What is Equity Release and How Does it Work

What is Equity Release

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Equity Release, or Lifetime Mortgage as it is also known is a tax free way you can unlock some of the cash tied up in your home. The money can be released either in one go, or you can ‘drawdown’ smaller amounts as and when required.

Currently one of the most popular reasons for releasing equity throughout the UK is for home or garden improvements, but homeowners also turn to lifetime mortgages to pay off existing debts or mortgages, for holidays, to help family get a foot on the housing ladder or to improve retirement funds by supplementing their pension pot.

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What appeals to many about a lifetime mortgage is that there are no monthly repayments; instead the equity loan is paid back once you have died or moved into care and the house is sold. As a result though, equity release costs are higher and will of course affect any inheritance you were planning on leaving to family.

But with a staggering £9.5 million of equity currently being released every day and £1.7 billion throughout the first 6 months of 2018; demand for equity loans is growing as people start to view it as part of their financial planning for later life. Understandable when you consider that with property prices having roughly doubled every 10 years since 1974, for many of us, our home is their greatest asset.

How does Equity Release Work?

In order to understand how equity release works, it’s important first to be clear on exactly what the word ‘equity’ means.

The ‘equity' in your home is the difference between its value and any outstanding loans secured against it, such as a mortgage. Basically it is the money you own but as it is tied up in your house, don’t readily have access to.

For example:

A house worth £250,000 with no outstanding mortgage against it would have £250,000 worth of equity
A house worth £250,000 with an outstanding mortgage of £50,000 would have £200,000 worth of equity

A loan is secured against your property in return for a tax free cash lump sum. You continue to own your own home and there are no monthly repayments to make. Instead both the original loan plus interest is only repaid once you have either died, or moved into long term care and the house is sold.

You can use the money how you wish and on approval from your equity release provider and subject to their terms and conditions, you still have the flexibility to move.

How much equity can I release?

How much equity you can release will depend on the value of your home and your age but the maximum is typically between 20% to 50% of the property value. The average equity loan throughout the UK is currently £78,000 but this varies as you would expect by region.

To qualify for an equity release scheme you must be at least 55 years of age, living in the UK or Northern Ireland and your home should be worth at least £60,000.

Our equity release calculator will help you understand more about how much money you could unlock from your home.

The older you are, the more money you can release and you can still apply for an equity loan if you have an outstanding mortgage on the property; you just need to use the cash you have released to pay off the loan first.

Am I eligible for equity release?

Although the criteria will vary from company to company, whether you are able to release the equity that is tied up in your home will depend on a number of conditions:

You or the youngest home owner must be 55 years of age or over
Your property must be in the UK and your main residence
It must also be in good condition and over a certain value

It’s worth noting that you can release equity from your home if you still have an existing mortgage however that mortgage would need to be fully paid off with the money that is released.

Equity release schemes

If you are considering unlocking the cash tied up in your home and want to compare equity release schemes, then there are two options available that let you release equity but remain living there, namely a home reversion scheme and a lifetime mortgage.

The Lifetime mortgage in the UK is the more popular of the two equity release options

Lifetime Mortgage - These work in a similar way to a normal mortgage in that it is a loan secured on your home; the difference being that you don’t have to make any monthly repayments. Instead the interest builds up over the years and is only repaid when the last surviving plan holder dies or moves into long term care.

Take a look at our ‘what is a lifetime mortgage section’ for more information.

Home Reversion - These are not loans and therefore work differently to a Lifetime Mortgage scheme. With a Home Reversion Plan, you agree to sell all or part of your home in return for a lump sum of money.

As a result there is no interest to pay however, as the value of the property increases, you only benefit from the increase on the percentage of the home that you still own.

It’s worth keeping in mind that home reversion companies are more likely to offer you less than the actual property value as they are taking on the risk of unknown future property prices. As a result their initial calculations are usually based on a property price that is lower than the market value.

When the property is sold upon the last survivor’s death (if joint) or because they’ve move into a care home, the home reversion company will receive their share of the proceeds

What are the pitfalls?

