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Guide to Equity Release

Guide to Equity Release

Category: Retirement
Updated: 14/12/2017

What is equity release?

Equity release is a way to unlock some of the money that's tied up in your home, perhaps to provide a regular income or a lump sum payment, either one of which could be a great boost to your later life finances. You can normally release up to 60% of the value of your home and continue to live there, usually without having to make any repayments. Our equity release advice service can give you a personalised overview of your options. To find out more about this form of later life lending, read on!

How does equity release work?

The 'equity' refers to the percentage of your home's value that you own outright, and as you approach retirement, hopefully that percentage will grow. You can then 'release' some of that equity through a lifetime mortgage (also known as an equity release mortgage) or home reversion scheme. This will allow you to tap into a substantial pool of money that can be put to good use in later life. With a lifetime mortgage, you are essentially taking out a loan of a percentage of the property's value. With a home reversion scheme, you can sell a percentage or all of your home to a home reversion provider.

Equity release is typically available to those aged 55+ and can be particularly suitable for those who haven't got a significant pension pot, and because the loan generally doesn't need to be repaid in your lifetime, you needn't worry about making repayments from your retirement income.

Lifetime mortgages explained

With an equity release mortgage, you borrow a percentage of the value of your home, which can be paid as a lump sum or in instalments depending on the type of plan you go for. Lump sum plans allow you to release a single amount in one go, and interest will be rolled up on the entire loan from that point onwards. These equity release schemes can be ideal for those who want a lump sum to pay off debts, make home improvements, take a holiday of a lifetime, buy a new car or as a financial gift to family. Note that the latter is often seen as a form of early inheritance.

Drawdown plans, on the other hand, allow you to release equity as and when you see fit, rather than taking a lump sum at the outset. This can be a great way to supplement retirement income. A drawdown plan can also reduce the amount of interest you owe, as interest will accrue on smaller amounts as they're released and as such will only gradually increase.

How does interest work?

Whichever option you go for, you typically won't make any regular repayments during the life of the loan. Rather, interest is charged which increases the amount you owe, much in the same way as with a traditional mortgage but without the repayments (some lifetime mortgages now require monthly repayments to be made during the term of the loan, but these are less common).

Interest is 'rolled up' or accrued during your lifetime and is typically repaid at the end of the loan, unless you make other arrangements with your lender. The mortgage is repaid when you die, or when you sell the home to move into permanent residential care; the sale proceeds will be used to repay the lender, plus any interest due.

Advantages of equity release schemes

  • 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 while enjoying a regular 'income' to enable you to enjoy your retirement.
  • If you take out a lifetime mortgage with a Negative Equity Guarantee, you will not owe more than the value of your home at the end of the term, meaning you can ring-fence other money or assets to leave as an inheritance for your loved ones.

Disadvantages

  • Lifetime mortgages will erode any inheritance you leave, even with a Negative Equity Guarantee in place.
  • If house prices fall, you'll end up owing a greater proportion of your property's value.
  • If you live long enough, the amount owed could end up being 100% of your property's value as interest accrues.
  • Younger borrowers can't borrow as much.
  • If you change your mind, the early repayment charges can be hefty, so make sure you read the small print and are sure of your decision before you agree to take the loan.

What about home reversion schemes?

Another form of equity release is home reversion, whereby you sell your home (or part of your home) to the home reversion company, who typically buys it at under market value. You get a lump sum or income and a lifetime lease that allows you to stay in your home, and on death or sale of the property the reversion company gets the share you originally sold.

It is worth taking into consideration that with home reversion you will only be able to take advantage of any house price rises on the proportion of the property that you still own, so if your property increases in value you will not get the full benefit of this (but will still be able to live there). However, such schemes are now few and far between, with equity release mortgages being far more common.

Am I eligible for equity release?

An equity release plan may be available if you:

  • Are aged 55 or over
  • Own your home
  • Have a very small or no mortgage on your home
  • Have a property which is of standard construction and not in a retirement complex

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

Are equity release schemes safe?

Equity release schemes have had a bad reputation in the past as they could often leave people owing more than the property was worth, but these days the industry is under far more scrutiny and a lot more safeguards are in place. It's now a fully FCA-regulated sector, and the industry body, The Equity Release Council, has a code of practice that members abide by. This includes a Negative Equity Guarantee, which means the amount you (or your estate) owe can never exceed the value of the property.

Releasing equity in my house – consider the costs

Knowing how much equity release costs will be a key consideration for anyone thinking about taking out this kind of mortgage, and the core part of that will be the interest rate you're charged. This will vary according to your own individual circumstances – including your age and how much you're looking at releasing from your home – which is why you'll want to use an equity release calculator when discussing things with your provider.

