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Equity Release
THE PROS, CONS AND EVERYTHING ELSE YOU SHOULD KNOW ABOUT EQUITY RELEASE AND LIFETIME MORTGAGES.
You have probably heard of the term equity release, also known as a ‘Lifetime Mortgage’. Perhaps you are unsure of what it means, or you have been advised this could be a solution to any financial problems you may have. It represents an opportunity to release cash – tax free – that is currently tied up in your property. Equity release provides this benefit without having to move home or be forced into making additional interest payments.
It might help to think of equity release as a ‘reverse mortgage’. In this scenario, you can take out the money on a fixed interest rate. The interest is then placed on top of the amount owed on the property. That amount is only paid back to the lender in the long term.
If you have questions about this process, or you wish to understand more about it, read our comprehensive guide below. It should provide you with all the answers you are looking for. Alternatively, our experts will be only too happy to provide further advice and support.
WHAT IS EQUITY RELEASE AND HOW DOES IT WORK?
No doubt this is the first question on your mind. The name accurately describes the process – a process that is restricted to people over the age of 55. If you own your own property, you will likely do so via a mortgage. Over the years, you make payments on that mortgage and gradually owe less on it. The value of the property is also likely to increase over that same time.
This creates equity in the property – the value of the property that you own less any mortgage (if any) outstanding on it. For instance, let’s say you bought your property for £40,000. You have now paid off your mortgage and you own your home outright. However, the value is now far beyond what it originally was. It may now be worth, say, £250,000. That means you have £250,000 equity in your property.
Equity release, therefore, refers to releasing some of the amount you have made on the property thanks to rising house prices and a gradually reducing loan.
HOW COMMON IS EQUITY RELEASE?
The Equity Release Council develops standards across the industry and has done so for 25 years. They have collated statistics and lending figures concerning the marketplace – figures that show how this market is on the rise.
In figures released at the end of October 2019, the ERC confirmed the market had grown by an impressive 8% compared with the previous quarter. The amount of funding was just shy of £1 billion, coming in at £988 million between July and September. This was a rise of £77 million from the previous quarter.
Equity release is available to homeowners aged 55 and over. A perfect storm of ingredients has made the market more active and popular in recent years:
- An ageing population – more people are qualifying to release equity from their properties and as we are all living longer, the option of tapping into your own equity to assist with rising living costs is very appealing
- Rising house prices – this creates more equity, especially as mortgages come to an end for those paying them
- The challenge of getting onto the housing ladder – rising house prices also affect those looking to enter the market, meaning more young people are seeking help with deposits from older family members
These aspects all bode well for the equity release market. With significant sums locked up in properties up and down the country, the options are there for people looking to utilise the equity locked up in their homes.
AN AGEING POPULATION
According to figures from the Office for National Statistics (ONS), almost 12 million people in the UK are aged at least 65. Around 25% of the people living in the UK will be 65 or older by 2041. Life expectancy has risen since the 19th century, although in 2011 rates stalled and have not regained traction.
While mortgages with longer terms have been more common in recent times, many people have still paid off their loans and own their homes free and clear today. With many younger people finding it much harder to buy their own properties, it is becoming far more common for the older generation to provide financial help. That help often comes via equity release, unlocking some of the cash held in a property, even in cases where a mortgage might still have a few years left to run. In this example the equity release / lifetime mortgage option could be used to pay off an existing mortgage.
AN AGEING POPULATION
According to figures from the Office for National Statistics (ONS), almost 12 million people in the UK are aged at least 65. Around 25% of the people living in the UK will be 65 or older by 2041. Life expectancy has risen since the 19th century, although in 2011 rates stalled and have not regained traction.
While mortgages with longer terms have been more common in recent times, many people have still paid off their loans and own their homes free and clear today. With many younger people finding it much harder to buy their own properties, it is becoming far more common for the older generation to provide financial help. That help often comes via equity release, unlocking some of the cash held in a property, even in cases where a mortgage might still have a few years left to run. In this example the equity release / lifetime mortgage option could be used to pay off an existing mortgage.
THE FUTURE OF EQUITY RELEASE
Property wealth is becoming more important than other forms of wealth in many cases. Statistics from the Equity Release Council reveal that the three busiest quarters in the equity release market have all occurred since Q3 in 2018. This points towards a future that could see even more older people cash in on their property wealth.
