A guide to Equity Release

Amanda Gillam
25th April, 2019
Equity Release

If you own your own home then equity release is often highlighted as a quick and easy way to release some of the capital tied up in it. It is offered to those aged 55 and over and is designed to be a way to re-access some of the value in the property. As equity release is tax free it is a very attractive option for those who may need to create some cash flow. There are several products that now come under the equity release umbrella, from those that offer a lump sum to equity release you can receive in regular, smaller payments. Equity release is a big decision – and there can be substantial costs involved – so it’s important to ensure you have all the facts before you make a decision.

The two main types of equity release

Lifetime Mortgage

A lifetime mortgage means that you retain ownership of the property. Just like a regular mortgage you can opt to make monthly repayments on what you’ve borrowed. Alternatively, you can simply allow the interest to roll up. If you do the latter, the property will be sold when you die – or go into care – and the mortgage repaid from the proceeds.

A lifetime mortgage is available to the over 55s
If you choose not to make any repayments, be aware that the debt can increase quickly (interest on the interest, etc)
Factors, such as your age and the property value, will have an influence but it’s normally possible to release up to 60% of the equity in your home with a lifetime mortgage
The “no negative equity guarantee” means that, even if there isn’t enough left to repay the mortgage after the property is sold, neither you nor your estate has to pay any more

Home Reversion

Home reversion means that ownership of your property passes to the lender in exchange for regular payments to you and the right to live there until you die. The main obligations to bear in mind for home reversion are the requirements to insure the property and also to maintain it.

Home reversion usually has a minimum age of 60 or 65
You can sell all of your home to a home reversion provider, or just a part of it
Home reversion providers will usually give you between 20% and 60% of the market value of whatever you sell to them
Normally, home reversion providers will expect a certain level of maintenance to be carried out at the property
This type of equity release also comes with a “no negative equity guarantee”

Both options for equity release offer the opportunity to ring fence a proportion of the value of the property so that this can be set aside for a specific purpose, such as inheritance.

Key questions to ask if you’re considering equity release

Equity release is certainly not right for everyone and there are “horror stories” where things have gone wrong. Tread carefully.

Would it be better to downsize? If you sell and move to a smaller property you could release cash from the move without incurring the interest involved in equity release.
What kind of inheritance do you want to leave behind? Equity release is ideal for anyone who doesn’t have family or friends they want to leave inheritance too. However, if you do have people you want to provide for on your death equity release will reduce what is available to them.
How much is the equity release going to cost? Lifetime mortgages, for example, are not the same as regular mortgages. Average interest is around 5.1% and if you choose not to make repayments the interest will repeatedly compound. Both types of equity release may also come with an arrangement fee.
Are you likely to want to move home? It’s possible to move home if you have taken out equity release on a current property – however, the new property must provide enough security for the lender to allow the transfer of equity release to take place.
Is the provider a member of the Equity Release Council? This will ensure that your equity release product comes with the “no negative equity guarantee.”
How much do you really need to borrow? With equity release it makes more sense to borrow less initially and then borrow more at a later date, if necessary. That’s because, as soon as you start to borrow, the interest begins to add up.
How will it affect your benefits? Receiving a lump sum or regular payments may have an impact on any means tested benefits that you currently get.
Are you sure that equity release is for you? It’s important to be completely sure about equity release before you do it, as it can be difficult to unwind an equity release situation once it has been set up.