Equity release refers to a range of products letting you access the equity (cash) tied up in your home if you are over the age of 55. You can take the money you release as a lump sum or, in several smaller amounts or as a combination of both.
Equity release options
There are two equity release options:
Lifetime mortgage: you take out a mortgage secured on your property provided it is your main residence, while retaining ownership. You can choose to ring-fence some of the value of your property as an inheritance for your family. You can choose to make repayments or let the interest roll-up. The loan amount and any accrued interest is paid back when you die or when you move into long-term care.
Home reversion: you sell part or all of your home to a home reversion provider in return for a lump sum or regular payments. You have the right to continue living in the property until you die, rent free, but you have to agree to maintain and insure it. You can ring-fence a percentage of your property for later use, possibly for inheritance. The percentage you retain will always remain the same regardless of the change in property values, unless you decide to take further cash releases. At the end of the plan your property is sold and the sale proceeds are shared according to the remaining proportions of ownership.
Lifetime mortgages
Most people who take out equity release use a lifetime mortgage.
Usually you don’t have to make any repayments while you’re alive, interest ‘rolls up’ (unpaid interest is added to the loan).
This means the debt can increase quite quickly over a period of time.
However, some lifetime mortgages do now offer you the option to pay all or some of the interest, and some let you pay off the interest and capital.
In the same way ordinary mortgages vary from lender to lender, so do lifetime mortgages.
When considering a lifetime mortgage, it’s useful to know:
The minimum age at which you can take out a lifetime mortgage. Usually it’s 55. We’re all living longer so the earlier you start the more it is likely to cost in the long run.
The maximum percentage you can borrow. 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. The percentage typically increases according to your age when you take out the lifetime mortgage, while some providers might offer larger sums to those with certain past or present medical conditions.
Interest rates must be fixed or, if they are variable, there must be a “cap” (upper limit) which is fixed for the life of the loan (Equity Release Council standard).
You have the right to remain in your property for life or until you need to move into long-term care, provided the property remains your main residence and you abide by the terms and conditions of your contract. (Equity Release Council standard).
The product has a “no negative equity guarantee”. This means when your property is sold, and agents’ and solicitors’ fees have been paid, even if the amount left is not enough to repay the outstanding loan to your provider, neither you nor your estate will be liable to pay any more (Equity Release Council standard).
You have the right to move to another property subject to the new property being acceptable to your product provider as continuing security for your equity release loan (Equity Release Council standard). Different lifetime mortgage providers might have slightly different thresholds.
Whether you can pay none, some or all of the interest. If you can make repayments, the mortgage will be less costly. However, with a lifetime mortgage where you can make monthly payments, the amount you can repay might be based on your income. Providers will have to check you can afford these regular payments.
Whether you can withdraw the equity you’re releasing in small amounts as and when you need it or whether you have to take it as one lump sum. The advantage of being able to take money out in smaller amounts is you only pay the interest on the amount you’ve withdrawn. If you can take smaller lump sums, make sure you check if there’s a minimum amount.