IS EQUITY RELEASE SUITABLE FOR YOU?
If you are wondering whether equity release is right for you, you may have been asking yourself several questions. Please read through the following statements and questions. If some or all these questions have already come to mind, you have plenty in common with the countless people who have decided this option is the ideal solution for their current needs.
- Are you keen to obtain a lump sum of money, tax free, which doesn’t require any monthly payments to be made?
- Are you keen to obtain a lump sum of money, tax free, while you pay an ‘interest only’ mortgage that contains an option to convert it to a lifetime mortgage?
- Are you keen to take out an equity release on a second property you own?
IS EQUITY RELEASE A SAFE OPTION?
- Would you like to take a once in a lifetime holiday or adventure?
- Do you dream of owning a holiday home?
- Do you want to carry out major refurbishment work at your home?
- Would you like to lower the value of your estate and provide loved ones with some money now?
- Would you like to have the confidence of knowing you can pay for care assistance in your own home?
- Are you looking to provide family members with assistance in owning a property?
- Would you like to be debt free?
- Would you like to maintain your current lifestyle in the years ahead as you go into retirement?
Lots of people considering an equity release will have thought about one or more of these possibilities. Read on to find out more about this idea, how it works, and whether it could be suitable for you.
This financial product has three essential guarantees locked in:
- The right to continue living in the property
- Avoiding the risk of negative equity
- The amount that is required to be paid upon death will never be greater than the value of the property; there will never be any debt left for the beneficiaries of the estate to pay
As with all financial products, this will not suit everyone. It does require that you own your own home, of course. Yet this is not the only element to bear in mind when you are considering all the options.
You can also guarantee inheritance with many plans that are out there in the market today.
The process of releasing cash from your property earned itself a bad rep during the early years of the process. The Equity Release Council was formed in 1991 and today promotes exceptional standards of conduct among those working in the industry. Therefore, it is recommended that anyone looking for an equity release company should find one that is a member of the ERC.
There were incidents where people took out these deals and ended up owing unscrupulous companies more than their properties were worth (negative equity). These horror stories put a lot of people off considering the deals. However, things have changed and any lender wishing to be a member of the Equity Release Council must abide by their code of conduct. As such, choosing a member of the ERC provides peace of mind that you will not fall foul of any nasty surprises.
Of course, as with any financial product, it is imperative that you seek independent advice. You should consider all possibilities for freeing up cash, whatever the reason might be for doing so. Only then can you decide whether equity release is the most appropriate scenario for your needs.
WHAT CRITERIA DO YOU NEED TO MEET TO OBTAIN AN EQUITY RELEASE?
The amount of money that can be borrowed on this deal will depend on the value of the property. The minimum level is £70,000. Meanwhile, the age of the youngest borrower must be at least 55. However, many providers do not have an upper age limit. This means people aged over 55 have an opportunity to benefit from this scheme. Quite simply, the older you are the higher the percentage of equity you ca take from your home.
As mentioned above, it is best to find a provider that is a member of the Equity Release Council. They will provide you with the highest level of service. There is a need to take each situation on its own merits. Finding a bespoke equity release plan will ensure you find the most appropriate solution for your needs. It is important to weigh up the available options. This is where our partner can provide you with a high level of service.
If, for any reason, this is not the most suitable solution for your requirements, our partner will inform you of why this is the case. They will also recommend the most appropriate alternative option available to you.
WHAT PERCENTAGE CAN YOU GET ON EQUITY RELEASE?
This will vary from one lender to the next. However, you may well find the percentages offered of your property value will differ from lender to lender. Ask us how much you can borrow based on your age and we will be able to give you a range of borrowing available to you, you can use this figure to make some calculations, so you know roughly where you stand before enquiring further. However, do make sure you are aware of the exact percentage applicable for the product you eventually select (if you decide to follow this route).
HOW MUCH INTEREST DO YOU PAY ON EQUITY RELEASE?
This is one of the most common questions we are asked. The interest rate applicable to these deals is much the same, regardless of which lender you choose. The lifetime mortgage enables you to claim a lump sum payment against the equity in your property. You could also claim that sum in a series of smaller payments if you wish – imagine a cash facility available to use as and when you require it.
