Equity Release explained

As property values continue to rise, many homeowners are looking for ways to make the most of their home’s increased value without having to sell. One option is Equity Release.

In this article, we will explore what equity release is, how it works, the different types available, its benefits and drawbacks, and important considerations to help you determine if it's the right choice for you. 

What is Equity Release?

Equity release refers to a range of financial products available to older individuals, typically those over the age of 55, that allow them to access some of the equity tied up in their homes without having to move. These schemes can be beneficial in certain situations, but they are not suitable for everyone.

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How does Equity Release work? 

Equity release is a financial product that enables homeowners to release an initial cash lump sum, as well as have access to further monies through a reserve facility if required. The amounts you are able to release are based on how old you are and the value of your home.  Your health is also taken into account and can allow you to release more of the equity in your home.  An individual can use this to boost their standard of living or to fund capital expenditure, whilst allowing them to continue to occupy their home.

Unlike traditional mortgages, there are equity release products available that have no monthly repayments. In this case, the loan amount, plus any interest is repaid when the  home is sold, usually upon death or moving permanently into long-term care.

There are two types of equity release:

1. Lifetime Mortgage
2. Home Reversion Plan

Lifetime Mortgage

A Lifetime Mortgage is the most popular type of equity release. It allows you to borrow money secured against your home, as long as it is your main residence, while retaining ownership. An advantage here is that it is possible to ring-fence part of your property’s value as an inheritance for your family.

Some providers offer larger sums if you have certain medical conditions or lifestyle factors, such as smoking. Throughout the duration of the loan, your home remains yours and you are responsible for maintaining it.  You will also benefit from any increases in the property value which can offset some of the interest that will accrue if not serviced.

Interest is charged on what you have borrowed which can be repaid or added on to the total loan amount. When the last borrower passes away or moves into long-term care, the home is sold, and the sale proceeds are used to repay the loan. Any remaining funds go to your beneficiaries. If your estate can cover the lifetime mortgage without selling the property, that’s also an option.

Should the sale proceeds not be sufficient to repay the mortgage, lifetime mortgages governed by the Equity Release Council come with a no-negative-equity guarantee, which ensures that you (or your beneficiaries) will never owe more than the value of your home, even if the debt exceeds the property’s value.

There are several variations of lifetime mortgages, each catering to different needs:

• Lump Sum Lifetime Mortgages: These allow you to make interest payments regularly or on an ad hoc basis, preventing the loan amount from increasing over time.
• Drawdown Lifetime Mortgages: These provide an initial release plus a flexible cash reserve that you can draw from as needed, giving you control over when and how much you borrow.
• Enhanced Lifetime Mortgages: These offer larger sums to those with certain health conditions or lifestyle factors, such as smoking, which may affect life expectancy.

Each type offers unique benefits, making it easier to find a solution tailored to your specific financial situation and needs.

Home Reversion Plan

A home reversion plan allows you to sell a portion or all of your home to a home reversion provider. This arrangement means the provider co-owns your home, unless you’ve sold the entire property, but you retain the right to live there for the rest of your life, often rent-free. In return, you receive a lump sum or regular payments, providing you with additional financial resources while continuing to enjoy your home. Upon passing away or moving into long-term care, the property is sold, and the proceeds are shared according to the ownership split.

The amount you receive through home reversion depends on your circumstances, particularly your age. As a general guideline, if you're 65, you might get as little as 25% of your home's market value. This percentage can rise to around 60% if you're 90. You can choose to sell up to 100% of your home, but because reversion providers pay a discounted rate, you won't receive 100% of its current market value.

These can be poor value if you were to die or have to move permanently into long term care shortly after taking one out.  The lender will also benefit in any increases in the value of your home for the percentage that they own.

Benefits of Equity Release

Access to Tax-Free Cash: Regulated equity release schemes offer a secure way to unlock some of the value tied up in your property. There is no direct tax on equity release as it is essentially a loan. It will either be paid tax-free as a lump sum or in instalments and use it for whatever you choose. It is important to note that this may be liable to inheritance tax if it falls in the estate on death.

Stay in your own home: Equity release can be a preferable alternative to downsizing, allowing you to remain in your current home while freeing up cash. Many people use the funds to make home improvements, which can enhance their quality of life and reduce the need for future repairs or modifications. This way, you get to enjoy retirement in the home you love without the stress and expense of moving.  

No Monthly Repayments required: With most equity release schemes, you don't need to make monthly repayments unless you choose to. The loan and interest are repaid when your home is sold, either upon your death or if you move permanently into long-term care. You can also make voluntary repayments or overpayments, typically up to 10% per year.

Flexible Access to Funds: You can opt for a lump sum or choose a drawdown lifetime mortgage, which allows you to withdraw smaller amounts as needed. This flexibility can provide a steady income while only incurring interest on the funds you actually access.

Potential to Reduce Inheritance Tax: Equity release might also be used as a strategy to give your family a cash gift, potentially reducing inheritance tax liability. 

Drawbacks of Equity Release

Increasing Debt: Interest on equity release loans compounds over time, meaning you’ll pay interest on both the original loan amount and any accumulated interest. This can cause the debt to grow significantly, though opting for an interest-only mortgage or making voluntary repayments can help manage this.

Impact on Benefits: Releasing cash from your home could affect your eligibility for means-tested state benefits like Pension Credit or council tax benefits.

Early Exit Fees: Lifetime mortgages are long-term commitments, and paying off the loan early may incur redemption fees. Check for any potential charges before committing.

No Additional Loans: Once you’ve used equity release, you generally cannot take out another loan against your home. Some providers may allow you to access more equity later if available.

Is Equity Release right for me?

Equity release can be a viable option for accessing the value tied up in your property, but it’s not suitable for everyone. It offers the flexibility to receive a lump sum or regular income, but it's crucial to ensure it fits with your long-term financial goals and living arrangements. If you’re considering moving or downsizing in the future, equity release might not be the best choice. It’s worth exploring other alternatives, such as downsizing, utilising other savings, or seeking support from family members, before making a decision.

Equity release should be carefully considered after exploring all available options. Seeking professional financial advice is essential to fully understand its implications. An independent financial adviser with specialist qualifications on equity release can help you evaluate different equity release products and find the most suitable solution for your needs.

How can we help?

Navigating the world of equity release can be complex, and it's important to understand all the options and implications. We have a team of experienced advisers who can help you explore whether equity release is the right choice for you and guide you through the process. Our advisers will take the time to understand your financial situation, goals, and concerns. They will provide tailored advice to help you make an informed decision.

We offer access to a wide range of equity release products from leading providers, ensuring that you have the best possible options to choose from. We provide ongoing support and regular reviews to ensure that your equity release plan continues to meet your needs.

Contact us today to schedule a consultation and find out how we can help you make the most of your home’s value.

Our team is here to support you every step of the way, ensuring you have the information and guidance you need to make the best decision for your financial future

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This article is for information only and does not constitute individual advice.

The Financial Conduct Authority (FCA) does not regulate estate planning, tax or trust advice.

This refers to lifetime mortgages and home reversion schemes. To understand the features and risks, ask for a personalised illustration