What is Equity Release?

What is Equity Release?

Equity Release allows older people to unlock cash from their homes. Rising house prices mean that many of us have seen the value of our homes increase over years or decades, and Equity Release lets you access that money to use as you see fit without having to move and downsize.

The amount of equity you can release will depend on a number of factors, including your age, the value of your home, whether you have any health conditions and the type of Equity Release plan you choose.

You have two options with Equity Release:

• Lifetime Mortgage
  By far the most common option that makes up the vast majority of the Equity Release market, this sees you borrow against the value of your home.
• Home Reversion Plan
  Used much less frequently, Home Reversion sees you sell all or some of your property to an Equity Release provider.

In either case, you don’t have to make payments until the property is sold at a later date, most commonly after the homeowner moves into long-term care or passes away.

Also, both options allow you to release tax-free cash lump sums from your property, potentially with the ability to draw down further lump sums at a later date. However, despite their similarities, the two types of Equity Release work very differently.

What is a Lifetime Mortgage?

A Lifetime Mortgage allows you to borrow against the value of your home to release cash. You retain full ownership of your home and the right to live in it for the rest of your life or until you move into long-term care. At that point the house is sold and the loan is repaid.

The provider charges interest on a Lifetime Mortgage but you don’t have to make any payments on it until you sell the home. Instead, in a typical Lifetime Mortgage, the interest is ‘rolled up’ and compounded into the loan each year.

As the interest is rolled up and compounded with a Lifetime Mortgage, and the interest rates are typically higher than a regular mortgage, borrowing money in this way can quickly become expensive.

To counteract this, some Equity Release plans allow you to keep up with the interest payments, either regularly or on an ad hoc basis, to keep the cost of borrowing down. Where you make ad hoc payments, these are typically allowed up to 10% of the loan value each year.

No Negative Equity Guarantee

The amount you’ve borrowed will increase as interest is added. Over the long-term, although unlikely, this could rise to equal the total sale price of the property. Lifetime Mortgages from the Equity Release Council’s approved list of lenders all include the no negative equity guarantee.

With a Lifetime Mortgage, some providers allow you to protect or ‘ring-fence’ a proportion of your home to leave to beneficiaries, although this will typically cost extra. Ask your provider for further information on this.

What is a Home Reversion Plan?

A Home Reversion Plan is by far the lesser-used type of Equity Release. It sees you sell some or all of your home to an Equity Release provider while retaining the right to live in it rent-free until you pass away or move into long-term care.

With a Home Reversion Plan, you know exactly how much of your property you’ve sold and how much you have retained to leave to beneficiaries later. The proportion of your property you’ve sold remains fixed over the life of the plan, unless you opt to draw down more cash at a later date.

At the end of your plan, the property is sold and the sale proceeds are divided up according to the percentage of the property you and the equity release provider own.

As with a Lifetime Mortgage, you’ll likely be able to release more cash from your home if you’re older, have a health condition or smoke. The amount you can release will also depend on the value of your home.

Why Equity Release?

People turn to Equity Release for a number of reasons, although the most common include paying for in-home care, making the property more accessible or supplementing a small pension pot.

The cash from Equity Release can be used as you see fit, however, from helping out family (perhaps to get on the property ladder themselves) to purchases such as a holiday or new car.

While it might be tempting to release equity from your home, it’s worth remembering that a Lifetime Mortgage can be an expensive way of borrowing, especially over the long-term.

Consider whether there may be other ways of releasing capital or other funds you can draw on before deciding upon Equity Release. An expert adviser such as one of the team at Drewberry’s trusted partner, Responsible Life, is best-placed to look at your finances in the round and discuss all your options with you in this area.

Jonathan Cooper
Senior Paraplanner at Drewberry

Is Equity Release Right for Me?

There are a few requirements that you must meet before you can use Equity Release. The biggest is your age — Equity Release is only for older homeowners. You must be at least 55 for a Lifetime Mortgage and at least 60 for a Home Reversion Plan.

The second requirement is the type of property and your property value. Only properties worth £70,000 or more are typically eligible for Equity Release, while certain types of homes are not eligible.

This is because the provider will want your home to be sold on the open market to maximise the value you both will receive from the sale and certain properties are hard to sell on the open market.

Properties usually ineligible for Equity Release include:

• Flats or maisonettes in a local / housing authority block of more than four storeys
• Static / mobile homes
• Houseboats
• Farms
• Hotels, guest houses and B&Bs.

Equity Release Help and Advice

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.