With housing wealth still one of the most important strands of later-life financial planning for the over-55s, equity release is growing in popularity. But what exactly is equity release, and how does it work?
Enquiry release: the basics
If you’re aged 55 or over and own your own home, you can extract money tied up in your property by using an equity release scheme. You don’t need to sell or move out of your property in order to join one of these schemes, making it an ideal way to tap into housing wealth without worrying about costly monthly repayments.
The two types of equity release
Equity release comes in two forms – Lifetime Mortgages and Home Reversion plans (both regulated by the Financial Conduct Authority for total peace of mind).
A Lifetime Mortgage allows you to extract your funds, either in a one-off lump sum, or in smaller amounts over an agreed period, up to the maximum limit that’s been agreed with the provider of the equity release plan. There’s also the option of retaining some of the value of your property – particularly useful if you’re considering passing down the property as inheritance to family members.
When you take out a Lifetime Mortgage equity release plan, you are still the owner of your home – you won’t need to move out or sell up. You (and your partner, if relevant) will be able to live in the property for the rest of your lives – hence the name of the plan.
Interest on the loan can be fixed or rolled up – it’s then repaid by your estate when you die or move into long-term care on a
A Home Reversion plan differs slightly, in that it involves the provider of the plan purchasing all or part of your property. You’ll still own the property, and won’t be paying any rent. At the end of the plan, the property will be sold and the proceeds will be distributed according to the remaining proportions of ownership.
Both of these plans are regulated by the FCA and the Equity Release Council, a trade body which represents over 350 equity release professionals. This offers total peace of mind to customers, and all members of the ERC are constantly working towards maintaining high standards and ensuring that all those joining equity release schemes get the best outcome possible.
The benefits of equity release schemes
Equity release is a viable option for many retirees – it can help them support themselves financially with a tax-free lump sum or a regular income, which can be spent on anything. Some people use equity release to supplement their pension, while others free up the funds to go on a once-in-a-lifetime holiday or refurbish their property.
There are no monthly payments, which means homeowners are free from the idea of rent or mortgage payments. There’s also a no-negative equity guarantee, which ensures that no matter what happens, you can never end up owing more than the value of the property.
Perhaps the biggest benefit of equity release schemes is retaining the right to stay in your own home for the rest of your life. This sense of stability and security is ideal for those who have retired and don’t want to move home or live somewhere else.
Things to consider
Though the pros may look fantastic on paper, an equity release scheme should not be entered into lightly, as there are many perceived downsides. The first downside is that it significantly reduces the value of your estate, which can affect any inheritance you might have planned to pass onto your children or other relatives.
Means-tested benefit could also be affected – if you currently receive pension credit or any kind of council tax exemption, these could be reduced, which eats into the money you’d receive from the equity release.
Equity release schemes were expressly designed to run for the rest of your life (or until you go into permanent full-time care). Unfortunately, this means that if, for whatever reason, you decide you want to pay off the scheme entirely before you die, there will be some substantial penalties in store. It also limits your ability to raise further finance in the future, by remortgaging, for example.
The actual set-up of equity release schemes can also be an expensive process – you’ll be charged for valuations, applications, the hire of solicitors and any other advice you receive during the process, and the figure can soon add up.
How do I qualify for an equity release scheme?
First off, you’ll need to be a UK resident and homeowner – that much is obvious! You also need to be over the age of 55 if you’re applying for the lifetime mortgage option, and over 65 if you’re opting for the home reversion scheme. You also need to have either paid off your mortgage already, or be able to pay the remainder of your mortgage on completion of the equity release.
Your property must have a minimum value of £60,000 – not difficult by today’s market standards, but still an essential criterion that must be met. Both freehold and leasehold properties are accepted, with a minimum remaining lease of 75 years.
Top tips for choosing the right equity release option
Equity release schemes are an enormous financial commitment and shouldn’t be entered into without the right advice. An independent financial advisor will be able to help you establish whether it’s the right option for you – they’ll be able to take you through the alternatives and explain the process more thoroughly.
Only borrow the minimum amount you need – or alternatively, choose a drawdown option, which allow you to borrow money as and when you need it. If you can afford to make interest payments each month, you should also consider choosing a scheme that lets you take up this option.
Early repayment charges can affect how attractive an equity release scheme is – if you look hard enough, you can find schemes that don’t charge if you want to repay early, as well as schemes with repayment charges that expire after a certain time.