What is Equity Release?
Equity release is a way to access some of the money tied up in the value of your home without having to move house. As a rule, you can take the money you release in a one-time payment, in several smaller instalments (to which you’ll pay interest), or as a combination of both.
You can usually release somewhere between 20% and 50% of the equity in your home. The exact amount will depend on your age and personal circumstances.
What types of plan are available?
The most widely recognized type of value is a home loan (mortgage) that isn’t paid off until you die. So, if you have no one to leave your valuables to, it’s a decent, though expensive, route to raise money. The money you release will need to pay off any outstanding mortgage first. The rest is a tax-free sum that is yours to spend as you wish.
If you do have people to pass assets to, equity release generally means there will be less for them to inherit. Then again, it is your money, so prioritise your own standard of living. Equity release products fall under two main categories:
1. Lifetime mortgage
This is the most popular and for those aged 55+.
Here you borrow a portion of your home’s value at a fixed or capped interest rate. Unlike conventional mortgages, where interest is charged on an amount that decreases with time, interest on lifetime mortgages is charged on an increasing sum, so your debt can grow quickly. This is because you don’t make any repayments, so the interest on the loan is therefore added to your debt on a continual basis.
Some ‘drawdown’ versions do allow you to pay back the interest, so you can reduce the overall cost. With this type, you can take money out of your property a bit at a time up to an agreed amount – with premium charged on the amount you take, rather than the entire amount available.
What does it cost?
To take up a lifetime mortgage, consideration needs to be taken for:
- Buildings Insurance
Legal fees and valuation fees
An arrangement fee to the lender for the product
A fee to an adviser for their advice and helping you set up the scheme
A completion fee, which can be paid at the point of completion or added to your mortgage.
These costs might add up to £1,500-£3,000.
2. Home reversion scheme
This is for those aged 65+.
Here a provider pays you a tax-free lump sum for a portion of your home at below market value. You can then live in the property (rent-free) until you die. When it’s sold, the proceeds are split based on the percentage you own and the lender owns. So if your property value rises significantly, so does the amount it gets.
Therefore with lifetime mortgages you know the exact rate, while as a generalisation home reversion plans are better if property prices stay flatter, worse if they rise substantially.
What does it cost?
To take up a home reversion, consideration needs to be taken for:
- Maintaining the property
- An arrangement fee to the provider for the product
- A fee to the adviser for their advice and help setting up the scheme
- Valuation fees – the valuation will determine how much you sell your home for, so make sure you pay for an independent valuation and never accept a valuation suggested by the reversion company
- Legal fees – make sure you pay for independent advice; the terms of the lease must be scrutinised by a solicitor appointed by you, and not by the reversion provider.
Advantages of Equity Release
- Equity release schemes enable you to release some of your home’s value but live in your home for the rest of your life rent free.
- Any money released is TAX FREE.
- Under a Lifetime Mortgage you can choose to either pay the interest each month to avoid the debt increasing, or simply allow it to be continually added to the amount borrowed. Alternatively under a Home Reversion plan you can sell some or all of your homes ownership to provide a lump sum of money without needing to pay any rent.
- All Equity Release Council approved schemes offer ‘no-negative equity guarantee’, which means you can be assured that any debt you create, plus any on-going interest which you might choose to add to the sum borrowed, will never become more than the property’s future value when you die.
Disadvantages of Equity Release
- Equity release schemes involve borrowing against your home, (or in the case of Home Reversion Plans – selling all or part of your home) and may work out more expensive in the long term than downsizing to a smaller property.
- Equity release may affect your entitlement to grants and state benefits
- Releasing equity will reduce your home’s value and therefore the amount of inheritance you will be able to leave. It can also make it more difficult when leaving your property to beneficiaries
- It may be difficult to end the plan and you may incur penalties to do so.