Equity Release

What is equity release? 

Equity release is a way to unlock cash tied-up in your property, tax-free while remaining in your own home. It is for property owners aged at least 55 and the most popular form of equity release is a lifetime mortgage.  

What is a lifetime mortgage? 

A lifetime mortgage is a type of equity release. You borrow a set amount of money and use your property as security. Unlike a standard mortgage, there is no need to make monthly payments towards the loan as you can choose to let the interest roll up over time. This means the interest is added to your original loan and to any interest already accrued and this means your debt will increase over time. Some lifetime mortgages will allow you to make monthly payments and pay back some or all of the interest. Other plans permit penalty-free repayments, usually up to 10% annually. 

When you die or go into long term care the loan needs to be repaid including the interest. This is usually done through the sale of the property.  

How does equity release work? 

The most common form of equity release is a lifetime mortgage. This can usually be accessed from age 55 onwards. Your equity release lender will decide how much you can borrow depending on your age and the property’s value. Some lenders can even take into account your medical history and may be able to lend you higher amounts than are available through standard lifetime mortgages. 

The maximum amount they can lend to you is dependent on the plan you choose. The amount you can borrow will depend on the age of the borrower, with the highest borrowing amounts available to older borrowers. If you want the option to make monthly repayments to your lifetime mortgage, your lender will need to check these are affordable for you. Making monthly repayments will reduce the interest costs incurred on your lifetime mortgage. 

Am I eligible for equity release? 

You must own a property in the UK to be eligible for equity release. There are also minimum requirements for your age, the value of the property and how much you want to borrow. You will not need to complete an affordability assessment for a lifetime mortgage and equity release lenders will consider those with a poor credit history. 

The minimum age for equity release starts at 55 

Equity release providers offering lifetime mortgages usually require a minimum age of 55. If you are below the age of 55 and already retired, then you could consider a retirement interest only mortgage instead. If you are a couple looking for equity release and only one of you is over the minimum age, you could still get an equity release product, but the younger partner would typically need to be removed from the deeds. 

When you take a lifetime mortgage you will be responsible for the maintenance, upkeep and insurance of your property. 

You have a poor credit history 

Equity release lenders will consider a poor credit history. Acceptance will be dependent on the lender's criteria and the nature of your credit history issues. If you are bankrupt, you may not be accepted for equity release, however there are some lenders who will accept county court judgements (CCJs) and an adverse credit history. 

How can equity release be used? 

How you choose to spend your cash is up to you. Equity release is often used to 

• supplement a pension 
• buy a new car 
• make home improvements, buy a 2nd Home, Buy to Let or Holiday Home 
• fund holidays 
• gift family members - helping children and grandchildren get onto the property ladder is a common example 

Drawdown or lump sum? 

You should check if your equity release product allows drawdowns or if it is a lump sum plan. Drawdown means you access your cash in stages rather than all in one go. The advantage of this is that for a lifetime mortgage you only drawdown the cash you need, reducing your interest cost compared to drawing down a larger sum in one go. Some equity release providers may set a minimum amount for each drawdown. 

Is equity release safe? 

Equity release providers are regulated by the Financial Conduct Authority and increasingly many are members of the Equity Release Council. This trade body has a set of regulations designed to make sure consumers are protected when using equity release products from their members. 

Some of the safeguards for consumers include the no negative equity guarantee and security of tenure. This means that when borrowers use a lender that is a member of the Equity Release Council, they will never owe more than the value of their property when it is sold following their death or moving into long term care. They can also be assured that they can live in their home for as long as they wish. Furthermore, equity release can only be obtained once you have received financial and legal advice. 

Any equity release company that has the Equity Release Council logo on their material must ensure you can still live in your home until you die or move into permanent care. They must also ensure that you will never owe them more than the total sale price of your home, even if its value drops.  

Pros and cons of equity release 

The obvious advantage of equity release is that it gives you money to spend now, rather than leaving it locked away in your home. The long-term increase in UK house prices means that a large proportion of homeowners’ wealth is locked into their property and is therefore inaccessible. If your home has increased in value over the years, equity release enables you to access some of that money to supplement your retirement income – instead of leaving it all to your beneficiaries, or to cover your long-term care costs. 

