This article was last updated on 1 February 2021.
Equity release can be confusing and often difficult to wrap your head around. Put simply, equity release relates to the process of taking a tax-free, lump-sum from the equity (cash value) of your home, in a similar way to a mortgage. This article will give you equity release tips, and tell you all you need to know about the plans.
Equity release products are authorised and regulated by the financial conduct authority and have many benefits for those that need additional income during retirement. Another advantage is that they reduce the pressure on your family and loved ones to support you financially.
When researching whether equity release is a suitable option for your circumstance, you will probably have many questions, for example, about how safe it is, and how it will affect your family. This guide will aim to explain precisely what equity release is, and highlight some of the potential advantages and disadvantages it could have for you.
We consider two main equity release options, lifetime mortgages and home reversion schemes. Lifetime mortgages are generally the most popular type of service, but you should always speak with advisers when comparing the different plans.
In this guide, we will answer some of the following questions to help you make sense of things:
Equity release can allow you to unlock a cash lump sum from the value of your house while you live there. This can be done by taking out a policy/ mortgage from an equity release provider that permits you to access the cash value of your home. You can then use the funds as you wish, giving you peace of mind in old age.
Typically, users choose a lifetime mortgage or a home reversion scheme. This article by the Financial Times provides more information about equity release, but you should always speak with an adviser to see if it is right given your personal conditions.
Equity release plans are an attractive financial option to over 55’s who wish to use the equity tied up in their property to enjoy retirement or provide a sufficient retirement income to cover future care needs. It is different from other forms and types of mortgages/debt because this service doesn’t require you to repay your debt until you die or sell your home.
As a homeowner, you have two options: to either borrow a cash lump sum or receive a regular monthly income, in return for a portion of your home. The borrowed money equates to a value less than your property’s market value, with interest accruing on the borrowed amount. Typically, interest is much higher than with a standard form of mortgage.
The exact amount you receive depends on the rule/terms of your equity release product and contract, your property value, and your circumstances and lifestyle factors such as your age and health. You will never receive the whole value of your home, but an adviser can help you estimate what you might receive with different plans.
The good thing is, you are free to spend the whole amount of money exactly how you wish. Whether that be on home improvements, long term care, or if you simply want a pension pot for security, the choice is yours!
Here is a short video on how equity release works. All products are authorised and regulated by the Financial Conduct Authority, a service offering consumer protection.
You can also watch this video on how does equity release work on youtube.
You should remember that all products are authorised and regulated by the Financial Conduct Authority, a service offering consumer protection.
For those aged 55+, under a lifetime mortgage policy, you will borrow a fraction of your property’s value at a fixed interest rate. In contrast to a typical mortgage, under this policy you don’t make any repayments and interest can quickly accrue on the borrowed amount, increasing the amount of debt you owe.
It is worth noting however that some versions of lifetime mortgage offer a drawdown option, which gives you the chance to pay back some of the owed interest, reducing the overall cost of the borrowed amount. These deals often reduce the stress of borrowing, as it means homeowners have smaller final debts to repay on the sale of their property.
However, if you make the decision to pay back money borrowed gradually, you should read some guides and speak to lenders about the best deal.
For those aged 65+, under a home reversion policy, your provider will make a tax-free lump sum payment to you, as a portion of your home’s value below market. This can allow you to remain in your home rent-free until you die.
Upon death, the proceeds from the sale of the property will be divided based on the percentage owned by yourself and the lender. As a result, if the value of your property increases during your time living there, so will the amount received upon selling. This can help your family pay for your funeral.
This YouTube video featuring Martin Lewis gives an insight into equity release schemes.
A lifetime mortgage and home reversion scheme both release equity, and therefore are regulated by the financial conduct authority. However, they are designed to be a commitment for life, and you must have a bank account to take one out. You may become restricted by an equity release scheme should you:
– change your mind
– want or need to move house; or
– wish to use your equity for another purpose later in life.
Below we have highlighted some of the pros and cons associated with equity release.
Below is a video on the pros and cons of equity release. Before purchasing any product, it is a good idea to seek equity release advice and independent financial advice, from a certified adviser. The prices of advice services from each business will vary, so consider these things too.
You are essentially dealing with your home, so you should not rush into an equity release scheme without first considering whether it is right for your situation. It is a big change, and you should also talk to your family, as your plan and situation can affect things for them, like their inheritance and their ability to cover the cost of your funeral.
You can also see this video on the pros and cons of equity release on youtube.
Equity release is considered safe since it is regulated by the Financial Conduct Authority (FCA). In addition to this, the majority of equity release providers will be a member of the Equity Release Council. All members must adhere to their statement of principles, which safeguards you from ever entering negative equity.
