Equity is the amount of ‘spare’ capital you have in your home. It’s typically expressed as a percentage of the house you own.
You can calculate how much equity you have in your property by taking the current value of your home and deducting any outstanding mortgage balance.
If you own a £400,000 property and have a £100,000 mortgage left to pay, you have £300,000 of equity in the home, equivalent to 75%.
Equity Release is a way of releasing capital tied up in your home. There are two types of Equity Release; however, they both work very differently.
To qualify for Equity Release you need to meet the following criteria:
An Equity Release Lifetime Mortgage allows you to borrow against the value of your home. You don’t have to make any payments on the loan during your lifetime if you don’t want to.
Instead of making monthly payments like a regular mortgage, you repay the capital borrowed, plus interest ‘rolled up’ into the loan, when the house is sold. This is typically after you move into long-term care or pass away.
For this reason, Lifetime Mortgages can become expensive over time as the interest is rolled up and compounded each year. This can eat into the amount of capital you can leave to beneficiaries from your home.
To keep a lid on costs, some people opt to make regular or ad hoc interest payments on their Lifetime Mortgages. This is only an option on Lifetime Mortgages, not on Home Reversion Plans, and not every provider will allow you to do so, so if this is your intention it’s important to discuss it with your adviser first.
When you borrow against your home, you retain the right to live in the property for as long as you want to, potentially for the rest of your life or up until you move into long-term care.
If you enter into a Home Reversion Plan, you agree to sell some or all of your house to an Equity Release provider for less than the market value. This is typically 20% to 60% of what the home is worth on the open market, depending on your age and state of heath.
Thereafter, the Equity Release provider then owns a set proportion of your property.
When the house is later sold, usually after you move into care or pass away, the Equity Release provider is entitled to a slice of the profits from the sale equivalent to the proportion of the house they own.
So if they took a 20% stake in your property, they’re entitled to 20% of the market sale price when you sell your home.
Home Reversion Plan
Borrow against the value of your home
Sell a proportion of your home to an Equity Release provider for less than the market value
The provider charges interest on the loan
You receive less than the market value for your property
The percentage of the home you own could fall as the amount you owe rises thanks to compound interest
The percentage of your home you’ve sold remains fixed, but you miss out on any gain in house prices on that percentage
If you want to come out early, there may be significant early repayment charges
If you want to come out early, you’ll have to buy back the proportion of your home you sold at full market value
The best equity release for you will depend entirely on your circumstances, although Lifetime Mortgages are by far the most common type of scheme in the UK.
With a Lifetime Mortgage, the amount of equity you own in your property could fall as the interest you owe the provider mounts up. Although some plans allow you to protect or ‘ring fence’ a proportion of your property to leave to beneficiaries, not all schemes allow this.
This could see the amount you owe increase considerably, especially if you live for a long time after releasing equity. You could end up having little or no equity left in your property.
However, with a Lifetime Mortgage from an Equity Release Council-approved member, you’ll receive the ‘no negative equity guarantee‘.
With a Home Reversion Scheme, the proportion of the property you sell to the provider doesn’t change over time. If you sold 20% of the property, you’ll continue owning 80% of the property going forward unless you choose to draw further cash from your home.
However, with a Home Reversion Plan you sell the proportion of your home at a significant market discount. This means you won’t get anywhere near the full value of the property. Moreover, you miss out on any gains in house prices on the proportion of the property you sold.
Which Equity Release product is right for you will depend on your circumstances. Each option has its own separate pros and cons that you need to weigh up. This is part of a wider process of trying to make sure that Equity Release is your best option.
Drewberry has partnered with the trusted Equity Release Provider Responsible Life to offer our clients access to the best Equity Release Advice.
Responsible Equity Release was founded in 2010 and is part of the Equity Release Council. It is also authorised and regulated by the Financial Conduct Authority and is one of the largest UK equity release advisers, with access to every single provider across the marketplace. 99% of its reviews on independent reviews website Trustpilot are listed as 5-star.