Equity release - your 2020 guide

What is equity release?

Equity release, or Lifetime Mortgage is a tax free way to unlock some of the cash tied up in your home if you’re over the age of 55. The money can be released in one go, or in smaller amounts as required.

It can be used for home or garden improvements, 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.

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 however you wish. If your equity release provider agrees, and subject to their terms and conditions, you still have the flexibility to move.

Types of equity release scheme

There are two main options that allow you to release equity from your home and remain living there:

Lifetime mortgage

A lifetime mortgage is the most popular option. It works like a normal mortgage, with a loan secured on your home. The difference is 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.

Home reversion schemes

These work differently as they’re not loans. With a home reversion scheme, you agree to sell all or part of your home in return for a lump sum of money.

As a result there’s 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.

Home reversion companies take on the risk of unknown future property prices, so they are likely to offer you less than the actual property value.

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

• For a lifetime mortgage you or the youngest homeowner must be 55 years of age or over
• For a home reversion plan, you or teh youngest homeowner must be 65 years of age or over
• Some lenders impose an upper age limit of 90 while others have no upper age limit
• Your property must be in the UK or Northern Ireland and your main residence
• Your property must be worth at least £70,000 and in good condition

If you have an existing mortgage you can still release equity from your home. However, that mortgage would need to be fully paid off with the money that is released.

The type of property  can also affect your eligibility for equity release. Most standard construction properties ie. brick, stone, tiled or slate roofed houses, flats and bungalows) are acceptable., Some lenders will also consider equity release on properties with certain non-standard features such as annexes and flat roofs, however these would be dealt with on a case-by-case basis, with some construction types presenting more challenges.

An advantage of equity release is that your income and expenditure  do not affect your eligibility, simply because there are no monthly repayments to be made.  Lenders are also more relaxed if you have a poor credit history, although this might depend on how bad the situation is.

Can you be refused equity release?

Equity release applications can be declined. Equity release lending criteria are based on the value of the property rising over time, so lenders look closely at issues that could affect the value and ability to sell the property.

Criteria vary between lenders, but the most common reasons given for refusing equity release are:

• ‘non-standard’ construction
• Risk of flooding
• Ex local authority
• Proximity to commercial property or electricity
• Flat roofs and single skin structures
• Poor condition and upkeep
• The presence of asbestos