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Equity Release

A comprehensive guide to Equity Release

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What is equity release?

Many people find themselves needing access to more cash in retirement. But if you don’t have enough savings, could you use the value of your home to boost your finances?

Equity release is a financial instrument that allows you to extract cash out of your property by taking out a loan secured against your home. It’s only available to people aged over 55 years. The loan is paid back when your property is sold when you move into long term care or in the event of your death.

You can release the equity in your home in different ways, either as;

- A guaranteed lump sum

- A regular income

- Combination of both a guaranteed lump sum and a regular income

All companies selling equity release have to be regulated by the Financial Conduct Authority.

The most common forms of equity release are:

- Lifetime mortgage scheme

- Retirement mortgage

- Retirement interest-only mortgage (RIO)

- Home reversion scheme

Working with an Independent Qualified Advisor

Although the agreement is between you and the insurance underwriter, it's often common and beneficial to work with an Independent Qualified Advisor, who will act on your behalf to find the best deal on the market for your circumstance. The advisor will act as a bridge between you and the underwriters, so they will ask you the questions required by the underwriter to generate a quote. The advisor will be rewarded by getting a pay-out from the underwriter, often there would be no cost to you for the use of their service and you get the benefit of their access to the whole market, which won’t be accessible to you without them.

Find out more

Further reading: Lifetime mortgage
Home reversion plan

Steps to taking out an equity release product

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What are the different types of equity release options?

Lifetime Mortgage

When it comes to equity release, a lifetime mortgage is the most common form of lending. A lifetime mortgage is a range of products that sit under the equity release umbrella. A lifetime mortgage offers you the opportunity to release capital tied up in your home (i.e. the equity). Unlike a conventional mortgage, which runs for a fixed term, a lifetime mortgage is designed to run for the rest of your life. You continue to own the home and only pay back the lifetime mortgage once you die or move into long term care. Unlike a traditional mortgage the interest is added to the loan amount, which means that it appreciates and will cost more the longer the loan is open. However, it can be a great way to release cash from your property if you have the available equity, without having to downsize or move. There is a range of lifetime mortgage products available from different lenders, depending on your requirements. We go into full details on each of these in our lifetime mortgage guide

Retirement Mortgage

Lenders don’t typically offer mortgages to customers once they retire as they view this as a risky investment. However, there are specialist retirement mortgages available to customers over the age of 50. These work as a large loan against the property, similar to a traditional mortgage. You will need to make regular payments, the same as a regular mortgage with the term typically fixed between 10-15 years. These are ideal for customers with an income past retirement age.

Retirement interest only Mortgage (RIO)

In 2018 the FCA authorised the latest form of equity release plans, the retirement interest only mortgage (or RIO for short). It works the same as a traditional interest-only mortgage in that you repay the interest on the mortgage each month and when finished, the balance remains the same as when you started. There are strict rules for proving income and passing lending criteria with retirement mortgages, both repayment and interest only. The main difference with RIO mortgages is that the term isn’t fixed. You pay the interest each month until you die or move into long term care

Home Reversion

A home reversion plan is an equity release product that allows you the opportunity to sell a percentage of your property (at its current market price), without having to move out, in return for a tax-free cash lump sum or monthly income payments. However, the equity release company won’t get its hands on anything until the property is sold, whether that is when you pass away or move into long term care. The amount the company offers to you will be well below the share’s actual value. For example, a 20% advance means surrendering 70% of your property’s value. The lender takes a larger share of your property, as they lend an initial amount and then have to potentially wait a long time before they see their money back.

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Difference between equity release products

Now that you know what a home reversion, lifetime mortgage and retirement mortgage are, let’s take a quick look at the differences between them

Cash Release

With a lifetime mortgage, you borrow from an equity release lender. You take out a new mortgage that runs until you die or go into long term care. The interest is fixed and runs for as long as you live. With a home reversion plan, you sell a percentage of your home to an equity release lender who recoups their money when the home is sold, you die or go into long term care. Neither of these products have any regular repayments needed as the lender gets their money at the end

With a retirement mortgage or RIO, you release money in the same way as the other Equity Release schemes but make regular payments, like a traditional mortgage.

