How does Equity Release work?
In a nutshell, Equity Release offers you the opportunity to borrow against your home’s value or exchange a part of it for a lump sum or regular income, all without leaving your home.
And if you happen to need more funds down the road, that could be possible too.
*Tax Planning and Estate Planning are not Regulated by the Financial Conduct Authority*
What are the 2 options?
Lifetime Mortgages lets you tap into your home’s value in a lump sum or smaller instalments, up to an agreed maximum.
- You retain ownership of your home.
- Interest on the loan can be fixed or rolled up, with the amount repaid from your estate upon your passing or when you move into long-term care.
- You can choose to make monthly interest payments to minimize the debt.
Home Reversion Plans give you access to part or all of your property’s value.
- You’ll know exactly how much of your property you’ve sold, and what’s set aside for future use.
- The percentage of property ownership you keep stays unchanged, regardless of property value fluctuations
- Upon plan completion due to death or moving into long-term care, your property is sold, and proceeds are distributed according to the ownership proportions.
Both options can provide additional funds while taking into account your age, health, and lifestyle factors.
*Equity Release, Lifetime Mortgage and Home Reversion plans will reduce the value of your estate and can affect your eligibility for means-tested benefits*
What is the eligibility criteria?
- You typically need to be at least 55 years old. This age requirement is a fundamental criteria for both lifetime mortgages and home reversion plans and is set by industry standards. It’s essential for consumer protection, as it ensures that you have had time to build up some equity in your property.
- You must own the property that you are considering for equity release, as you can’t apply for equity release on a property you don’t own or on a property that you only partially own.
- If you have an outstanding mortgage on the property, the amount you can release through equity release will depend on the size of your remaining mortgage. You will also have to pay off your existing mortgage and any early repayment charges with the money you release.
- Most types of residential properties are eligible for equity release, including houses, flats, and bungalows. However, certain property types, such as mobile homes and some leasehold properties, might have restrictions.
- The property should be your primary residence, meaning it’s where you live for most of the year.
- The amount you can release is often based on the current market value of your property, and lenders will typically conduct a property valuation to determine its worth. The value of the property is a crucial factor in deciding how much equity you can release.
- Some equity release providers may take into account your health and lifestyle factors when determining eligibility. These factors can affect the amount you can release. For instance, if you have certain medical conditions or lifestyle habits, such as smoking, some providers may offer you a larger sum because your life expectancy may be shorter.
- While your income and credit history typically don’t play a significant role in equity release eligibility, some lenders may conduct a financial assessment to ensure you can meet any ongoing interest payments, if you choose to make them.
- You must also have the legal capacity to enter into a financial agreement. This means that you must be of sound mind and capable of making financial decisions.
Key Considerations
Cost: Equity release can be more expensive compared to traditional mortgages due to higher interest rates. In particular, lifetime mortgages often come with interest rates that are higher than those of standard mortgages.
The debt can accumulate quickly if the interest is rolled up, which means it’s added to the loan balance rather than paid off regularly.
It’s important to keep in mind that house price growth might not necessarily cover the interest costs over time.
Term: Lifetime mortgages don’t have a fixed term or a specific date by which you need to repay the loan. The interest rate for a lifetime mortgage typically remains unchanged for the duration of the agreement, except when you take additional borrowing.
Value of Home: Home reversion plans may not provide you with a sum that truly reflects your home’s market value. The amount offered is usually less than the open market sale value.
Future Needs: By releasing equity from your home, you might limit your ability to rely on your property for future financial needs, such as long-term care. It’s crucial to consider how releasing equity aligns with your long-term financial plans.
Flexibility: If you decide to move to a different home while holding a lifetime mortgage, you might not have sufficient equity left in your current property to downsize. In such cases, you may need to repay a part of the mortgage.
Equity release schemes can be complex and costly to unwind or change if you change your mind or your circumstances evolve.
Impact on Benefits: The money you receive from equity release could affect your eligibility for means-tested benefits. It’s crucial to understand how accessing your home’s equity might influence your current and future entitlements.
Tax: Normally, you won’t have to pay income or capital gains tax on the funds released from your primary residence. However, if you decide to invest the released funds, tax might be applicable on any returns or gains.**
Fees/Charges: Expect to pay various fees associated with equity release, such as arrangement fees, legal fees, and survey fees. These costs can vary depending on the specific plan.
Early repayment charges may apply if you change your mind about equity release, although they typically don’t apply in the event of your death or long-term care planning.
Estate Planning: When you opt for an interest roll-up plan, the amount available to pass on as an inheritance to your family may decrease over time due to the accumulating interest on the loan.
*Tax treatment varies according to individual circumstances and is subject to change *
