Equity Release: Your Questions Answered…
What is Equity Release?
Equity release refers to a range of products which let you release the equity (cash) tied up in your home.
The schemes are generally open to those aged over 55, and allow you to take the money you release as a lump sum, in several smaller amounts or as a combination of both.
How does it work?
There are two equity release options:
- Lifetime mortgage:
- The lifetime mortgage is secured on your property (home) and the lender will have a charge on your property until the loan is repaid. The lifetime mortgage is designed to run for the rest of your life and the loan amount and any accrued interest will usually be paid back when you die or when you move into long-term care.
- Home reversion:
- This is a different scheme that allows you to sell part or all your home to a home reversion provider in return for a lump sum or regular payments. At the end of the plan your property is sold, and the sale proceeds are shared according to the remaining proportions of ownership.
How does a lifetime mortgage differ from a regular mortgage?
- With a regular mortgage, you make regular repayments towards the capital (amount borrowed) and the interest. Although some lifetime mortgages now offer you the option to pay all or some of the interest and capital, usually you don’t have to make any repayments while you’re alive and interest ‘rolls up’ (unpaid interest is added to the loan and this also attracts interest).
- With lifetime mortgages the interest rates must be fixed or, if they are variable, there must be a “cap” (upper limit) which is fixed for the life of the loan.
- As you make regular payments on a regular mortgage, the balance reduces over the term until the loan is repaid. However, with lifetime mortgages, as any unpaid interest “rolls up” the debt will increase quickly over the term.
- With regular mortgages a term is agreed with the Lender and the intention is that the loan is repaid at the end of the term (e.g. 25 years). With lifetime mortgages the loan amount and the term agreed will depend on your age, health and the value of the property. However, if you are still alive and living in your home at the end of the term, the loan will continue to run and the total amount that you owe will continue to increase.
- Unlike regular mortgages, your lifetime mortgage will include a guarantee called a “No Negative Equity Guarantee”. This means that your estate will never have to repay more than the amount received from the sale of your home; provided it is sold for the best price reasonably obtainable.
In the same way regular mortgages vary from lender to lender, so do lifetime mortgages.
When is the loan repaid?
Generally, you must repay the lifetime mortgage when one of the following events occurs:
- The property is sold
- When you die
- You leave your home permanently because you need long term care
- You cease to use the property as your main residence
Can I stay in my home?
Yes.
Provided you observe the terms and conditions of the lifetime mortgage you have the right to continue to live in your home for as long as you wish. Your home must be sold when you die, if you have gone into long term residential care, or you cease to use the property as your main residence.
Can I downsize in the future?
If you wish to move to another property, it may be possible for you to transfer the lifetime Mortgage to your new property. But only if the new property is acceptable to your lender’s lending criteria. Even if the new home is acceptable to your lender, you may still be required to repay part of the lifetime mortgage. If your new home is not acceptable then the lifetime mortgage will need to be repaid.
What are my obligations in respect of the property?
Although schemes vary from lender to lender, generally your obligations are the same as those associated with a regular mortgage:
- The property must be kept in good repair and condition
- The property must be insured, in accordance with the Lender’s requirements
- You must pay all outgoings in respect of the property
- The property must be used as your main residence and not for commercial use
- You must not allow anyone else to move into the property without the Lender’s consent
- You must not create any other mortgages on the property
Is equity release right for me?
Equity release may seem like a good option if you want some extra money and don’t want to move to a new house. However, there are some important considerations:
- Equity release can be more expensive in comparison to an ordinary mortgage. If you take out a lifetime mortgage; you will normally be charged a higher rate of interest than you would on an ordinary mortgage. Your debt can grow quickly if the interest is rolled up.
- Home reversion plans will usually not give you anything near to the true market value of your home when compared to selling your property on the open market.
- If you release equity from your home, you might not be able to rely on your property for money you need later in your retirement. For instance, if you need to pay for long-term care.
- Although you can move home and take your lifetime mortgage with you; if you decide you want to downsize later on you might not have enough equity in your home to do this. This means you might need to repay some of your mortgage.
- The money you receive from equity release might affect your entitlement to state benefits.
- You will have to pay arrangement fees, which can reach approx. £1,500-£3,000 in total, depending on the plan being arranged.
- If you’ve taken out an interest roll-up plan, there will be less for you to pass onto your family as an inheritance.
- There might be early repayment charges if you change your mind, which could be expensive.
Where can I find out more?
Your Solicitor cannot provide financial advice and therefore you must discuss your circumstances and requirements with a financial adviser.
Sometimes a financial adviser is tied to a lender or product. We therefore recommend that you speak to an independent financial adviser (IFA). An IFA will provide advice on the product(s) available that are most suitable to you. They will advise you on the full range of products available from a full range of lenders in the marketplace.
Further help and assistance can also be found at:
https://www.moneyadviceservice.org.uk/en/articles/equity-release-help