Equity release could be a good idea if you’re looking to unlock tax free cash tied up in your home to use how you want, without worrying about monthly repayments. However, it may not be a good idea if you don’t like the idea of your family’s inheritance being affected.
Having said that, there are equity release schemes that allow you to protect a percentage of the value of your property therefore guaranteeing an inheritance, which is why it’s important to seek advice from professionals.
Equity release mortgages, or Lifetime Mortgages as they are also known are becoming more popular as people look for ways to increase their income or provide a cash lump sum to make life more enjoyable.
But given that you are dealing with what is probably your biggest asset, your home; equity release is not a decision that should be taken likely, so the following information could help you decide whether you want to take the next step and speak to a fully qualified adviser.
Use the equity release calculator to see if its right for you
Is Equity Release a good idea for me?
Equity release allows you to release money secured on your home, giving you a cash sum you can borrow to do anything you choose with; pay for that luxury holiday you’ve always dreamed of; home improvements such as an extension or alterations that will make life easier, as a gift for family or to help them get on the housing ladder or perhaps to provide additional retirement income.
The most popular scheme is known as a Lifetime Mortgage.
Interest charged by the lender is accumulated and added to the original equity you have released, the sum of which is only repaid once your home is sold.
To be eligible for equity release you need to be at least 55 years old, own your own home and have sufficient equity in your property, which is the difference between the value of your property and any outstanding loan or mortgage you may have secured against it.
If you live in a “retirement home or village” such as the ones supplied by McCarthy and Stone, lenders may be more cautious due to their restricted saleability, so there may be restrictions on how much you can borrow.
It’s worth noting that you don’t necessarily have to have a mortgage free property, as any existing mortgages or loans can be repaid with the money you release.
Is Equity Release Safe?
Due to bad practice in the 1980’s and early 1990’s when some unscrupulous lenders arranged expensive deals resulting in people owing more than the value of their home, lifetime mortgages quite rightly got a bad name. I’m pleased to say however in our new tightly regulated Financial Conduct Authority age, things have changed drastically meaning lifetime mortgages are very safe and in fact increasingly being seen for some as a valuable tool for making retirement more comfortable.
Now the lifetime mortgage market is regulated by the Financial Conduct Authority (FCA) and most companies are signed up to the Equity Release Council, which is a trade body that sets the standards for equity release schemes.
As part of these standards, the Council stipulates that:
- Interest rates must be fixed or if variable, there must be an upper limited or cap that is fixed for the lifetime of the loan
- You must be able to stay in the property for life or until you move into care, just so long as you abide by the terms and conditions of your lifetime loan
- You have the right to move to another property as long as your provider is happy that the new property offers continued security on your equity loan.
- The lifetime mortgage must come with the all important ‘No negative equity’ guarantee which means that when the property is sold and solicitors and agents fees have been taken into account, if the amount left is not enough to pay the outstanding loan, neither you or your estate will be liable to pay any more.
In addition to these product standards, for your security the Council also provide strict rules and guidance on the sales process and stipulate that you can only take out an equity release loan if you receive professional financial advice and independent legal advice.
So to be certain that your equity release scheme is safe, you just need to ensure the company you choose is a member of the Equity Release Council.
How much equity can I get?
What are the pros and cons of equity release?
As previously mentioned, being highly regulated means that equity release schemes these days are very safe but it is important to understand exactly how does equity release work and to be aware of the implications and how they can affect your family..
What are the advantages of equity release?
- You receive a tax free lump sum of money to spend how you wish
- There are no monthly repayments unless you choose a lifetime mortgage plan that lets you repay some of the interest
- You can live in your home for the rest of your life
- You continue to have full ownership of your home
- You benefit from any increase in the value of your property
- You will never owe more than the value of the property
- You have the flexibility to use the money as and when you like with a ‘drawdown’ facility (with this type of plan you only pay interest on the money you have taken, not the amount held in reserve)
- You have the flexibility to move in the future
What are the pitfalls of equity release?
- The interest on equity release costs more as rates tend to be higher
- The money owed can increase quickly as you pay interest on the interest accrued
- It will reduce the value of your estate, affecting any inheritance you wish to leave for family – some lifetime mortgages will allow you to ring fence a percentage of the value of the property but this will reduce the amount of money you can release
- Early repayment charges may apply if you repay early
- Your entitlement to state benefits may be affected
Use the calculator to see if its right for you
Important Facts about Equity Release
Will I still own my property?
Yes, with a Lifetime Mortgage you continue to own the property until die or move into permanent care and the property is sold. (There is another form of equity release known as a Home Reversion Scheme which involves selling all or part of your home to a company however this option is not as popular in the UK).
Are they for people with large properties?
No; you just need to have sufficient equity and property worth at least £150,000.
What is the smallest amount I can borrow?
You can borrow from £10,000 with some lenders but different providers do have their own limits.
Will my children inherit my debt?
Your children won’t inherit the debt however once you have died, they will need to repay the loan from the proceeds of the sale of the property. Once the loan has been repaid, any remaining equity would then be paid to your children.
What’s more, for your added security all lifetime mortgages with companies that are members of the Equity Release Council now come with a “no negative equity guarantee”, which means that you will never owe more than the value of your home.
Are Equity Release Interest Rates much higher than others?
Lenders will charge more than the standard mortgage rates as they are having to wait a long time to get their money back and are also taking a risk that your property will always be worth more than the mortgage.
Currently rates for Lifetime Mortgages are around 5% compared to normal residential rates of around 3% to 4%.
Can I repay the loan if my circumstances change?
Yes, you can repay these loans at anytime, although there could be admin fees or an early interest charge included. Having said that there are now some schemes that let you pay off some of the interest on a regular basis so I suggest you explore this with your adviser.
You can also move house if you wish, subject to the size of your outstanding loan and the value of the new property.
Will this affect my State Benefits?
Potentially yes, your benefits could be affected depending on your own individual circumstances. Your advisor can help you with this and you can also go to the Benefits Agency or Citizens Advice for more information.
How will I know if I am being ripped off?
To ensure you are getting the best advice, it is important to know that your Financial Advisor is fully qualified (visit www.unbiased.com for your nearest adviser). All Lifetime Mortgage companies in the UK are regulated by the Financial Conduct Authority and as members of the Equity Release Council, you are also protected by their strict rules and guidance.
Your solicitor can also act as a good independent point of advice.
Does equity release affect your credit score?
Equity release will not affect your credit score and because the amount of tax free cash you can release depends on your age and the value of your property, your current credit score will not affect you eligibility to apply either.
Equity release can however affect certain benefits you may receive such as pension or universal credit, so it is important to get the advice of a qualified expert before you make any decisions.
Ongoing changes to the way pensions are being calculated, concerns over endowment mortgage repayments, our changing values and the longer lives we are living all mean that sales of equity release are growing.
If you are clear on all the facts, have explored all your options and want to enjoy your hard earned income comfortable in the knowledge that it will reduce your family’s inheritance, then equity release may just be your key to a more comfortable life.
Whatever your decision though, do make sure you talk to a professional who can help you compare equity release schemes across the whole of the market and more importantly, your family first as this is something that will affect everyone..