Understanding Equity Release
Equity release is a financial option available to homeowners, typically those aged 55 or over in the UK. It allows you to unlock a portion of the equity (the difference between the value of your home and any outstanding mortgage) in your property without having to sell it. This can provide you with much - needed cash, which can be used for various purposes, such as supplementing your retirement income, paying off debts, making home improvements, or funding a dream holiday.
There are two main types of equity release schemes in the UK: lifetime mortgages and home reversion plans.
Lifetime Mortgages
A lifetime mortgage is a loan secured against your home. The key feature is that you don't have to make regular repayments on the loan during your lifetime. Instead, the loan, along with any accrued interest, is repaid when you die or move into long - term care. The amount you can borrow through a lifetime mortgage depends on several factors, including your age, the value of your property, and your health. Generally, the older you are, the more you can borrow as the lender anticipates a shorter time until the loan is repaid.
For example, a 60 - year - old with a property valued at £300,000 might be able to borrow around 34.1% of the property's value, which is £102,300, under standard terms. If they have certain health conditions that could affect their life expectancy, they might be eligible for a medically enhanced lifetime mortgage, which could potentially allow them to borrow a higher percentage.
|
Age of Youngest Homeowner
|
Maximum Percentage of Property Value which can be Released (LTV) with a Lifetime Mortgage (Equity Release) - Standard Terms
|
Maximum Percentage of Property Value which can be Released (LTV) with a Lifetime Mortgage (Equity Release) - Medically Enhanced
|
|
55
|
29.6%
|
27.3%
|
|
60
|
34.1%
|
34.1%
|
|
65
|
38.8%
|
39.3%
|
|
70
|
44.0%
|
43.8%
|
|
75
|
51.3%
|
49.1%
|
|
80
|
58.1%
|
51.5%
|
|
85
|
58.4%
|
51.5%
|
There are different types of lifetime mortgages:
-
Lump - sum lifetime mortgage: You receive a one - time payment of the borrowed amount. This is useful if you need a large sum of money for a specific purpose, like paying off a significant debt or making a major home improvement.
-
Drawdown lifetime mortgage: With this option, you get an initial smaller lump sum, and there is also a cash reserve facility. You can withdraw additional funds from this reserve as and when you need them. Interest is only charged on the amount of equity you have actually used, not on the unused portion in the reserve. This can be a good choice for those who don't need a large amount of money all at once but want the flexibility to access more funds in the future.
-
Interest - only lifetime mortgage: This is the only type of lifetime mortgage where you are required to make monthly payments. However, these payments are only for the interest on the loan. By making these monthly interest payments, the principal amount of the loan remains the same as it was when you first took out the loan. This can be beneficial if you want to keep the amount you owe from growing due to compound interest.
Home Reversion Plans
A home reversion plan is quite different from a lifetime mortgage. In this case, you sell a part or all of your home to a home reversion provider. In return, you are allowed to live in the property rent - free for the rest of your life under a lifetime tenancy agreement. The money you receive from selling the share of your home is tax - free, just like the money from a lifetime mortgage.
When you die or move into long - term care, the property is sold at its full market value. The portion of the property that you did not sell during your lifetime is then given to your beneficiaries. The home reversion provider makes a return on their investment from the share of the property they bought from you. For example, if you sell 50% of your home worth £400,000, you would receive £200,000 upfront. When the property is sold in the future, 50% of the sale proceeds go to the provider, and the remaining 50% goes to your estate.
Comparing Equity Release Options with Other Financial Products
When considering equity release, it's important to compare it with other financial products to see which one best suits your needs.
Equity Release vs. Traditional Mortgages
-
Repayment Structure: Traditional mortgages require regular monthly repayments of both the principal and the interest over a fixed term, usually 25 - 30 years. In contrast, with a lifetime mortgage (a type of equity release), you don't make regular repayments during your lifetime. The loan is repaid when you die or move into long - term care. This can be a significant advantage for retirees who may not have a regular income sufficient to cover traditional mortgage repayments.
-
Interest Rates: Interest rates on equity release products, especially lifetime mortgages, are generally higher than those of traditional mortgages. This is because of the unique nature of the loan, where the lender has to wait until the end of the borrower's life or long - term care placement to be repaid. For example, as of 2024, the average interest rate on a lifetime mortgage is around 5 - 6%, while a traditional mortgage for a younger borrower might have an interest rate of 2 - 4% for a similar loan - to - value ratio.