Importantly lifetime mortgage and home reversion companies are regulated by the Financial Conduct Authority (FCA) which means there are safeguards in place to protect you; therefore there are no pitfalls as such. Having said that, taking out an equity loan is a big decision and one that could affect your family and any benefits you may receive, so it does require careful consideration.

In addition to the Financial Conduct Authority controls, most providers are also members of the Equity Release Council, which sets the standards for equity loans including a ‘No Negative Equity’ guarantee. equity release council logo

This guarantee ensures that once the property is sold and the solicitors and agents fees have been paid, if there is insufficient money remaining to pay the outstanding equity loan, neither you, your family or your estate will be liable to pay any more.

In addition, the Equity Release Council (ERC) also stipulate that members allow homeowners:

The right to remain in their home for life or as long as they choose
The flexibility to move to another property without financial penalties

Over50choices is also a member of the Equity Release Council and authorised by the Financial Conduct Authority.

So is equity release safe – yes as long as you ensure the provider you choose is a member of the ERC (you can use the find a member portal on their website) so you have complete reassurance that your chosen equity release scheme is secure and that you are covered by the No Negative Equity Guarantee.

What are the pros and cons of equity release from your home?

Which is the best Equity Release Scheme?

If you are considering a lifetime mortgage it’s important choose a company that is a member of the Equity Release Council so you know they abide by their rules and you are protected.

There are currently 12 providers registered with the Council (listed below); you may not be familiar with all of their names but that shouldn’t be of concern as you have the reassurance of the ERC’s seal of approval, ensuring all the safeguards are in place.

You will then need to seek professional advice to help you compare the market and decide whether equity release is a good idea for you. This can be done either through an equity release qualified IFA or an independent broker.

The benefit of using an independent broker is that they will compare equity release plans across the whole of the market and not just individual companies, which in turn will give you a much broader view of the best and most suitable company for you.

Having reviewed the market, we have chosen to team up with leading award winning specialist, Age Partnership. They offer initial free no obligation help and advice, are able to compare the whole of the market and because of their prominent position, have agreed preferential rates with leading lenders that you may not be able to get elsewhere.

They can talk through your requirements, compare leading providers all of whom are members of the equity release council, review the best equity release interest rates and help you decide on the right scheme for you.

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Canada Life
More 2 Life
Aviva
Hodge Lifetime
LV
Nationwide

Responsible Lending
Legal & General
Just
Retirement Plus
One Family
Pure Retirement

Your equity release questions answered

Will I still own my own home?
- Yes, ownership of the property remains with you and you can live in the property for the rest of your life.
Can I move home in the future?
- Yes, you can move home with an equity loan subject to the provider’s scheme rules. All members of the ERC must offer schemes that allow flexibility to move without facing financial penalties.
Will my family be left with my debts?
- No, when the property is sold your outstanding balance will be repaid to the equity release provider and any surplus paid to your family/estate. In the event that you owe more than the property is worth, your family will not be asked for any money, as all plans come with a no negative equity guarantee.
What happens if I have to go into care?
- Should this happen and you have a partner/spouse living in the property then the will continue to do so. If you live alone and are unlikely to return then the property will be sold and the provider repaid and the balance returned to you; your family will be consulted at all times.
Can I apply if I still have a mortgage outstanding on the property?
- Yes, although this will need to be repaid from the new equity release mortgage. Our advisers can advise you on this.
How long will it take to apply?
- Applying is simple and your adviser will help you with this once you have decided to proceed.
  
  Once you have applied it typically takes around 6 to 8 weeks to get all the legal paperwork and mortgage in place.
I'm not sure what to do or where to start!
- Don't worry, you are not alone.
  
  Releasing equity from your home can seem quite daunting, but the specialists at Age Partnership are here to help. They will not talk financial jargon at you but instead they will hold your hand all the way through the process, help you compare equity release plans and answer any questions you may have or concerns.
  
  To start, why not use the equity release calculator to see how much you could borrow, if you're not sure of your property value just take a guess, it doesn't matter as we can help you with this.

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Equity Release - Your 2019 Guide