By taking a closer look at the principles of what is involved and the way equity release schemes are closely regulated and protected (not only by the finance industry regulator, the Financial Conduct Authority, but also the Equity Release Council), this useful way of releasing some of the capital otherwise tied up in your home might appear less scary than at first sight.
It might be helpful first of all to look at the two main ways of releasing the equity in your home:
- just as the term suggests, this involves taking a new mortgage on your property by way of a single cash advance or in a number of payments agreed between you and the equity release provider
- the difference is that in this type of mortgage, repayment of the loan is deferred until you die or move into longer-term care and the interest on the loan is also allowed to accumulate until that time when complete repayment of the mortgage may be made from the proceeds of the sale of your home
- until that time, you may continue to live in your home as though nothing else had happened
- because of the effects on any inheritance you intended, you need to discuss any plans to arrange an equity release with your family and children, but the lifetime mortgage you arrange does not have to be for the whole value of your home – it might be for just a proportion, and you are completely free to leave the remainder to the beneficiaries of your estate
Home reversion plans
- an alternative approach to equity release involves the actual sale of the whole or part of your home to the provider, whilst you retain the exclusive right to live in it until you die or until you move into long-term care, when the provider may sell the proportion of the home that was bought and the remaining proceeds go to you or your estate.
These form the basis of equity release schemes in general, although the way in which any particular scheme works may vary slightly from one provider to another.
Just how much capital you may be able to release from the home you own might be indicated by using our free equity release calculator.
Regulation and protection
Equity release schemes are bound by the rules and regulations of the Financial Conduct Authority and the industry’s self-regulator the Equity Release Council. The latter, for instance, says that equity release is one of the most regulated of all financial services products in the UK.
Principal safeguards include
- your right to continue to live in your home until you die, or until you move into long-term care, provided that you adhere to the conditions and terms of the equity release contract
- lifetime mortgages must have either a fixed rate of interest or a maximum that is fixed throughout the mortgage term
- equity release schemes must contain a “no negative equity” clause – meaning that when your home is eventually sold and all fees and charges have been paid, if the proceeds from that sale are less than the loan provided by the equity release plan, you have no more to pay.
All in all, therefore, you might be encouraged by the fact that equity release is probably a lot less scary than it might have first appeared.