Equity Release is the over-arching term used to describe a range of products that allow you to release money tied up in your home.
For most people the family home is their biggest asset. However, it’s not of much practical use if you find yourself needing a cash boost and your income isn’t quite measuring up. Equity Release products allow you to access money tied up in your home while retaining ownership.
However, releasing equity is a big step and there are specific criteria to meet so it’s crucial to take qualified, independent advice in order to fully understand the risks and benefits before making any decision. But set up properly, Equity Release products can provide the funding you need – how you spend the money is up to you.
There are two main types: Lifetime Mortgages and Home Reversion plans. But within that there is flexibility in, for example, how you take the money, or repay it. However, you must be at least 55 years old to qualify.
- Lifetime Mortgages
These allow you to continue to own your own home and to borrow money against it. There is interest to pay on the loan and you can either pay all or part of this interest, or choose to pay nothing and have the interest (compounded) added to the loan. The loan amount plus any interest is normally repaid to the lender upon death or when you need to move into long-term care. With a Lifetime Mortgage, the amount you’re able to borrow depends on your age, health and the value of your home. We recommend that you involve family in your decision to take out an Equity Release contract as it will have an effect on the inheritance they will receive.
Lenders are becoming more flexible and adapting to people’s needs. For example it is possible to guarantee that an agreed percentage of your home’s future value is kept for beneficiaries; ad hoc payments can be made without penalty; a cash drawdown facility can be included.
Key fact: you must be aged over 55.
- Home Reversion
This is a product that allows you to release capital by selling all or a part share of your property to a provider who then grants a lifetime tenancy allowing you to remain living in your home until your death (or for a couple, the death of the remaining partner) or move into long-term care. Generally, the older you are the greater the amount you can release or the smaller the share of the property you need to sell. It’s not for anyone under age 65.
Key fact: you must be aged over 65.
Set up properly, Equity Release products can provide security, a helping hand for offspring to get on the housing ladder, or home improvements. And increasingly, this option is being taken to cover a shortfall in retirement income or to repay an interest only mortgage due to mature without adequate provision for repayment.
Having once lurked in the darkest recesses of this sector – a last resort option with a risk of losing your home to a mortgage lender – Equity Release products are now firmly part of the mortgage product family.
Its popularity as a way to unlock the value of a home has also meant that regulations have become tighter for these products. Equity Release advice and lending is now fully regulated by the Financial Conduct Authority (FCA) and further safeguards are provided by the Equity Release Council (ERC). One of these safeguards is the ‘no negative equity’ guarantee, meaning that provided you’ve met the lender’s terms and conditions you, or your beneficiaries, won’t have to pay back more than your property is sold for. This is provided it is sold for the best price reasonably obtainable.
But this route isn’t for everyone and there are specific criteria to meet. Remember, it’s likely to reduce the amount you pass on to beneficiaries when you die, may restrict your moving house in the future, there are fees payable, and there could be early repayment charges. Additionally, entitlement to means-tested benefits may be affected, and it may also restrict the future amount available from your property should you need to fund long-term care.
If you are strongly opposed to Equity Release, it is encouraging to note that a number of lenders offering standard mortgages have begun to loosen their criteria when considering later life lending. Some have increased the maximum age that they will allow the term to run to provided they are satisfied the repayments are affordable until the end of the term. Other lenders have introduced retirement interest only (RIO) mortgages. With this type of product, interest must be paid each month on the amount borrowed but there is no term and the capital would normally be repaid once the borrower (or remaining borrower if a joint mortgage) has died or moved into long-term care.
Whether it’s right for you as an option, will depend on your circumstances. It’s crucial to take qualified advice so that you fully understand the risks and benefits before making any decision. It’s also essential to involve any dependants or potential beneficiaries in the process so they are aware of the potential outcomes.
- Case Study
Our Property Finance Advisers recently helped one of our clients achieve a very favourable outcome with a Lifetime Mortgage:
The client is in their early 70s and was introduced to Rouse Limited by an existing client.
The client receives the state pension along with income from three small pension annuities from insurance companies. They have just enough to live on each month after paying rent – which ate into their savings and they considered it a waste of money.
During the initial meeting, (free and without obligation) they indicated they were very keen to own their own home again as, among other reasons, they were worried about future rent increases and the possible sale of the rented property. A two bedroomed flat was on the market for £120,000, in the desired location.
Our advisers, took the time to explain the options available and indicated that it may be possible to secure a Lifetime Mortgage which, when combined with savings, would be enough to cover the cost of the purchase price and the initial costs involved with the purchase.
Having completed a detailed Equity Release fact find questionnaire and carried out research, our advisers recommended an ‘interest roll up’ Lifetime Mortgage product.
A detailed suitability report, including full details of the mortgage product, the reasons why this particular product had been recommended when comparing all similar products in the market along with the risks involved, together with a mortgage illustration, were provided and the contents fully explained, before an application was submitted to the lender.
The client was surprised and delighted to be told that it was still possible to obtain a mortgage and there were no monthly repayments to make. This helped make them more financially secure and removed the worry about paying rent and making ends meet each month.
The client had thought that Equity Release products were only available to existing home owners and didn’t realise that a Lifetime Mortgage could be used to help to fund a house purchase.
The client is fully aware that by not making monthly interest payments and by choosing to have the interest ‘rolled up’, the amount borrowed plus the compounded interest will have to be repaid to the lender and that the debt will grow more quickly. Repayment would normally be on death, or if they have to move out of the property and into long-term care.
The client has discussed the plans with the family member who is sole beneficiary of the estate and made them aware that this will affect the inheritance as the equity in the flat will reduce, potentially to nothing, in the future. They have confirmed that they fully understand and support the client’s plans.
If you are considering Equity Release as an option, please call Sara Reed, our Property Finance Adviser on 01983 535740.
Your home may be repossessed if you do not keep up repayments on your mortgage.
The Financial Conduct Authority does not regulate some forms of Buy to Let Mortgages.
To understand the features and risks of a lifetime mortgage you should ask for a personalised illustration.