Deciding whether equity release is the right option for you is complicated and there are many different options to consider. This blog covers the basics of equity release to give you the information you need to help decide whether to release equity from your home and which type of product is the best option for you and your family.
Equity release – what it is and why it’s useful.
Equity release is a way of releasing equity (money) from the value of your home, without you having to move out of it. This can provide you with a lump sum of tax-free money or additional regular income, or both, to use as you wish.
Who is equity release suitable for?
Equity release tends to be suited to individuals aged 55 or over, with either no mortgage or only a small amount of mortgage left to pay off. You must be a homeowner and you must also continue to live in and maintain your home upon releasing the equity from it. It is most suitable for those who are retired and living off a pension. Do be aware that some products will have a higher minimum age requirement.
What types of equity release schemes are there?
With lifetime mortgages you borrow a tax-free, lump-sum loan of a specified value that is secured against your home, whilst you continue to own and live in your home. The lender, as mentioned previously, gets their money back by selling your home if you die or move out (for example, into a care home). With a lifetime mortgage you also have a no negative equity guarantee which means that if the money made from selling your house is not enough to repay the outstanding loan, you will not be liable to pay any remainder from your estate.
There are several lifetime mortgage options which include; roll-up or drawdown mortgage, interest-only mortgage, fixed-repayment mortgage, shared appreciation mortgage (SAM), for more information on all of these please take a look at our downloadable guide.
Home reversion plans
The other main type of equity release plan is a home reversion plan. This option means you sell all or part of your home to an individual or company and continue to live there as a tenant. Your home is then sold when you die or decide to move out into long term care.
Retirement interest-only plans
Finally, a retirement interest-only mortgage (RIO) is similar to a standard interest-only mortgage but you only have to prove you can afford to pay the interest rather than proving your income as you would have to do with a traditional mortgage. They are relatively new packages and with most types of RIO mortgages, you will only repay the loan when you sell your property, move into residential care or reach the end of your life. However, some RIO mortgages can stipulate that you must repay the loan after a certain number of years or once you reach a certain age.
You can read more about the various types of equity release schemes, including the wide range of options for a lifetime mortgage in our comprehensive downloadable guide.
How much do I need to repay with an equity release scheme and when?
Equity release is tax-free but how much money you need to repay and when depends on which scheme you decide to go with. In most schemes, you are not required to pay anything back whilst you are still living in your home, in others, you repay the interest. Make sure your provider gives you full details of what is expected and read all of the terms and conditions of any contract before signing it.
Is equity release safe?
Equity release can be a really useful way to gain additional tax-free retirement income in some circumstances. It will not affect your credit score and your current credit score does not affect your ability to apply.
However, there are some risks involved, so for professional equity release advice, you should always speak to an Equity Release Council-approved equity release advisor first, to make sure that you choose the form of equity release that is right for you, or to see if there are other products available that will be of greater benefit in your situation.
Key things to consider:
Because you don’t make monthly repayments with a lifetime mortgage, the debt grows over time and can reduce the value of your property, something that does not happen with retirement interest-only mortgages.
Interest-only equity release plans can mean the repayment charges will vary depending on interest rates which can make it difficult to make your repayments if your pension is a fixed rate.
With a home reversion scheme, you are often only paid between 35-60% of the market value of your property because the buyer cannot sell your home until you die or move out. Therefore the money you get from your property will vary depending on how old you are when taking out the plan and you will never get the full market value.
Equity release products may affect your entitlement to various benefits and your income tax position so make sure to consider this before agreeing on a product.
Equity release providers must be regulated by the Financial Conduct Authority (FCA) which means they must meet certain standards. However, the advice they give will not be tailored specifically to your circumstances so it is always best to get professional and personal advice from a reputable source before deciding on an equity release product.
Be aware that not all home reversion providers are regulated by the financial conduct authority, buying from such firms may mean you lose out on some of the protection offered by other companies.
You should also ensure that the equity release provider you decide to use is registered with the Equity Release Council for additional peace of mind.
How do I know if equity release is right for me?
If you are still thinking that equity release might be the best option for retirement income for you then speak to Martyn, our independent financial advisor for advice on the products available to you and to discuss which option may be best in your circumstances.