What is Equity Release and How Does it Work? A Guide for Homeowners

Equity release is a way of using your home to generate income without needing to downsize your property. It is a type of mortgage that allows you to unlock the equity in your home through a tax-free lump sum payment or payments.

What are the benefits of Equity Release?

• Tax-free cash to spend however you like
• Lock in a fixed low rate
• Live in your home for as long as you like
• No monthly payments
• Take the mortgage with you to a new home
• You can pay off the mortgage early
• No negative equity guarantee

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What can Equity Release money be used for?

The funds generated from releasing equity in your home can be used for any legal purpose, such as:

• paying for home improvements
• paying off an existing mortgage
• purchasing property
• paying for holidays
• purchasing a car
• debt consolidation
• providing a gift to a family member
• topping up income

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What types of Equity Release products are there?

There are two equity release product types available: Home Reversion and Lifetime Mortgage.

Home Reversion will revert property ownership to the company providing the money, while a Lifetime Mortgage term is for your lifetime.

The majority of equity release products today are lifetime mortgages.

What is a Lifetime Mortgage?

A lifetime mortgage is the most common type of equity release option. With a lifetime mortgage, there is a charge against the property, but you retain ownership.  

Lifetime mortgages are run for the remainder of your life until you have passed away or moved permanently into long-term care. Any increase in the property value belongs to you and your beneficiaries.

There are no monthly repayments, and interest is charged on the amount you release, which is usually fixed for life.

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Types of Lifetime Mortgage:

• The lump sum: a one-off, tax-free lump sum from your home. There are no regular repayments, but the interest is added to the loan, which is repaid along with the initial loan when your home is sold.
• The drawdown: the total sum of money you can borrow with the equity release provider, which can be released as an initial amount with the rest kept in an interest-free reserve to be accessed in instalments.

Whether you decide to release the equity as a lump sum or via a drawdown, there are a variety of flexible options that could be available with different providers. For example, you may be able to make optional repayments, usually up to 10% of the initial amount borrowed per year, or pay the interest each month.

While the lump sum may seem like the more attractive option, if you don’t actually need it in one go, you’re better off taking it in chunks because you only pay interest on the amount you actually withdraw.

An equity release adviser can help you find the best solution for your circumstances.

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What is Home Reversion?

A home reversion plan works differently from a lifetime mortgage and is unsuitable for everyone.

With a home reversion plan, you continue to live in your home, but you sell part or all of it to the reversion company that provides you with a regular income and/or a tax-free lump sum. When your home is sold, the reversion provider will take its share of the proceeds.

You don’t pay any rent, but you won’t get the full market value of your house when it comes to selling it. The price you get will depend on your health and your age.

If there is a chance that you may move home again (other than moving into long-term care), you will need to make sure that your new home is acceptable to your home reversion plan provider. This is because the balance will be transferred and held against the new property.

How much does Equity Release cost?

The cost of equity release depends on the type of product you choose and the way you release the equity:

Lifetime Mortgage

With a lifetime mortgage, the cost depends on the interest rate on the amount you’re releasing. Rates are typically between 3-5%.

You’re not forced to make any repayments, but not doing so allows the interest payments to grow exponentially over time – which can make a lifetime mortgage expensive.

As most lifetime mortgages have fixed interest rates for life, an experienced equity release advisor can tell you exactly how much you might owe in the future if you don’t make any payments.

Home Reversion plan

This type of equity release doesn’t have a cost associated to it, as you’re simply selling a portion of your home to the provider. However, you might consider the value you receive as a form of cost.

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Is Equity Release safe?

Equity Release has been available in various ways since 1965 and is regulated by the Financial Conduct Authority. There are also several safeguards in place by our industry trade body – The Equity Release Council, such as:

• Being able to take the mortgage with you to a new home
• Being able to pay off early
• No negative equity guarantee
• Face-to-face legal advice for all
• Right to live in the home for the rest of your life

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Who is eligible for Equity Release?

To qualify for equity release, you must meet the following criteria:

• Be age 55 and over.
• Be a UK homeowner.
• Your property is worth a minimum of £70,000.
• You have little or no mortgage left on your property.

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How much equity can I release?

The amount you can borrow depends on your age, the value of your home and any potential health issues.

There is a minimum loan amount of £10,000, a minimum property value of £70,000 and no maximum for either.

The older you are, the more you can release, normally up to a limit of 60% of the home’s value. You can take an initial lump sum, and if this is appropriate for you, set up a drawdown facility with smaller payments.

How is the interest paid on Equity Release?

Although you do not have to, you can choose to pay some of the interest as you go to save on the overall cost when you move into care, or to preserve the value of your property for your beneficiaries when you die.

The interest applicable rolls up and adds to the balance over the duration of the mortgage. However, most products are offered on a lifetime mortgage with a fixed interest rate, giving you certainty.

The interest applicable can be paid in one of the four ways:

• In full on sale of the property should you pass away or move permanently into long-term residential care.
• In full by way of sale/lump sum/re-mortgage, and thereby concluding the mortgage term early.
• Incrementally by setting an interest serviced product – you can set up monthly payments from £25 to the full interest applicable each month.
• You can typically overpay by 10% per year covering capital and interest by making overpayments. Some products even allow up to 12%, 15%, 20% and 40% per year overpayment based upon the initial balance.

Comparing interest rates is important when choosing the right lifetime mortgage as this can make a big difference depending on how long you continue to live in your home for, as the interest can build up significantly over a long period of time.

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What is a No Negative Equity Guarantee?

A no negative equity guarantee means your estate (and beneficiaries) won’t be held responsible to make up the difference in the unlikely event that the property’s value has fallen to the point that the sale isn’t enough to cover the outstanding loan. In this case, the difference will be written off.

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How does the Equity Release process work?

At Ramsay & White, there are no upfront fees to pay and our advisors can provide you with a free consultation to help you assess your options.

The process is:

1. Our advisors will carry out a quick and easy consultation to find out more about your circumstances.
2. From here, they will find the best product on the market to suit your needs and help you complete the application process.
3. A property valuation will then need to be carried out by a local surveyor who will create a valuation report for the lender. This will determine how much equity can be released.
4. An equity release solicitor will oversee the legal process and liaise with the lenders’ solicitor.
5. Once the conveyancing and the legal process have taken place, you will receive an offer from the lender and a Solicitor’s Certificate.
6. Once the final checks and the legal paperwork are complete, a completion date will be set.
7. The funds released are first sent to your solicitor, who will deduct any charges before forwarding the net amount to you.

Equity release may involve a lifetime mortgage which is secured against your property or a home reversion plan which requires the sale of property for a discounted price. To understand the features and risks, ask for a personalised illustration. You only continue to own your own home with a lifetime mortgage.

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