ opinions or evaluations. Learn more about our editorial guidelines.
  1. HOUSING FINANCE AND MONETARY POLICY 2012 Journal of the European Economic Association Volume: 11, pp 101-122 DOI: 10.1111/J.1542-4774.2012.01095.X Alessandro Calza 1,Tommaso Monacelli 2,Livio Stracca 1. 12345
  2. Housing Finance and Monetary Policy 2009 Social Science Research Network Alessandro Calza 1,Tommaso Monacelli 2,Livio Stracca 1 1 European Central Bank ,2 Bocconi University 1
  3. “Equity release records broken as unprecedented Q4 activity sees 2017 lending reach £3.06bn with annual growth at a 15-year high”. Equity Release Council. 23 January 2018. Retrieved 5 August 2018.1
  4. “Consultation Paper CP 13/18” (PDF). Bank of England. 2 July 2018. Retrieved 5 August 2018.1
  5. “Reverse Mortgages: Report to Congress” (PDF). Consumer Financial Protection Bureau. Retrieved 1 January 2014.1
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Nicola is a financial writer for EveryInvestor and is passionate about the opportunities that equity release can open up for homeowners. Her extensive business experience and deep understanding of the industry means that she’s always up-to-date with the latest developments.