Other advantages and disadvantages to consider -  

• Access tax-free cash tied up in your property 
• You get to stay in your own home 
• Option to take a lump-sum or drawdown funds as needed (lifetime mortgage only) 
• No negative equity guarantee means you will never owe more than the value of your house when this is sold following your death or moving into long term care 
• Interest costs for a lifetime mortgage builds over the years (unless you choose to repay some or all of the monthly interest) 
• Interest rates are usually higher than Retirement Interest Only mortgages 
• Your beneficiaries could see their inheritance eroded through interest costs or through having a smaller share of the property 
• The amount you can borrow is less the younger you are 

Is equity release ever a bad 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 practical 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. You should discuss it with your children as it'll affect the amount of inheritance you leave behind, and you will need to seek suitable equity release advice, with this being a vital part of the process. 

Other equity release fees 

In addition to interest costs, you will also have to pay other fees to get an equity release product. These can include: 

Valuation fees - Just like a mortgage, the equity release lender needs to obtain a valuation of your home. This can range from a quick inspection through to a more detailed assessment.  

Arrangement fees - Some lenders may include an arrangement fee for your equity release product.  

Advice fees - You need to receive advice from a qualified adviser to apply for equity release. Different brokers charge fees in different ways, this may be a percentage of the loan amount or a fixed fee.  

Solicitor fees - You will need a solicitor to make sure your equity release is managed correctly and any change in ownership is documented correctly. 

Early repayment charges - Lifetime mortgages are designed as a long-term arrangement with repayment made on the sale of the borrower’s home when they die or move into long term care. If you decide you no longer want the mortgage and decide to pay it back earlier, you could incur an early repayment charge. Some lenders will waive the early repayment charge for those who settle their lifetime mortgage due to moving home. There are no early repayment charges if you die or move into long-term care.   

The importance of professional advice 

Professional financial and legal advice is essential when considering equity release. Receiving advice is a mandatory part of the process. A good adviser will talk to you about what you are wanting to achieve with the money, the potential alternatives, such as downsizing, and any risks and upsides of the alternative products available. In summary your adviser will: 

• Consider if equity release is right for you and suggest alternatives if not 
• Tell you which type of equity release is most suitable for you, for example draw down, interest servicing or the option to make adhoc interest repayments 
• Share with you a personalised illustration showing you the overall cost and fees, what happens if you don’t want equity release anymore, a description of the provider and the product including an interest rate for lifetime mortgages, any additional product features and what you have said you want to release in funds and the type of product you are interested in 
• Identify those providers who offer the product features most important to you, such as avoiding early repayment charges if you wish to pay back your loan, no negative equity guarantees to make sure you never owe more than you borrow when the property is sold following your death or going into long term care and how to protect your beneficiaries inheritance 
• Find the best interest rate for your circumstances and credit history 

Some financial advisers will use a panel of equity release providers from which they will select the most suitable provider for you and your circumstances. Different advisers may have different providers that they work with. 

Does equity release affect tax credits, benefits or pension entitlement? 

Equity release may affect your eligibility for tax credits or benefits. This is because many benefits are means-tested. Having a certain amount in savings or additional income can change what you are entitled to. Your adviser should be able to help you understand if this will be a risk. 

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. 

What happens when I pass away? 

If you have taken a lifetime mortgage, then this will need to be repaid when you die (or if you go into long-term care). If you have taken a lifetime mortgage in joint names, then it will be on the death of the second partner when this will need to be repaid. Usually your home will be sold, and the proceeds used to pay back the lifetime mortgage. Any money that is remaining will form part of your estate.
Your beneficiaries will need to contact the lifetime mortgage lender and provide a copy of the death certificate and probate document. The lifetime mortgage lender will then deal with the executors of your estate (or the estate’s administrators if you die without a will) to discuss how the lifetime mortgage will be repaid. There is sometimes the option for beneficiaries to settle the lifetime mortgage debt using other assets and not just by the sale of your home. 

Can my partner stay in our home after my death? 

If you have taken equity release in joint names, then the surviving partner can remain in the home until they pass away or when they need to go into long-term care, the surviving partner could also move or downsize to a new property without having to pay back the lifetime mortgage. The lifetime mortgage lender will need to agree to this and that the new property provides sufficient equity to cover the outstanding lifetime mortgage. If equity release is not taken in joint names and the surviving partner is not on the policy, they will need to repay the mortgage. 

Equity Release is a long term commitment which could accumulate interest and is secured against your home. Equity release is not right for everyone and may reduce the value of your estate.