-
Eligibility: Traditional mortgages are typically more focused on the borrower's income and creditworthiness to ensure they can make the regular repayments. Equity release, on the other hand, is mainly based on the value of the property and the age of the homeowner. People with a lower income but significant home equity may find it easier to access funds through equity release rather than a traditional mortgage.
Equity Release vs. Retirement Interest - Only (RIO) Mortgages
-
Repayment Requirement: RIO mortgages are designed for retirees and require monthly interest - only payments. This means the principal amount of the loan remains unchanged over time. In contrast, a lifetime mortgage (equity release) may not require any monthly payments at all, although the interest compounds over time. For those who can afford to make the monthly interest payments, a RIO mortgage might be a better option as it can prevent the debt from growing as much as in a lifetime mortgage.
-
Loan - to - Value (LTV) Ratio: The LTV ratio for RIO mortgages is generally lower compared to some equity release products, especially for older borrowers. For example, a RIO mortgage might offer an LTV of up to 40 - 50% for a 65 - year - old, while a lifetime mortgage for the same person could potentially offer an LTV of up to 38.8% (standard terms) or higher with a medically enhanced plan. So, if you need to access a larger portion of your home's equity, equity release might be more suitable.
Factors to Consider Before Choosing an Equity Release Program
Costs Involved
-
Arrangement Fees: Most equity release providers charge an arrangement fee, which can range from £700 to £3,000. Some providers may include this fee in the loan amount, while others may require you to pay it upfront.
-
Valuation Fees: You will need to have your property valued by a professional valuer. This fee can vary but is typically a few hundred pounds. In some cases, the equity release provider may cover this cost, or it may be included in the arrangement fee.
-
Legal Fees: You will need to use a solicitor to handle the legal aspects of the equity release. These fees can also vary depending on the complexity of the case but can be around £1,000 - £2,000. Some equity release plans may contribute to your legal fees, and others may offer free legal advice through a panel of solicitors.
-
Interest Rates: As mentioned earlier, the interest rates on equity release products can be relatively high. The interest on a lifetime mortgage compounds over time, which means the amount you owe will grow significantly over the years. It's important to understand how the interest rate will affect the total amount you will owe in the long run.
Impact on Inheritance
Taking out an equity release will reduce the value of your estate that you can pass on to your beneficiaries. With a lifetime mortgage, the amount of the loan plus the accrued interest will be deducted from the value of the property when it is sold to repay the debt. In a home reversion plan, the share of the property that you sold to the provider will not be part of your estate. However, some equity release providers offer inheritance protection plans, where you can set aside a certain percentage of the property's value to be passed on to your family, even as the loan amount grows.
Effect on Benefits
Equity release can potentially affect your eligibility for means - tested benefits, such as Pension Credit, Housing Benefit, and Council Tax Reduction. The money you receive from equity release may be considered as capital, and having too much capital can reduce or even eliminate your entitlement to these benefits. It's crucial to seek advice from a benefits advisor or a financial advisor who is knowledgeable about the impact on benefits before proceeding with an equity release.
QA
Q: Can I still move house if I have an equity release plan?
A: In many cases, yes. With a lifetime mortgage, some plans are portable, which means you can transfer the mortgage to a new property, subject to a new valuation and meeting the lender's criteria. For home reversion plans, it can be more complicated. If you want to move, you will need to negotiate with the home reversion provider, and they may have specific terms and conditions regarding the transfer of the agreement to a new property.
Q: What happens if the value of my property goes down?
A: Providers who are members of the Equity Release Council offer a no - negative - equity guarantee. This means that when the property is sold to repay the equity release loan (either in a lifetime mortgage or as part of a home reversion plan), the amount owed to the provider will never exceed the value of the property. So, if the property value has decreased, your estate will not be left with a debt.
Q: Do I need to get financial advice before taking out an equity release?
A: It is highly recommended. Equity release is a complex financial product, and there are many factors to consider, such as the costs, the impact on inheritance and benefits, and the long - term implications of the loan. An authorised and regulated financial advisor can help you understand all the options, calculate how much you can release, and determine if equity release is the right choice for your specific circumstances.
References
-
-
-
