Beginners Guide to Equity Release
Equity release has been a widely discussed topic in recent years, however many people struggle to truly understand how it differs from conventional re-mortgaging. Since its complete regulation in 2007 the equity release market has been rapidly increasing to an all time high of 1.7 billion in 2015. With a market of this size it is important that people understand their options, especially those coming up to retirement age.
What is equity release? Equity release is the process of obtaining a tax-free income or a lump sum by borrowing against the value of your house, whilst still being able to live in the property. However the lender is repaid the capital and the interest at death of the client or if they enter long term care. It’s typically seen in elderly people that do not intend or are not able to leave a large estate to their heirs when they die.
It is common belief that equity release is available for anyone who is 55 years of age or above, however it’s important to note that only some of the products are available at this age. There are two equity release options, lifetime mortgage and home reversions.
A lifetime mortgage is the most common equity release product. A mortgage is taken out on the property to provide capital, either in a single lump sum or in drawdown facility to release further capital. The interest is traditionally rolled up and repaid when the homeowner moves out or dies, but can be setup so the interest is paid in monthly or yearly payments. A benefit that makes it attractive to so many is that the borrower remains the legal owner of the property. This type of equity release is typically available for those who are over 55 and up to 60% of the property can be borrowed. Although the amount that can be released is linked to life expectancy so a healthy 55 year old may only be able to release 25%.
Home reversion is a type of equity release where you sell part or all of your home to a provider in return for an income or a lump sum. You can expect to receive 20%-60% of the value of the property, but it is important to note that you are no longer the legal owner of the property. You are allowed to live in the property rent free until you move out or die, however you have to cover the cost of maintaining the property. Most providers will only offer this as an option if you are over 60 or for some providers 65.
Regulation of the equity release market is primarily done by the Financial Conduct Authority. They are supported by the Equity Release Council who are the industry body for the equity release sector. Its aim is to ensure all the equity products on the market are accessible and safe for customers.
The equity release market is a heavily debated subject, mainly due to companies in the late 1980s not offering a “no negative equity guarantee” leading to lenders chasing family members to cover the short fall. Today the market is different and the majority of providers now offer a “no negative equity guarantee”, making it a viable option for providing tax free cash or an income supporting people through retirement.
Releasing equity from your home is a lifetime commitment, so it’s worth including your family in any decision you make.
This a lifetime mortgage or a home reversion plan. To understand the features and risks, ask for a personalised illustration.
Equity release is not right for everyone. It may affect your entitlement to state benefits and will reduce the value of your estate.
CHECK THAT THIS MORTGAGE WILL MEET YOUR NEEDS IF YOU WANT TO MOVE OR SELL YOUR HOME OR YOU WANT YOUR FAMILY TO INHERIT IT. If YOU ARE IN ANY DOUBT, SEEK INDEPENDENT ADVICE.
THERE WILL BE A FEE FOR MORTGAGE ADVICE. THE PRECISE AMOUNT WILL DEPEND UPON YOUR CIRCUMSTANCES BUT WE ESTIMATE THAT IT WILL BE £1000.