What is Equity Release? Questions and Answers.
Q. What is equity release?
A. It’s the name for a range of financial products that give you access to the equity (in effect, the cash) that is tied up in your home, as long as you are over 55 years old. You can release the money as a lump sum or via regular smaller amounts.
Q. What are the 2 main equity release options?
A. Lifetime mortgage and home reversion.
Q. What are the main differences between the two?
A. With a lifetime mortgage you borrow money secured on your property. With home reversion, you sell part or all of your property to a company in return for a lump sum or regular smaller payments. You have the right to stay living in the property until you die.
Q. Which option do most people who release equity from their property use?
A. Lifetime mortgages. Unlike an ordinary mortgage, you don’t have to make monthly repayments while you are alive. Interest is added to the loan and the total loan amount plus interest are paid back, either when you die or when you move house. Just like ordinary mortgages vary between lenders, so do lifetime mortgages. Most lifetime mortgages have a fixed rate of interest. Some providers offer variable rate lifetime mortgages, but these offer less certainty.
Unlike conventional mortgages where interest is charged on an amount that decreases with time, interest on lifetime mortgages is charged on an increasing sum, so your debt can grow quickly.
When considering whether to take out a lifetime mortgage, you should check the following:
- The minimum age at which you are permitted to take out a lifetime mortgage. Many lifetime mortgage providers insist that you are at least 55 or 60. Don’t forget that the earlier you start a lifetime mortgage, the more it is likely to cost in the long run.
- The maximum loan to value (LTV) ratio you can borrow. Depending on your age, you can borrow up to 50% of the value of your property.
- Whether you can pay some or all of the interest. If you can do this, the mortgage will ultimately cost less. However, with a lifetime mortgage where you can make payments, the loan amount may be based on your income – to be able to afford the repayments – as well as the value of your home.
- Whether you can withdraw the equity you’re releasing in small amounts as and when you need it or whether you have to take it as one lump sum. The advantage of being able to take money out in smaller amounts is that you only pay the interest on the amount you’ve withdrawn. If you can take smaller lump sums, check to see if there’s a minimum amount.
- What level of maintenance you’ll be expected to carry out on your property and how often your property will be inspected by the lender (this could be every few years).
Q. What about home reversion?
A. Home reversion allows you sell some or all of your home to a home reversion provider. In return you’ll get a lump sum or regular payments. You have the right to stay living in the property until you die, although you do have to maintain and insure it yourself; the home reversion company does not take on that responsibility. Note that you will normally only get between 20% and 60% of the market value of your property (or the part that you sell).
When considering whether to take out a home reversion plan, you should check the following:
- The minimum age at which you can take out a home reversion plan. Some home reversion providers insist that you are at least 60 or 65 before you can apply.
- The percentage of the market value you will receive. This will increase the older you are when you take out the plan but may vary from provider to provider.
- Whether or not you can release equity in several payments or one lump sum.
- What level of maintenance you’ll be expected to carry out and how often your property will be inspected (this could be every few years).
If you are thinking of taking out an equity release product, you should take financial advice from a specialist. All advisers recommending equity release schemes must have a specialist qualification. Check that your adviser does, and:
- Searches the whole of the market, so they can find the right plan for you.
- Is on the Financial Conduct Authority register (you should search by the firm’s name). A firm that is on the FCA register must sign up to the Financial Ombudsman Service, which is a free complaints service if you’re unhappy with their response to a complaint
Before you decide whether or not to take out an equity release product, ask the adviser:
- what their fees are
- what other fees you’ll have to pay (legal, valuation, set up costs)
- what type of equity release products they can they can offer
Note that Equity Release should usually only be offered to clients after other solutions are eliminated, for example:
- Remortgage. This is not the right solution if you are either too old or do not want to have to pay the monthly repayments on a mortgage, something you don’t have to do with an Equity Release product.
- Moving. Have you considered downsizing first? Although that’s not an option if you wish to stay in your current home because of its location.
- Bank loans. Not normally a good solution due to the relatively high monthly cost.
- Borrowing from family. Not usually possible.
- Using existing savings.
There are several different equity release schemes available on the market so you need to seek professional financial advice before deciding whether Equity Release is right for you. Equity release may not be suitable for your needs. Please obtain specialist independent advice and always ask for an Illustration.