A guide to equity release
First published 20 October 2017 • Updated 25 March 2019
As you enter later life, you may find you need additional sources of income. One solution may be to release some money from the value from your home, while continuing to live there. This is known as equity release. This is a major decision, so should never be taken without independent professional advice.
What does equity release mean?
Your equity is the total market value of your home, minus any mortgage you haven’t yet paid off. In short, it’s the sum you’d walk away with if you sold the home for cash.
But if you don’t want to sell your home, you may still be able to access a large portion of this money. If you have paid off your existing mortgage (and so own your home outright) you can consider an equity release scheme.
Equity release can provide you with a large sum of money to spend while enabling you to continue living in your home. It can be particularly useful for covering large expenses later in life, such as long-term care. However, there are downsides to accessing the value of your home in this way.
Generally, to use equity release you need to be between the ages of 55 and 95. There are two main types: lifetime mortgages and home reversion schemes.
This is the most popular type of equity release. You borrow a lump sum in the form of a mortgage, which is eventually repaid from the sale of your home either when you die or move into long-term care. The amount you can borrow is usually between 18 per cent and 50 per cent of the property’s total value – typically the older you are, the more you can release.
The amount you owe will grow with interest, but you can sometimes reduce this by paying off the interest as you go (this is known as an interest paying mortgage). Also, most providers now offer a ‘no-negative-equity guarantee’, which means the debt will never be more than the sale value of the property.
You may qualify for an enhanced lifetime mortgage if you have a serious health condition or an unhealthy habit, like smoking. This can enable you to borrow more, or to pay lower interest.
Talk to your financial adviser about the pros and cons of a lifetime mortgage.
Home reversion schemes
With a home reversion scheme, you sell all or part of your property – but with a legal right to continue living in it until you die or move into long-term care. The money can be paid to you either as a lump sum or as a regular income, whichever you prefer.
Whether you sell all or only part of your home, you won’t receive full market value for it, so bear this in mind when making your decision. Some providers of home reversion schemes require you to be over 60.
If you’re considering a home reversion scheme, you can speak to a financial adviser to find out what suits your future wishes and financial situation the most.
How am I protected?
The Equity Release Council was set up to protect people from losing out from these schemes. Any equity release company that has the Equity Release Council logo on their material must ensure you can still live in your home until you die or move into permanent care. They must also ensure that you will never owe them more than the total sale price of your home, even if its value drops. You also have the right to ask a solicitor to check all the documents before signing up to a scheme.
What are the risks?
One downside of an equity release scheme is that it will reduce the amount of inheritance your beneficiaries could otherwise receive. With a lifetime mortgage in particular, you run the risk of owing far more than you borrowed when the time comes for the home to be sold – up to the total value of the property (but not more than that).
This is because a lifetime mortgage (like a regular mortgage) charges compound interest. If you don’t pay off the interest at regular intervals, the entire sum will compound – so at around 5 per cent interest, the amount you owe would double every 15 years. This is a good reason to be cautious of lifetime mortgages if you hope to leave a good inheritance for your family.
One way to reduce this risk is to take out a series of smaller lifetime mortgages over the years. This way you will not be paying interest on the whole sum for the whole period of time, so the amount you end up owing will be less.
Another good reason to do this is that your money is better off invested in your home (where it is likely to grow) than in a cash bank account. Yet another is that having lots of money in your account may reduce the benefits you are entitled to, including help with the cost of care. The value of your home is not included in any means test as long as you are living there – but cash in the bank certainly will be.
Always ask your financial adviser or mortgage broker to explain the risks to you in detail. including how much it could cost your family in the long term, and whether downsizing might be a better option.
Can I end the scheme early?
You can choose to end your equity release scheme early, but this can cost you. If you’ve changed your mind, it’s important to speak to a financial adviser as soon as possible to work out the most cost-effective way of organising your finances. (Even better, go over all your future plans with your adviser at the start, so you’re less likely to change your mind.)
If you want to move home, you can keep your scheme running as normal. You’ll have to tell your equity release company so that they can decide if your new home is similar in value.
How do I set it up?
Your financial adviser or mortgage adviser can help you decide whether an equity release scheme is appropriate, or whether you should consider other options such as downsizing instead. Your adviser can also find the best one for you from the whole of the market and set it up for you. As an extra safeguard, have your solicitor check over the agreement you have with the equity release company before signing it.
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