Equity release could be a good idea if you want to unlock tax free cash from your home, without having to move house or worry about monthly repayments. However, releasing equity 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 in 2021?
Equity release lets you release money tied up in your home, giving you a cash sum to use as you wish. So, if you’re considering home or garden improvements, looking to help family financially, planning a luxury holiday or want additional retirement income, releasing equity could be a good idea.
So what’s the catch with equity release?
The good news is that the money released is tax-free with no monthly repayments to make. The catch with equity release is the loan plus interest accrued is repaid through the sale of your property. However, this only happens when you die or move into long term care.
The most popular equity release scheme is known as a Lifetime Mortgage. To be eligible you need to be at least 55 years old, own your own home and have sufficient equity in your property. This is the difference between the value of your property and any outstanding loan or mortgage you 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.
Latest news January 2021: Equity release interest rates are at their lowest ever starting from 2.27% AER and will be fixed for the rest of your life - so now could be a good time to consider your options
Is Equity Release Safe?
Equity release is safe as it’s regulated by the Financial Conduct Authority (FCA) and overseen by the Equity Release Council (ERC). Their rules and safeguards ensure you always own your home and have flexibility to move. In addition, all FCA and ERC governed lifetime mortgages come with a no negative equity guarantee.
Here’s how the Equity Release Council’s protect you:
- Interest rates must be fixed or if variable, there must be an upper limit 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 provides strict rules and guidance on the sales process. To ensure you understand exactly how does equity release work, they stipulate that you can only take out a 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?
One of the main disadvantages of equity release is interest rates are higher compared to residential mortgages. Another pitfall is that interest is compounded, so will grow much quicker. However, for many home owners one of the main advantages of equity release is that there are no monthly repayments.
Whether the positives outweigh the downsides will depend on your personal requirements. Which is why understanding all of the pros and cons from the outset is key.
What are the pros 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 cons 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
Tips for choosing the right equity release scheme
- Consider all the alternatives first
- Only borrow the money you need or choose a drawdown scheme
- Consider interest repayments or inheritance protection options
- Compare the whole of the market
- Get independent advice from a qualified equity release adviser
- Check options for early repayment
Important Facts about Equity Release
Will I still own my property?
Yes, with a Lifetime Mortgage you continue to own the property until you 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 interest rates for Lifetime Mortgages are around 3% compared to normal residential rates of around 2% to 4%.
Can I repay the loan if my circumstances change?
Yes you can repay an equity loan at anytime however you may incur additional admin fees or early repayment charges. There are schemes that let you repay some of the interest on a regular basis which may be worthwhile if paying off your loan is a consideration.
You can also move house if you wish, subject to the size of your outstanding loan and the value of the new property.
Your adviser will help you explore all the options before deciding if equity release is a good or bad idea for you.
Will this affect my State Benefits?
Potentially yes, your benefits could be affected depending on your own individual circumstances. Your adviser can help you with this and you can also go to the Benefits Agency or Citizens Advice for more information.
How can I avoid any pitfalls of equity release?
To ensure you avoid any pitfalls, it's important to get advice from a qualified financial adviser (visit www.unbiased.co.uk 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.
Equity Release could be right for you
It could make life that bit easier