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Guide to Equity Release

Guide to Equity Release

Category: Retirement

Updated: 01/03/2017
First Published: 03/05/2012

Equity release plans can improve your finances in retirement, but should not be entered into lightly.

The plans allow you to unlock the money that's tied up in your home to provide a regular income or a lump sum payment. You can release part, or all, of the value of your home and continue to live there, usually without having to make any repayments.

How does equity release work?

"Equity" refers to the percentage of your home's value that you own. As you approach retirement it's more likely that you will have repaid your mortgage and will own your home outright.

If your retirement pot isn't very big, the money tied up in your property can be a tempting pool to tap into. There are two types of equity release plan, which work in very different ways:

  • Lifetime mortgages
  • Home reversion plans

Lifetime Mortgage

How it works

You borrow a percentage of the value of your home. With most plans, you make no regular repayments during the life of the loan, and interest is charged that increases the amount you owe. However, some lifetime mortgages now require a monthly repayment to be made during the term of the loan. The mortgage is repaid when you die, or when you sell the home to move into permanent residential care.

How the provider makes money

The lifetime mortgage lender makes money by charging interest. This interest is accrued throughout your lifetime, or paid monthly in some cases.

  • You get to stay in your home
  • You can take a lump sum or an income
  • You retain ownership of your home, allowing you to benefit from house price rises
  • Drawdown lifetime mortgages let you borrow the money when you need it, so you can save on interest
  • If you die soon after taking out the mortgage, you won't have accrued as much interest on your loan
  • Lifetime mortgages will erode any inheritance you leave
  • If house prices fall, you'll end up owing a greater proportion of your property's value
  • If you live long enough, the amount you owe could end up being 100% of your property's value
  • Younger borrowers can't borrow as much

Home Reversion Scheme

How it works

You sell your home (or part of your home) to the home reversion company. You get a lifetime lease that allows you to stay in your home. On death or sale of the property, the reversion company gets the share you originally sold.

How the provider makes money

The reversion company buys a stake at under market value, and then benefits from increases in house prices throughout your lifetime.

  • You get to stay in your home
  • You can take a lump sum or an income
  • You can leave a specific stake of your property as an inheritance
  • The percentage of your property you sell the reversion company remains the same - it doesn't increase as no interest is charged
  • You and the reversion company share in house price rises and falls
  • The reversion company buys a share of your property at under market value
  • If you die or have to sell your home soon after taking out a scheme, you will have sold a share of your home for less, without getting full benefit from the money you released

Are you eligible for an equity release scheme?

An equity release plan may be available if you:

  • Are 55 or over
  • Own your home
  • Have a very small, or no mortgage on your home

However, although most retired homeowners would be eligible for equity release, it's a massive decision - and one that needs to be considered with family and after taking financial/legal advice.

Things to think about and look out for…

Before entering any equity release plan, make sure you take legal and financial advice.

Inheritance. An equity release plan will affect the inheritance you leave behind. Depending on how much you release, and the type of plan you hold, your children or beneficiaries may not receive any financial legacy from the value of your property. It's important to discuss with anybody who stands to benefit from your inheritance - you may want to involve them in the process, too (a reputable adviser will strongly encourage this).

Spouse or partner. If you take equity release in your sole name (either because you meet someone after taking it out, or because your partner is younger), sometimes it may mean that your spouse or partner has to move out of the home when you die. Check the situation regarding this before entering into any agreement.

Benefit entitlement. Unlocking wealth from your home can have an impact on your current and future state benefit entitlements.

Negative equity guarantee. If you are considering the lifetime mortgage option, make sure your provider offers a negative equity guarantee. This means that the amount you owe can never exceed the value of your property.

Age. The younger you are, the less you will be able to release from your home. This is because you are likely to live longer. It's not pleasant, but you need to consider what would happen if you were to die soon after taking an equity release plan. Some plans offer a capital guarantee option if you die in the early years; however, this may reduce the amount of money you can release.

Fees. Almost all equity release mortgages will require you to pay valuation, legal and arrangement fees - so you'll need to have a certain amount of money available upfront.

Property construction. The materials your home is built from can affect whether you can release equity. If your home is timber frame, or a pre-fabricated construction, you may not be eligible.

If you have to move or go into care. Most modern plans will allow you to move home and take your equity release plan with you. However, if you're moving to a smaller property, you may have to repay part of what you borrowed/released. If you have to sell to move into retirement housing or a care home, the equity release plan will normally have to be repaid.

Alternatives to equity release

Equity release is just one option to help boost your income in retirement. There are alternatives...

  • Can you carry on working part time? There's nothing to say you have to stop when you reach your state retirement age.
  • Are your savings and investments working as hard as they can? Speak to a financial adviser to make sure you maximise your wealth.
  • Shop around before buying an annuity. Simply shopping around for the best, personalised annuity rate could substantially improve your retirement income.
  • Make sure you get all the benefits you're entitled to. You've paid your stamp all your working life. Check that you're getting all the state benefits you're entitled to. Check out the Online benefits calculator from Age UK.
  • Downsize your home. Another way to release equity is simply to move to a smaller property. You'd release some money to use in retirement, not have a third party owning a portion of your home, and be able to leave an inheritance too.

What next?

Equity release service provided by MCB Financial Services Limited

Compare annuities online

Online benefits calculator from Age UK

More retirement guides

Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.