Getting to grips with the Basics
Many people approach retirement owning the family home and would like to access some of the value stored in its bricks and mortar. Downsizing is one option but if you still need the space or a move seems too daunting, equity release may provide a last-resort solution. If you are 55 or older, it could turn some of your home’s value into cash, without forcing you to relocate, but it’s no magic money tree, as plans may be expensive and often inflexible.
Two ways to Release Equity
There are two main types of equity release: lifetime mortgages and home reversion plans. With a lifetime mortgage, you borrow a percentage of your home’s value but retain ownership. Under a home reversion plan, you sell an agreed proportion, or all of, your home to the plan provider. Both types are subject to Financial Conduct Authority (FCA) regulation and each has its pros and cons.
Equity release activity has been growing, and older homeowners unlocked £3.92bn of property wealth during 2019. In parallel with FCA regulation, industry standards are set by the Equity Release Council (ERC). This trade body was previously called Safe Home Income Plans, whose quality control work now falls to the ERC’s Standards Board. Equity release products must be safe and reliable, and recommended only when suited to a client’s needs by a person qualified to advise on them.
This Mortgage is for life(Usually)
Like an ordinary mortgage, a lifetime mortgage is secured against your home; you still own that and you or your beneficiaries can still gain from any increases in value, offset by interest accruals. The plan releases a percentage of your property’s value as a lump sum. This may be a one-off payment, but drawdown schemes let you take an initial sum, followed by further amounts within a pre-set limit when needed.
Interest is charged on the amounts you have received and the interest is compounded, so you don’t make any monthly payments unless you select an interest-only lifetime mortgage. Most lifetime mortgages carry a fixed interest rate and although variable rate products are available, under ERC standards, they must be capped (have an upper limit) for the life of the mortgage.
The sum you can borrow largely depends on your age and your property’s value.
You can normally borrow up to 60% of the value of your property. How much can be released is dependent on your age and the value of your property. If you survive for many years, rolled-up interest could mean your debt would overtake your property’s value, but a ‘no negative equity’ guarantee is usually available and some schemes offer ‘inheritance protection’ to ensure the property’s value can’t be wiped out entirely. For a lifetime mortgage, you need to be 55 or older. The property must be your main residence, of standard construction, and worth at least £70,000. Plans may be transferable to another suitable property if the lender agrees.
Lifetime Mortgage Drawbacks Include:
- Usually, the interest is added to what you owe and accumulates over the years, with interest accruing on the interest
- If you decide to repay the plan early, there may be an early repayment charge
- When you die, the loan and any accrued interest will be paid off from the value of your home, reducing what your heirs receive (though it may also reduce any Inheritance Tax due on your estate).
The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated.
Home reversion means selling a stake in your home
Home reversion involves selling all or a proportion of your home in return for cash, on the basis that you can continue living there rent-free, generally for the rest of your life. Home reversion plans aren’t loans, so there’s no interest accruing. However, if property prices rise, you only benefit according to the proportion you still own.
For a home reversion plan, most lenders will require you to be at least 60 or 65. Your individual circumstances will determine how much equity you are able to sell to the plan provider. This could be 100% of your property. However, you will only receive a percentage of the market value of that portion, maybe only about 25% if you’re at the younger end of the age range.
Home Reversion Drawbacks include:
- You’ll get much less than the market value of the stake in your property that you part with, because of your right to continue living there whilst payday for the plan provider may be many years away
- If you die soon after starting a plan, you could have sold off (part of) your home at a fraction of market value, though some schemes make a rebate if you die within a certain time
- The government Money Advice Service says: ‘Home reversion plans are highrisk products. They could have major implications for tax, benefits, inheritance and your long-term financial planning.
Equity Release Standards
Equity release advisers must be qualified by examination and Equity Release Council standards require plans to have the following features unless clearly stated otherwise:
- A ‘no negative equity’ guarantee, so the debt can’t exceed a property’s value y Optional repayment allowed at any time (early repayment charges may apply)
- Freedom to move home and transfer the plan
- For lifetime mortgages, interest rates must be fixed or if variable, must be capped for life
- Able to remain in the property for life or until you go into long-term care.
Professional advice is essential; equity release isn’t the right solution for everyone.
Releasing cash from your home reduces the value of your estate and the amount of inheritance you leave, so you should involve your children and dependants from the outset.
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Think carefully before securing other debts against your home. Equity released from your home will be secured against it.
To understand the features and risks, ask for a personalised illustration.
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