You are still the owner of your home in this example. Some plans allow you to pay back part of the interest that accrues during the lifetime of the plan
Alternatively, you could opt for a home reversion plan. This gives you the option to use some equity while remaining in the property. It essentially means the lender owns a portion of your home but cannot claim it until after you die. This provides security while still giving you the cash you need from the deal. The agreement provides a tax-free lump sum for you and part of your property for the lender, which will be below the usual market value for that portion.
In this case, the product is different since the lender takes ownership of a portion of your home. No interest is therefore applicable, since the lender will claim their stake once you die and your estate sells your home to access the funds. At this stage, the lender will get the percentage of the property they bought from you in exchange for the lump sum to start with.
CAN I SELL MY HOUSE IF I HAVE EQUITY RELEASE?
Some people decide to downsize rather than releasing equity from their property. However, this is not the most practical solution in some cases. If you wish to remain where you are, perhaps because of the location of the property or because friends and family are nearby, equity release could be a better solution.
But what happens if you release some equity and then find you need or want to move later?
You should still be able to do this in most cases. You will need to speak with your equity release provider to confirm they are happy for you to do this. If so, the debt on your property will move to the new one. They will want to know where you are moving to and which property you intend to purchase. There should be no risk to them of not getting their funds from the eventual sale of the new property when this occurs.
CAN YOU GET EQUITY RELEASE ON A HOUSE WITH A MORTGAGE?
You can, but there is an important point to note if you are considering taking this route. Let’s say you have £30,000 outstanding on your home loan and £150,000 equity in your property. You may choose to release £70,000 in equity in this scenario. (The amount being available to you will be based on your age)
However, of the £70,000 released, you would be required to pay off the outstanding home loan (in this example £30,000) before you do anything else. This is a requirement of the agreement. You can use the remaining cash (in this example £40,000) however you wish. So, it is possible to use the process in this manner, but you should be aware of how it works.
IS THERE AN UPPER AGE LIMIT FOR EQUITY RELEASE?
Most lenders are happy to consider any property owner for equity release at any age. There is a minimum age, of course, which is usually 55.
That said, some lenders may be warier of accepting people for equity release when they are of an advanced age. The older you get, the fewer choices you may get. However, while some lenders may turn you down even if you are in your nineties or older, there will still be many that are willing to consider you. The rule of thumb, as always, is to shop around. Even if the first lender you approach declines, another may be happy to accept.
WHAT IS THE DOWNSIDE TO EQUITY RELEASE?
Releasing cash from the equity held in your property is not without cost. The interest payable on the amount you release will compound over the years. The longer you live, the more you will owe when you die than you did when you released the cash.
This means any family members named in your will could receive far less from the sale of your property than they might have expected. It is important to talk this through with your family, so everyone understands the situation.
You will never owe more than the value of your property when the time comes to repay the debt. That means there is no chance of family members inheriting a large debt – something that did sometimes happen in the early days of equity release. Nowadays, these products have a clause that confirms this cannot happen.
Another point to consider is that once you have committed to releasing equity from your home, you may find it hard to change your mind. There are typically penalties that would be applied in such cases. These may make it impossible to change the situation you are in. Do think carefully and take professional advice to make sure this is the right decision for you before you go ahead.
You should also consider the status of any benefits you are currently in receipt of. Some will still apply and still be paid to you even if you release equity from your home. However, this is less likely to be true if you have means-tested benefits of some kind.
IS THERE AN ALTERNATIVE TO EQUITY RELEASE?
There are several alternatives to releasing the equity tied up in your property. Perhaps the most obvious is dipping into other investments or savings you may have available. Some people decide to continue working instead of retiring, to ensure they still have ample cash coming in. If you have already retired, you could consider going back to work part time.
If you wish to release some cash from your property but you do not want to take the equity release route, you could move home instead. There are two ways to consider this. Firstly, you might simply move somewhere smaller but stay in the local area. You can then retain the cash left over from the sale of your current property once you have bought somewhere else to live.
The second option is to move out of the area and go somewhere property prices are cheaper. This may allow you to purchase a similar-sized property while still getting some cash from the sale. However, many people dislike this idea because it may entail moving away from friends and family.
