What is Equity Release?
There are two main types of equity release:
- lifetime mortgages
- 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 of your home to the plan provider. Whether either of these plans are suitable, will depend very much on your specific circumstances and needs, with both having pros and cons.
Equity Released from your home will be secured against it.
Like an ordinary mortgage, a lifetime mortgage is secured against your home; you still own that and you or your beneficiaries 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 draw down 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, although variable rate products are available, sometimes with a capped rate.
Rolled-up interest is eventually payable with the capital repayment when you die or move into long-term care and the property is sold.
The sum you can borrow largely depends on your age and your property’s value. As a rough guide, if you’re 65 with a £250,000 home, you could typically borrow up to £80,000. 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 in the region of £70,000. Plans may be transferable to another suitable property if the lender agrees.
Home Revisionary Plans
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, you normally need to be aged at least 65. Your property must be your main residence, of standard construction and worth in the region of £80,000 or more. The portion of equity you sell to the plan provider depends on individual circumstances and may be all of it. 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
Please be aware
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).
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 high-risk products. They could have major implications for tax, benefits, inheritance and your long-term financial planning.”