Therefore, in order to be sure that your equity release scheme is safe and you are protected, just check the provider you choose is part of the Equity Release Council. Their no negative equity guarantee will ensure that you never have to pay back more than the amount you borrowed by releasing equity.
This BBC article highlights how home equity release schemes could end up costing pension firms billions of pounds.
There are a few alternatives if you make the decision that the advantages of equity release do not compensate for the downsides. Other ways of generating wealth for your retirement include downsizing, renting out a room, and asking your family for support.
Before you make any decision, it is crucial to seek advice from an adviser. They can help you properly understand your options, and the benefits and pitfalls of each (including their hidden costs and risks). Advisers can also help explain some of the equity release myths.
As well as speaking with equity release advisers, you should seek independent financial advice. The benefits of independent advice are vast. In particular, experts can give advice based on your personal circumstances and finances. They can explain the impact that each scheme or plan will have on your retirement experience, and give you tips to help you combat the risks and pitfalls.
Lenders allow you to borrow a percentage of the value of your house/estate. Typically, the deal will be in the range of 20-50% of the value of your estate.
The exact deal you receive is determined by considering your situation as a whole. Lenders consider your age, health, and other circumstances when deciding on the details of your plan.
Typically, the older you are, the more you can borrow. However, you must remember to deduct the cost of fees, such as arrangement fees and valuation fees, from the maximum amount you are quoted.
You should also be sure to consider the different interest rates in the equity release market. Typically interest on an equity release loan is higher than for a standard mortgage. Rates generally range from 3 to 5%, so we recommend speaking with advisers to guarantee you choose the best type of loan for your circumstances.
Another thing to think about is whether you wish to receive regular payments or a one-off lump sum. Speak to an adviser, who will consider your personal condition and help you make the right choice.
Use this equity release calculator below to see how much money you could be entitled to. It is free to use, and only takes about 30 seconds to do!
Equity release can secure you an income in later life, giving you peace of mind during retirement. Compared to the alternatives, it may be a more comfortable option, as you can continue living in your home for the rest of your lifetime, or until you move to long term care. For example, you do not have the hassle and removal costs that you get with downsizing.
However, the advantages must be considered alongside the pitfalls of the plans. This is why we recommend you speak with an adviser before taking out any of the mentioned plans. They will have certified qualifications, as well as experience and knowledge will give you confidence in your decision.
There are often hidden costs with both types of plans. You will need to pay valuation fees, and any amounts owed to advisers when you seek advice from experts. The good thing is that, in most cases, the advice process begins with a free consultation.
When borrowing, you will be charged interest. How much depends on a range of factors, and is decided by the companies themselves. You need to consider the impact the interest rate of different loans might have on your capital and pensions.
Equity release may not be the best solution if you do not plan on living in your home for the rest of your lifetime. If you are thinking about moving, you can access cash and increase pensions by downsizing, and avoid the risk that debt from loans poses. If you take out a lifetime mortgage or home reversion plan and then want to move, you may have a heavy cash penalty for doing so.
Finally, taking out a plan is a complex process, and might not be in the best interests of your beneficiaries as it can reduce their inheritance and ability to cover funeral costs. If you have no beneficiaries to leave your assets too, though, this catch will not affect you.
There are plenty of websites that can provide guides and reviews to help you make sense of things. To find out how much you can from borrow from equity release, read the tips and guides from others on Over 50 Choices and Age Partnership. This service gives advice and information from people who have taken out equity release plans themselves. Their tips and experience can help you compare the equity release products available.
As always, we recommend that you seek financial advice from an expert, to ensure you understand the advantages and risks surrounding equity release. They will help you choose the equity release plan that is right for you, and help you understand the alternative policies that are out there.
If you wish to gain more information and advice regarding equity release, you can contact us here at UK Care Guide, and we’ll be more than welcome to help you with any questions you may have. Our article on equity release can provide more information on where to get advice, including information on the best equity interest rates and providers in 2019. Our experts can also help you understand the alternative products available, in line with your personal needs.
Ultimately, if you wish to explore equity release further, you should weigh up the pros and cons, while taking into account expert advice, which safeguards your finances in later life. There are various tools and guides available to help you make sense of things, but ultimately you should talk things through with an adviser before agreeing to anything. An adviser is needed to check the details of your policy and ensure you are sold the form of service that is right for you, long term.
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With reductions in interest rates there are some really good equity release deals available. The cheapest that we have seen in over 10 years! Contact us for free, in conjunction with Key Advice, to see what you could get.
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