Equity release is a big decision. It’s important that you understand the key terms and features of this type of financial product so that you fully understand what you’re entering into. Ideally you should consult a financial adviser, as well as discussing your plans with your family or anyone who would be a beneficiary of your estate.
The Moneyfacts Equity Release Advice Service, provided by Just Retirement Solutions Limited, will help you decide if equity release is right for you.
To help you understand some of the jargon used, take a look at this page.
Jump to: Annuity Downsize Drawdown Lifetime Mortgage Early Repayment Charge Equity Equity Release Council Equity Release Plan ERC Estate Home Reversion Income Inheritance Protection Guarantee Inheritance Tax Joint Policyholder Lifetime Mortgage Loan-to-value LTV Lump Sum No Negative Equity Guarantee Portable Rate Compounds Reversion Company
An annuity is a type of financial product that pays you an income for the rest of your life.
To downsize means you sell your home to buy a smaller one, or one that is of lower value. By downsizing, you could release some of the money tied up in your home.
A drawdown lifetime mortgage is a type of lifetime mortgage that allows you to release money as and when you need it, up to an agreed limit. The mortgage is secured against your home.
The advantage of a drawdown lifetime mortgage is that interest only begins being charged once the money is released. However, the amount you owe will continue to grow as interest is applied on the amount borrowed and on the interest already accrued over the long term.
The lifetime mortgage is repaid when you or the last surviving borrower living in the property dies or moves into permanent long-term care.
If you choose to, you can repay your lifetime mortgage at any time (either in cash, or by selling your home). However, if you do there may be a fee to pay in addition to paying back the money you released – this is known as an early repayment charge.
There isn’t an early repayment charge with a home reversion plan because you will have sold part of your home to a home reversion provider. If you wanted to buy back the share of the property you sold, you would have to do so at the current full market value.
The amount (or percentage) of your home that you own, above any mortgage that may be outstanding on the property.
The Equity Release Council is the industry body for the equity release sector. They represent the providers, qualified financial advisers, lawyers, intermediaries and surveyors who work in the equity release sector.
A major focus of the Equity Release Council’s work is to ensure that products are safe and accessible for consumers. Each member of the Council that provides equity release products is signed up to the Equity Release Council’s Statement of Principles which puts in place a number of safeguards and guarantees for consumers. This means that people who use equity release products offered by Equity Release Council members can have confidence in the products they use and the information they receive. On top of this, all members also abide by the overarching principles of the Council.
You can read more about the Equity Release Council and their Statement of Principles here.
A way that you can unlock the money tied up in your home to help finance your retirement. There are two types of equity release plan: home reversion and lifetime mortgages. Equity release is normally available to you if you are aged 55 or over, and own your own home worth over £70,000. Plans are only available on your main residence, which must be in the UK. The minimum age, property value and eligibility varies between product providers.
See 'Early repayment charge'.
When you die everything you own (after any borrowing has been deducted), is known as your estate.
This type of equity release plan works by you selling part, or all, of your home to a reversion company. The company buys its portion of your home at under market value, banking on house prices to rise so that it makes a profit. Unlike a lifetime mortgage, the percentage of your home that you own never changes. So if you sell 50% of it to the home reversion company it remains as that percentage and will not increase.
A few equity release plans will let you take your money as income rather than a lump sum. Remember though that the income may only be payable for a set period of time, after which point it may stop. If you are considering using this option it is also worth getting advice about the possibility of releasing a lump sum. You could then use the lump sum to purchase an annuity which will pay you a guaranteed income for life.
A Lifetime Mortgage enables you to release money tied up in your home by providing you with a loan secured against the value of your property. Many providers offer a no negative equity guarantee which means neither you nor your loved ones will ever owe more than the value of your home. However, it can mean there is nothing left as an inheritance when you pass away.
An Inheritance Protection Guarantee means that you can preserve a portion of your home’s value as an inheritance. Having an Inheritance Protection Guarantee will reduce the amount of money that you can release from your home.
This tax is paid on death from the proceeds of your estate. The tax is charged at 40% on the value of your estate in excess of £325,000. A surviving spouse/civil partner does not have to pay this tax, and the deceased allowance of £325,000 may be carried over. This means that for married couples/civil partners, inheritance tax is only payable on estates worth more than £650,000, assuming no other property has been passed on to anybody else, such as children. The government has proposed increasing the inheritance tax threshold to £1 million for family homes from 2017.
Equity release plans run until the money is repaid, or until the last policyholder moves into permanent long-term care or dies. So having a joint equity release plan means that your spouse or partner would not have to move home if they outlive you, or you have to move into permanent long-term care.
This form of equity release works by you borrowing, or releasing, a percentage of your home’s value, which is secured against your home. The percentage you are able to release will depend on your age, with older borrowers able to release higher percentages than younger borrowers.
Interest is charged on the amount you release and the amount you owe increases over time as interest is accrued. The mortgage and interest are repaid on death, or if you have to move into permanent long-term care. You don’t have to make any repayments but there are some providers who do allow regular repayments to be made should you wish to.
This is the percentage of the property’s value that you currently owe the equity release provider. With a home reversion equity release plan this percentage always stays the same. However with a lifetime mortgage the amount you owe increases over time.
Most equity release plans will allow you to take your money as a cash lump sum. This lump sum is tax-free.
This feature of most lifetime mortgages ensures that neither you nor your loved ones will ever owe more than 100% of your home’s value. Providers that are members of the Equity Release Council offer this guarantee as standard.
When equity release borrowing can be taken from one home to another if you decide to move. All equity release plans offered by Equity Release Council members have to be portable, and charge no penalty if you do move home – this is subject to the new property meeting the provider’s lending criteria.
On a lifetime mortgage, this is the addition of interest to the amount you have borrowed. The interest charged is earned on the amount of cash released plus previously-accumulated interest. When the rate compounds monthly this refers to how often the interest is capitalized (credited to the account). Interest doesn’t have to compound monthly, for example it could be any number of times per year or other unit of time – yearly, half-yearly, quarterly, monthly, weekly or daily.
Home reversion plans are where you sell all, or part of your home to a home reversion company. It is then this company that owns the portion of your home that you sold.
Call the Moneyfacts Equity Release Advice Service provided by retirement specialist Just Retirement Solutions Limited on 01737 233462^. There’s no obligation to buy but an advice and arrangement fee of £749 is payable if you purchase a product that Just Retirement Solutions recommends.
Just Retirement Solutions has helped retirees release an average of £41,988* from their homes. Their advice is always quality checked and you’ll only be recommended a product where neither you nor your loved ones will ever owe more than the value of your home. Their expert team can answer your questions, guide you through the process and help you make the right decision for your circumstances.
As releasing equity can affect your entitlement to state benefits, everyone receives a full state benefits review. In fact, over half of the people that Just Retirement Solutions speaks to are eligible to claim benefits, and new claims can be worth up to £6,890 a year**.
*Average initial release value taken by unique Moneyfacts customer, between 2007 – July 2016
** Based on a sample of 196 Just Retirement Solutions customers between 1/1/2015 and 31/12/2015
^ Lines are open 9am to 5pm, Monday to Friday (except bank holidays). Calls may be recorded or monitored, and may be charged.
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Home Reversion Plans
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