As we said before with a lifetime mortgage, you can choose to take money upfront or in installments or even as a drawdown

We go into full details on each of these in our Lifetime Mortgage Guide

Lender’s Earnings

The lender charges interest on the loan amount with a lifetime mortgage. Your debt increases with time as the interest is compounded monthly (Interest charged on interest).

With a home reversion plan, the lender makes money by selling your home to retrieve their amount and make a profit when you die or move to permanent care.

A retirement mortgage works like a traditional mortgage and runs for a fixed term of usually 10-15 years. You can either pay full repayments (capital and interest) or interest only. Either way, the lender receives their money in the form of fixed interest with each repayment.

Age

A home reversion plan is for those aged over 65, whereas lifetime and retirement mortgages are accessible to those over 55.

Ownership

With a lifetime or retirement mortgage, you retain full ownership of your property while with a home reversion plan, you sell a percentage of your property.

Borrowed Amount

You can borrow a maximum of 50% of the value of your home with a lifetime or retirement mortgage. For a home reversion, lenders offer between 20% to 60% of the value of the share of your home.

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Why take out equity release?

Here are a few reasons to consider enrolling in an equity release scheme;

• You may have built up noticeable equity in your home as property prices have increased since you bought it
• Many people use equity release as a way to fund their family's futures, giving money to children for a deposit on their home.
• You can consider equity release to unlock your property’s equity for home and garden improvements and upgrading your living standard.
• You can use equity release to boost disposable income. A tax-free lump sum can provide a long-term retirement income or cover care costs.
• You can plan and fund your vacations at a later age through equity release schemes.

What are the main advantages & disadvantages of an equity release product

What are the advantages of equity release?

There are a lot of advantages to equity release. A few of them are:

• You will retain ownership of your home until you move into long-term care or die. You can choose how you spend your money. For example, use it to pay for care, re-invest it, fund vacations, or make home improvements.

• You’ll have negative equity guarantees. Therefore, you’ll never pay more than what your property is worth when the product life ends, as the product is backed by the ERC.

• Tax-free access to money

What are the disadvantages of equity release?

Every financial product comes with a few disadvantages. Let’s take a look at some for equity release.

• Equity release can result in a reduced inheritance amount that you leave behind.

• With equity release products, valuations are often lower than you might get for it on the open market.

• Equity release schemes affect your tax status and entitlement to specific welfare programs.

• Interest rates in equity release schemes can be higher than conventional mortgages or other loan options (although most traditional mortgages aren’t available to over 55’s)

Costs involved in equity release

There are a few costs involved in setting up an equity release such as: • Legal fees • Financial advice fees • Valuation fees • A mortgage arrangement fee • A completion fee These costs can vary when compared with different equity release companies. Generally, you should allow for anything between £2,500-£3,500 for these fees.

Equity Release Council

The equity release council (ERC), launched in 2012, is a UK organisation that promotes safe equity release products and ensures to safeguard the interest of the homeowners who opt to take out equity release from different UK lenders. The ERC is supported by leading providers of equity release schemes and works with the UK government. Each member of the ERC council that offers equity release products, is bound by its comprehensive principles which aim to make the product safe for its consumers. ERC Statement of Principles The ERC statement of principles offers peace of mind to equity release companies and their consumers. The comprehensive principles mention that the members will: • Make sure that their actions promote confidence and awareness in equity release • Act at all times in good faith, with the best interest of consumers in mind, treating them fairly in all their actions • Ensure conflicts of interest are pointed out quickly and managed in all fairness • Deliver acceptable outcomes for consumers from the start of the equity release, through every point of contact during the life of the product ERC Product Standards According to ERC, the equity release product standards are as follows. • Interest rates must be fixed for lifetime mortgages. A cap should be used for variable interest rates till the life of the product. • You have the right to stay in your home until you move into long-term care or you pass away. • The equity release product must have “No negative guarantee”. It means that when the property is sold, and the agent and solicitor fees have been paid, if the amount left is not enough to repay the outstanding loan, you won’t be liable for them. • You can move to a new property if the new property is acceptable by your equity release provider.

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