Let us answer eleven important questions to better understand how equity release works and why it is important to seek professional advice if you are considering taking this route.
1. What is equity release?
Equity in your home is the difference between the value of your property and the balance of any debt that is secured on your property, such as a mortgage. Equity release is a term for a range of financial products designed to help you turn the equity you have in your property into money you can use. The most popular form of equity release is called a lifetime mortgage and is aimed at homeowners aged 55 and over.
2. Who is eligible for equity release?
You must be aged 55 or over if you wish to apply for equity release. If both you and your partner are on the deeds of the home, then you must both be aged at least 55. Many equity release providers will insist on your property having a minimum value of £70,000.
You can release equity from your home if you haven’t yet paid off your mortgage, but you must repay your mortgage before you complete the transaction. Many people use the proceeds from the equity that they release towards this. You can then spend the rest on whatever you want.
3. Can I release equity from any property?
The property you are releasing equity from must be your permanent main residence, which you live in for more than six months of the year. Some equity release providers may be reluctant to accept your application if there is anything unusual about your property, such as if it is of non-standard construction. An equity release adviser would be best suited to find out if your home is acceptable to lenders.
4. Can I stay in my home with equity release?
Many people, once they reach retirement, are finding themselves asset-rich and cash-poor. Yet they don’t usually want to downsize to free up capital. Equity release enables you to stay in your home and to release the money you need.
5. How does an equity release calculator work?
An equity release calculator can give you an idea of how much tax-free equity you can release from your home. Using one is important to understand how equity release works because by providing your age and your estimated property value, the calculator can give you an estimation of how much cash you could release from your home.
6. Are there different types of equity release products?
Yes, there are two main types of equity release schemes: lifetime mortgages and home-reversion plans.
How does equity release work with a lifetime mortgage?
With a lifetime mortgage, the most common type of equity release scheme, you can either opt to release equity from your home in a lump sum, or you can take it out in stages up to a limit agreed with your equity release product provider at the outset.
There are no required monthly repayments but with some plans you will have the option to make payments. If you do not pay anything, the interest that is charged is compounded, meaning it is charged not only on the amount borrowed, but also on any interest that has built up from the previous month.
This means that the longer you hold the loan, the more interest you will be charged. Lenders approved by the Equity Release Council have to offer lifetime mortgages with a fixed interest rate, and, where rates are variable, there is a fixed upper limit. All of their lifetime mortgages will also come with a no-negative-equity guarantee, so that in the unlikely event you owe more than your home’s value, the remainder will be written off.
Home reversion plan
The other main type of equity release product is a home reversion plan, although these now account for less than one per cent of the market. With this type of scheme, you sell part or all of your property to a plan provider, and they will pay you a tax-free lump sum in return.
This lump sum won’t be for the market value of your home because the provider is giving you the right to live there rent-free for the remainder of your life. When you die, your property will be sold and some or all of its value will go to the company that sold you the reversion plan, depending on the percentage they bought.
7. How does equity release get repaid?
Your loan and any interest to be paid doesn’t become repayable until you either pass away or enter long-term care. You retain complete ownership of your property and have the right to remain there for the rest of your life. If you have taken out an equity release product with your partner, the loan only has to be repaid when the last deed holder has passed away or entered long-term care.
There are some options if you then want to move
If you want to downsize, some products allow you to repay what you owe without penalty when you move. Otherwise, you are able to take the product with you, provided the new property meets the lender’s criteria.
8. How much can I borrow against my property with equity release?
The amount you will be able to release from your property depends on your circumstances and which equity release provider you use.
The way it works is:
- The equity release lender you choose will have your home professionally valued so they know how much it is worth
- They will also look at your age to help them decide how much you can release. You might be able to release more if you currently have or previously have had a medical condition
- Once you receive an offer, you will need to visit a solicitor with experience in equity-release conveyancing
- Your solicitor will walk through everything with you before you sign the necessary documents
- When this has been done, you could receive a cheque in as little as two to four weeks, although it can take longer
9. What are the main disadvantages of equity release?
Taking value out of your home now means that there will be less available to your estate in the future. This will affect the amount you can leave as an inheritance when you die, so it’s a good idea to let your family know if you are considering equity release. They will then be aware of the impact this could have on them in the future.
10. Do the funds released have to be used for a particular purpose?
No, the money you release from your property can be used as you wish. Some people use the equity to help family onto the property ladder, to make home improvements, or to boost their disposable income in retirement.
Taking your equity as a lump sum could also affect your entitlement to means-tested benefits and your tax position, so it’s vital that you seek professional financial advice before you proceed. This will help you understand the financial impact of taking this route.
11. Are equity release products regulated?
Firms who arrange equity release products and providers of these products are regulated by the Financial Conduct Authority (FCA).
It’s also a good idea to deal only with providers and advisers who belong to the Equity Release Council trade body. This means they must abide by the Standards Board’s Statement of Principles, so they have to provide the best advice and service.
They must also guarantee that you will never end up in a situation of negative equity whereby you owe more than your home is worth. This is guaranteed no matter what happens in the property market. Another benefit of choosing a provider covered by the Equity Release Council is that it must be portable, so you can transfer the plan to another property, subject to lending criteria, without having to pay a penalty.
- Why not use the free equity release calculator, provided by our partners Responsible Equity Release, to see an estimate of the amount that you could release?
The Telegraph Equity Release Service is provided by Responsible Equity Release. Responsible Equity Release is a trading style of Responsible Life Limited. Responsible Life Limited is authorised and regulated by the Financial Conduct Authority and is entered on the Financial Services Register (https://register.fca.org.uk/) under reference 610205. Only if you choose to proceed and your case completes will Responsible Life Limited charge an advice fee, currently not exceeding £1,490.
If you would like more information on how equity release works, simply call 0800 0291087 to request a guide or to arrange your free consultation. Lines are open between 9am – 8pm Monday to Friday and 9am – 5pm on Saturday.
The above article was created for Telegraph Financial Solutions, a member of The Telegraph Media Group. For more information on Telegraph Financial Solutions click here.
Information correct at date of publication.