What is Equity Release?

What are the types of Equity Release?

There are 2 main types of Equity Release in the UK.  The original type (and what many still think is the only type) is the “Home Reversionary” plan which involved the pre-sale of your property, for cash today, with the property reverting to the possession of the Home Reversionary provider when the last applicant passes away or enters long term care.

Most Equity Release plans taken out these days are the more modern version of Equity Release called the “Lifetime Mortgage“, which acts more like a regular residential mortgage that many are familiar with.  However, unlike a regular mortgage the Lifetime Mortgage usually has no end date or maximum age, does not require the applicant to have an income and most have a “no negative equity” guarantee which means the loan amount can never be more than the value of the property.  This arrangement is far more flexible than a Home Reversionary plan and offers more options, especially in terms of repaying the loan, moving house, selling the property or even releasing more cash in the future.

Who is Equity Release For?

Equity Release can be an attractive option for people looking to unlock the wealth tied up in their home as it is a way of releasing funds that can be spent today whilst retaining the right to live in the property for the rest of their life.  As such, it is naturally aimed at those home owners of a certain age who both have surplus equity in their property and a need or desire for money to spend on themselves or their family.

If you are looking to supplement your income, fund a holiday or home improvements, pay off debts or provide financial support to family members, including a house purchase, then equity release is certainly worth considering as an option.  You will generally need to be a homeowner aged 55 or older with enough equity in your home to be released.

How old do I need to be for Equity Release?

Equity release products are generally aimed at those aged 55 and over who own a UK property with enough value in their property to support the loan.  The amount of equity that can be released will depend mainly on the applicant’s age at the time and the property’s value.  As the age increases then Equity Release providers will be willing to lend more as a percentage of the value of the property.  So although 55 is the age at which you start to be able to access Equity Release, you may not be able to release as much as you need until you either increase in age or your property value increases.

What can the Equity Release money be used for?

The money released from your property via Equity Release can be used for pretty much anything you want.  There are few restrictions and we have gone into more detail in our article on what the money released from Equity Release can be used for.

How much money do you get from Equity Release?

The amount of money that an Equity Release provider will payout is mainly based on the ages of the applicants and the value of the property.  Generally, the older the (youngest) applicant and the higher the value of the property then the more money that can be released.  Each lender calculates the amount in different ways, and these amounts change over time as both the lenders themselves change the amounts they are willing to lend.  Long term UK interest rates and gilt price (which can feed into the cost of an equity release plan) changes can also have an effect.

Please have a look at our article on how much you can borrow with Equity Release to find out more details.

What are the benefits of Equity Release?

Equity Release has many advantages for UK homeowners of the right age.

It provides homeowners with a way to access the wealth tied up in their property, without having to move or sell and downsize.  This can be especially beneficial for those nearing retirement who may need additional funds to maintain their lifestyle, or those looking to improve their home.

You generally don’t have to make any repayments unless you want to.  If you choose not to make repayments (and so have no outgoings for the Equity Release plan) then the interest is added to the loan and is repaid when your home is sold. This makes it easier for those on fixed incomes as there’s no need to worry about making regular payments. It also means you can maintain ownership of your home until the end of your life, or until it’s sold (assuming you take out a Lifetime Mortgage type of Equity Release).

Most Equity Release plans taken out these days (certainly those from providers who are members of the Equity Release Council) have a “no negative equity guarantee”.  A “no negative equity guarantee” means that in the case of a Lifetime Mortgage, if the value of the loan is higher than the value of the property when it becomes time to sell, then the lender will only be able to request repayment at the maximum of the property value, and the Equity Release provider will have to cover the rest of the loan balance.  This means that borrowers can have extra security that there will not be extra demands from the lender on the remaining family as a result of the loan becoming larger than the property value.

Another advantage of Equity Release is that it can be tailored to your individual needs. For example, you can choose whether to take a lump sum or drawdown payments over time, and you can also choose how much you wish to borrow.

Finally, Equity Release can also be a more tax-efficient way of accessing your money. For instance, if you opt for drawdown payments rather than a lump sum, you may benefit from paying fewer taxes as the payments will be spread out over a period of time.

Overall, Equity Release can provide a great solution for those looking to access some of their property wealth. With careful consideration, it can help unlock a valuable asset while ensuring that you remain in control of your finances.

What are the risks of Equity Release?

Equity Release is a major financial decision, and like any decision of this magnitude, there are risks associated with it that should be carefully considered.   These risks can vary depending on the type of Equity Release product you choose as the way in which a Home Reversionary Plan and Lifetime Mortgages work can be quite different.

Some of the potential risks of Equity Release include:

• Reduced inheritance: One of the primary risks associated with equity release is that you may reduce the amount that your family will be able to inherit. If you opt for a Lifetime Mortgage plan, for instance, any interest accrued on the loan will be added to the original amount borrowed, meaning that your estate will have less value when you pass away.  Although with a “no negative equity guarantee” this risk is effectively capped at the value of your property.

• Unaffordable repayment plans: Depending on the type of Equity Release plan you choose, you may have to make regular payments towards your loan. If these payments become unaffordable then you could end up in serious financial difficulty. To protect yourself, it’s important to carefully consider your budget before taking out an Equity Release plan.

• Tax implications: It’s important to note that if you opt for a Lifetime Mortgage any money released from your home could be liable for tax. You should speak to an accountant or a suitably qualified financial advisor or professional to find out more details about your own unique situation.

• Fees and charges: When taking out an Equity Release plan, you should always read through the terms and conditions very carefully and understand all the fees that could be due.  There can be fees from the provider regarding the taking out of the product, or associated fees such as having to find a solicitor.  These should all be taken into account when assessing if Equity Release is right for you.

These are just some of the risks associated with Equity Release. It’s important to think carefully about whether it’s the right option for you, and always seek independent advice before taking out a Lifetime Mortgage or other form of equity release.  You can find out more details in our dedicated article on the risks and if Equity Release is safe.

Final Thoughts on what Equity Release is

Equity Release can be a great way to access money tied up in your home, to be able to spend it while you’re fit and healthy enough to fully enjoy it.  

With the introduction of the new style of Equity Release, the “Lifetime Mortgage” there are now a lot more options to help you tailor your Equity Release plan around your unique situation and circumstances.  There is now increased flexibility (for example with the option to repay the plan if you change your mind) and many other options (such as Equity Protection and No Negative Equity Guarantee) which increases the chance of getting the right plan for you. 

However, despite the many benefits of Equity Release and the improvements to flexibility, there are still risks and pitfalls that you need to be aware of before you decide to go ahead.  It is still a major life decision and it’s important that you not only select the right Equity Release plan but make sure that Equity Release is right for you at all.  It is important to assess the benefits alongside the risks

If you would like to talk to an Equity Release Adviser then please get in touch as we are always happy to chat about Equity Release.  We offer a free consultation where you can explore what Equity Release is, ask any questions you may have, and see if it might be for you.  You can give us a ring on 01173 823 823 or email at contact@leafifa.co.uk.