The most important thing is to look at all your options before making any decisions. The right decision for one person may be unsuitable for someone else. The value of your property, its location, and your ties to people in the local area would also come into play.
DO YOU HAVE TO PAY INTEREST ON EQUITY RELEASE?
It depends on the type of release you go for. If you take out an Interest Only Plan, then you are expected to make interest payments, otherwise most plans allow you to repay up to 10% of the amount borrowed each year on more of an ad-hoc basis.
IS DRAWDOWN RIGHT FOR YOU?
For instance, let’s say the company you decide to use agrees to let you draw £70,000 against the value of your property. You may decide to draw £20,000 now and leave the rest to draw against later. This is known as drawdown. This would mean you would only accrue interest on the £20,000 you have taken out now, whilst having funds to access at any stage later if required.
By paying off the interest as you go, it is not added to the original amount you released from your property. This keeps costs down. If you do not pay back any interest during the life of the deal, it will be added onto the amount you were given by the company. The interest will compound too, meaning that in subsequent years you will accrue interest on the original sum loaned plus the interest added in earlier years.
The other type of release is a home reversion plan. This means you sell a portion of your property to the company, giving them the ownership of that portion. You get a cash sum for it, free from tax and free from interest rates too. When you die, your property is sold, and the company receives the percentage of the property they purchased from you.
HOW LONG DOES IT TAKE TO GET EQUITY RELEASE?
It depends on the type of release you apply for. If you decide the home reversion plan is for you, you can expect the paperwork to be completed in around six to eight weeks.
The process for a lifetime mortgage can be slightly faster, completed in around four to six weeks. Both scenarios assume everything goes smoothly and would be dealt with properly by solicitors.
WHAT HAPPENS WITH EQUITY RELEASE WHEN YOU DIE?
Upon your death, your property is typically sold as part of liquidising your assets by your executors. The amount owed to the equity release company will then be paid to them from the sale. This could mean the lifetime mortgage plus the interest that has accrued on it. Alternatively, if you opted for the home reversion plan, the company would receive the percentage of the property you agreed to sell them for the cash lump sum you received. This will likely be worth more than the amount given to you.
For example, let’s say you were paid a £50,000 lump sum for a 30% stake in your property. If that property was worth £300,000 at the time, the stake would have been worth £90,000 then. You will always receive less than the going rate for the stake.
If your property is worth £350,000 when you die, the company will receive their 30% stake as agreed. This would be worth £105,000, a sum that would be paid to them in cash.
Modern agreements have a negative equity clause built into them. This ensures your dependents cannot be left with a bill to pay, as the value of the agreement cannot rise above the value of the property at the point of sale.
CAN I PAY BACK EQUITY RELEASE EARLY?
It’s possible, but it is advisable to read the rules surrounding your equity release plan prior to agreeing to it. Most, but not all, providers have a clause that adds charges if you try to repay the plan early. You may be able to do so, but it could be expensive if you do go ahead.
You may find it difficult to locate a provider that does not have early repayment charges in place. At the very least, make sure you understand the potential charges and what effect they would have if you did want to repay the loan before time.
Many lenders will offer fixed early repayment charges which will be known at outset if you repaid the loan in full in say the first 8-10 years.
WHICH IS THE BEST EQUITY RELEASE COMPANY?
There are many companies offering home reversion plans and lifetime mortgages in the UK today. It is vital to understand the best company for one person may not be the best for another. No two people will be in identical financial situations, nor will they require the same amount of cash from their property.
Hence why it is important to speak to a professional for expert advice and support before making your decision. If you have decided equity release is right for you, you should still make sure you consider all the potential providers carefully.
IS EQUITY RELEASE TAX FREE?
Yes. If you release some cash from the equity in your property, you will not be required to pay any tax on it. That said, some people decide to invest part or all the money in some way. If this is the case, tax would be payable on anything you make on that investment. For example, if you release £20,000, spend £10,000 and put the remaining £10,000 into a savings account, you would earn interest on that £10,000. You would then need to pay tax on the interest earned, although it would not be applied to the capital you have deposited in that account.
If you require further information about equity release and whether it might be the right option for you, contact Ample Mortgages today. Our advisers can assist you in finding out more information.