What is Equity Release?
Types of Equity Release
This is the most common type of equity release. You borrow money secured against your home, while being able to remain in your home.
The mortgage does not require you to make monthly repayments as the interest will roll up and be added to the loan, however, some plans will allow you to clear all or part of the interest, rather than roll up.
The mortgage is usually repaid from the sale of your home when you die or move permanently into residential care and any remaining balance is passed back to your estate.
Home Reversion Plan
You raise money by selling all or part of your home to a home reversion provider in return for an income or lump sum, while continuing to have the right to live in it, until you die or move into permanent residential care. Sage Equity Release do not provide advice on home reversion schemes.
Do I Qualify for Equity Release?
- For a lifetime mortgage you (or both of you) need to be at least 55 years old.
- For a home reversion plan most providers need you (or both of you) to be at least 60 years old.
- You must own a standard property in the UK.
- Your property must be in reasonable condition and valued over £70,000. There may be further restrictions dependent on the type of property you own.
- If you have a mortgage or secured loan on your property, you’ll have to pay off any outstanding mortgages or loans secured against your property at the same time as taking out the equity release.
- You do not need to earn an income.
- If you have had credit issues in the past we may still be able to help you.
- If you have anyone over 17 years of age living with you (apart from the property owners), they should take separate legal advice. If they wish to remain living with you in the property, they may need to sign a waiver confirming that they understand they don’t have the right to reside there if you die or move into permanent residential care.
Peace of Mind
Is Equity Release Safe?
Equity release products are safe as they are regulated by the Financial Conduct Authority (FCA). This is the UK’s financial regulatory body whose aim is to ensure protection for consumers.
In addition, equity release is governed by the Equity Release Council (ERC), who provide extra safeguards such as:
- You can live in your property for life, or until you move into permanent residential long-term care.
- You can move home and move your plan to an alternative property (providing it is acceptable to the equity release product provider).
- No Negative Equity Guarantee, which means you will never owe more than the value of your home when it is sold after you die, or move into permanent residential long-term care.
All providers and plans that we recommend are covered by these Equity Release Council Guarantees and all members must adhere to the Council’s Statement of Principles, designed to promote high standards of conduct and practice.
Things to Consider
What should you be aware of?
How much to borrow?
It is important to take what you need….but not more than you need!
Lump sum or drawdown?
Lifetime Mortgages can be taken as a lump sum, as an income, as a drawdown, or a combination.
If you have a one-off significant expense such as the need to repay an existing mortgage, or for large home improvements or a one off purchase such as a camper van, or a holiday of a lifetime, then a lump sum could be suitable.
If you only need a small initial amount now and then future sums as and when you need them then a drawdown could be the right option as you will only start to pay interest on the money once you borrow it or ‘draw it down’.
If you need an income then you can now have a fixed income plan, which may be suitable, as again you only pay interest on the money when you borrow it. These plans will pay you a fixed income for a set period.
As equity release normally reduces the value of your estate, it could mean a reduced inheritance for your beneficiaries and loved ones. It is always important to discuss your intentions with your beneficiaries prior to taking out an equity release plan.
If leaving an inheritance is important to you, it is now possible to include an inheritance protection guarantee to some lifetime mortgages, to provide that peace of mind.
Inheritance protection can ensure that even after taking a release of equity, you can guarantee that some equity in your property can be passed to your chosen beneficiaries.
Early Repayment Charges
Lifetime mortgages, as the name suggests, are designed to run for the rest of your life.
In the event that you wish to repay the loan early by either selling your home, or because you have come into funds which will enable you to repay the mortgage, then the lender may ask you to pay an Early Repayment Charge.
These charges can either be fixed or variable, however they can run for a considerable length of time and be expensive, so ensure you understand all the penalties on your plans and that your adviser explains them clearly.
Our clients are always aware of any penalties on their plans, as we ensure these are explained clearly and thoroughly, prior to any plan being taken out.
Whilst we ensure we highlight this should we feel it could effect you, it is always recommended that if you are in receipt of any means tested benefits that you check to ensure that these will not be effected prior to taking out any plan.
If you do not clear the interest and let it roll up, then the interest will compound (simply this means interest will be charged on the interest).
Compound interest can increase quite rapidly in some circumstances and eat into any remaining equity you may have.
An example would be if you took out a Lifetime Mortgage for £50,000 at an interest rate of 4%, then after approximately 18 years that debt would have doubled to £100,000.
It is worth noting though that you would also have had 18 years’ worth of potential house price growth to factor in, however, this can never be guaranteed, as house prices can go down as well as up!
If you need a lump sum then you could consider selling your home and moving to a smaller property or a cheaper area to release some of the equity in your current home.
If you need additional income you may want to consider taking in a lodger or renting a room out to provide additional income, some of which could be tax free.
Traditional mortgages or RIO’s (Retirement Interest Only mortgages)
A number of lenders now will lend into retirement, so if you have a reasonable monthly income, or are still working and you are happy to make a contractual monthly mortgage payment, then this is always an option that needs to be explored.
In the event we feel this option would suit your needs, we will always discuss this with you and will be able to refer you to a trusted partner, should you wish to explore this further. Your Home (or property) may be repossessed if you do not keep up repayments on your mortgage.