You'll be required to pay fees for arranging the mortgage, too, much like with a residential mortgage, which can vary according to provider. You'll also have to pay valuation and legal fees, and advice fees are another cost; as an example, our adviser partners MCB charge £999, and the fee can be paid with money raised via equity release and is only due on completion.

However, it's only when you sell the home that the full costs will be realised, as it's only then that interest will have to be repaid. This is why getting the best possible interest rate is essential, and why you'll want to work with advisers and brokers to get the best deal.

Equity release FAQs

  • Will I still own my own home?
    Yes, if you take out a lifetime mortgage, you will still own your own home – even if the loan is a large percentage of the value, you'll still own the rest of it, the difference being that you may not be able to pass on much of it once interest has accrued.

  • Can you sell your house and still live in it?
    If you were to opt for a home reversion scheme, then yes, it could be entirely possible to sell your property and continue to live in it under a lease arrangement.

  • Can equity release be transferred?
    If you want to move home and transfer your equity release debt to the new property, most providers should be able to accommodate. Indeed, equity release plans that comply with the Equity Release Council's standards allow you to move to a "suitable alternative property", but bear in mind that some properties won't be eligible – such as those in retirement complexes – and if you're moving to a smaller property, you may have to repay part of what you borrowed/released.

  • Can equity release be repaid before death?
    Yes, but generally only if the property is sold and you move into long-term residential care. In this case, the property will be sold and the loan repaid, plus any accrued interest. Some providers will take the same view if you move in with relatives for the same reason, but in other cases, the 'lifetime' nature of the mortgage means you'll pay hefty early repayment charges if you want to pay it off (exact rules will depend on your particular lender, so make sure to discuss these questions with them thoroughly before releasing equity).

  • Is equity release taxable?
    The cash lump sum released from your home is tax-free. However, if you decide to place this money in a savings account, secure a regular income through an annuity or make an investment, tax may then be payable on any interest, income or gains you receive.

  • Will equity release affect inheritance?
    Yes, in that it will reduce it. 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, so it's important to discuss this with anyone who stands to benefit from your inheritance.

  • What about inheritance tax?
    Because you'll be passing on less of your asset to your beneficiaries, they'll be required to pay less inheritance tax. Even if you use the money you release to give to loved ones, it won't be counted in your inheritance tax bill, as long as you live for seven years after you gifted the money.

  • Will equity release impact my 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 the plan ends. Check the situation regarding this before entering into any agreement.

  • Does equity release affect tax credits, benefits or pension entitlement?
    If you're currently eligible for certain tax credits or benefits, bear in mind that taking out equity release may affect that eligibility. This is because many of those benefits are means-tested, and if you suddenly have a large amount of savings (through the lump sum arrangement) or extra income (through drawdown) your entitlements could change accordingly. However, your state pension typically won't be affected, as this is an entitlement for everyone over state pension age, depending on your National Insurance record.

Is equity release ever a good idea?

Taking out a lifetime mortgage can be a lifeline for those who may not have a decent pension pot, or who aren't willing or able to downsize into a smaller property. As long as you fully understand the process – including the type of lifetime mortgage you're getting, how interest is charged and how it can impact everything from inheritance tax to state benefits – it could prove to be a viable way to boost your bank balance in retirement.

That said, releasing equity from your home isn't a decision to enter into lightly, which is why you'll need plenty of support to determine if it's the right course of action for your particular needs. Not only will you need to thoroughly discuss it with your children as it'll affect the amount of inheritance you leave behind, but you'll need to seek suitable equity release advice, with this being a vital part of the process.

The importance of getting expert advice

Before entering into any equity release plan, make sure you take legal and financial advice, the importance of which can never be underestimated. You'll need to be totally confident that you're making the right decision, and speaking to qualified, independent equity release advisers can help ensure that.

They'll go through the whole process with you, from explaining the nitty gritty of how equity release works to giving you a personalised illustration, and many will offer an equity release calculator so you'll see exactly how much you could borrow, and what the eventual repayment could look like. Our preferred equity release advisers, MCB Financial Services, are equity release specialists, and can help ensure that releasing equity from your home is the right decision.

Alternatives to equity release

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

  • Can you carry on working part time? There's nothing to say you have to stop when you reach state retirement age, and a growing number of people are choosing to stay in the workplace.
  • Are your savings and investments working as hard as they can? Speak to a financial adviser to make sure you maximise your wealth, and find the best savings rate possible.
  • 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 worked hard all your life, so check that you're getting all the state benefits you're entitled to, for instance using the online benefits calculator from Age UK.
  • Downsize your home. Another way of releasing equity from your home is simply to move to a smaller property. You'd release some money to use in retirement without taking on additional debt, and would potentially be able to leave an inheritance too.

What next?

Equity release service provided by MCB Financial Services Limited

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.

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