Heide Swift DipFA, CeMAP, CeRER
What exactly is, Equity Release?
The definition of Equity Release:
‘The use of financial arrangements that provide the owner of a property with funds derived from the value of the property while enabling them still to use it’
Equity release refers to a range of financial products that allows access to equity (cash) tied up in property if you are over the age of 55. Money can be released as a lump sum, in several smaller amounts, or as a combination of both. Funds may be used however you wish.
There are 2 Equity Release options:
- Lifetime Mortgage: a mortgage is secured on your property (residential property) and you retain ownership. Some of the of the value of your property can be ring-fenced if required, 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 Scheme: part or all of your home is sold 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 or go into long term care, 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 purposes. The retained percentage 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 (either on your death or your move into long term care) your property is sold by the lender and the sale proceeds are shared, according to the remaining proportions of ownership.
Who can take out Equity Release?
Anyone over the age of 55 can take out an Equity Release plan. It’s a loan secured against your home and payments are NOT mandated if you take a Lifetime Mortgage as oppose to a Home Reversion Scheme. Taking out a Lifetime Mortgage might mean you end up with end up with a significantly higher debt than you originally take out if you choose not to service the interest payments or reduce the capital loan. If you take out a Home Reversion Scheme the lump sum payment you receive is likely to be significantly under the market value of your property.
If you need money but are unable to raise the funds in an alternative way (for example, re-mortgaging with a traditional mortgage or a loan) and you don’t want to down-size, then Equity Release may be something to consider.
I hear from people whose financial circumstances have changed and they can no longer be considered for a traditional mortgage. If they don’t want to move (or perhaps are not in a position to move) then Equity Release is a possibility. It’s important to understand exactly what the possible down-sides are. You may not leave any equity in your property to benefit your beneficiaries when you die (or if the loan is repaid if you move permanently into long-term care).
What can I use Equity Release funds for?
You can use the funds from Equity Release for virtually anything! Some examples of cases I’ve worked on recently:
- A couple coming to the end of their mortgage term on an interest-only mortgage. They had not made any arrangements to pay off the loan. A standard re-mortgage over a short mortgage term was not affordable so they selected Equity Release and are intending to pay the interest in lieu of their current mortgage repayments.
- A couple with no children – no beneficiaries – in their early 70s. They plan to travel and have a couple of big birthdays and an anniversary looming. They are using the equity in their home to enjoy their retirement.
- A lady wants to help her son and his wife get onto the property ladder – so she wants to gift him the money via an Equity Release plan. This is known as “living inheritance”. The beneficiaries benefit while the donor is still alive and the donor can see their family enjoying the money.
- A lady coming to the end of her mortgage term. Her husband had sadly passed away and her pension income was not enough to be able to obtain a standard re-mortgage. She used Equity Release to pay off her residential mortgage and borrowed a little extra to replace her boiler.
- An elderly couple who, although were still living at home, needed help around the house. Their son and his family were living with them and they were getting under each other’s feet. So they used Equity Release to convert a barn in the grounds for the extended family to live in whilst retaining their independence from each other.
- A couple in their early 60s are conscious of the increasing cost of living. They are both unemployed for health reasons and only on a small private pension income, currently. They are considering Equity Release to change their boiler and to replace the windows to
- reduce their heating bills.
- A divorced, self-employed lady in her early 60s is self-employed but not earning enough to be able to support a standard mortgage. She wants to replace the windows in her property and repay a small mortgage.
How much could I borrow, with Equity Release?
The amount you can borrow with Equity Release depends not on your level of income and outgoings (like a standard mortgage).
It’s based on your AGE and the value of your PROPERTY.
Why? Because of the No Negative Equity Guarantee, the lender will need to calculate the amount they will lend you based on the roll up of interest over the remainder of your life. They will take Office of National Statistics data to anticipate how old you will live to (based on your current age). Their calculations will need to ensure there roll up of interest plus the original loan, does not equate to more than the property value.
They are taking the risk in terms of projecting your lifespan and this is why interest rates are usually higher for an Equity Release (Later Life Mortgage) than a traditional mortgage.
Of course, some people live much longer than others. It’s important to know that you WON’T be evicted or repossessed if you live a long and healthy life!
Why is Equity Release different from a standard mortgage?
In very simple terms:
- You don’t HAVE to make any payments (of interest or capital) if you don’t want to.
- You do NOT have to meet a lender’s affordability checks as the assumption is you’ll let the interest roll up.
- The interest rate is fixed for the rest of your life.
- The amount you can borrow is based on the value of the property and how old you are.
Can I buy a new home with Equity Release?
Yes, you can.
Over the past couple of years I’ve helped 2 households move home.
In one case, a widowed lady wanted to move closer to her daughter and family who live in a more expensive area than she was living in.
In the 2nd case, a couple wanted to move near their daughter and partner, on the south coast. Although they didn’t “upsize”, the property was in a more expensive location than they moved from.
It’s important to know that Equity Release mortgage offers are often valid for less time than a standard mortgage. So we’d need to be really careful when selecting lenders that we can anticipate the completion date to avoid the offer expiring before the home move has been completed.
When it comes to Lifetime Mortgages, if you envisage that you would like to move home in the future we would need to ensure you have a portable policy. This gives you the right to move to another property subject to the new property being acceptable to your provider as continuing security for your Equity Release loan (an Equity Release Council standard). Please note that although you can move home and take your Lifetime Mortgage with you, if you decide you want to downsize later on it might be that you do not have enough equity in your home to do this.
The Equity Release Council
The Equity Release Council is the industry body for UK Equity Release specialists including providers, advisors and solicitors. Members of the Equity Release Council agree to the Council’s rules and have signed up to their Statement of Principles.
The Equity Release Council is guided by 4 brand values which guide everything it does. They are:
Authoritative : To be at the vanguard of substantiated, credible, evidence-led market insights, knowledge and data.
Progressive: To be the advocate of market change, innovation, betterment and reform.
Incisive : To have clarity of thought, commitment of decision making and the rigour to deliver the right solution.
Trustworthy: To inspire confidence, reliability and transparency across all stakeholders.
Heide is a member of the Equity Release Council and can be found in their directory of advisors. Their website can be accessed here: Equity Release Council Website
By clicking this link you will be departing from the site of Swift Mortgages & Finance, neither Swift Mortgages & Finance nor Quilter Financial Planning Ltd are responsible for the accuracy of the information contained within the linked site.
What you need to know about Equity Release:
Equity Release including Home Reversion Plans and Lifetime Mortgages will reduce the value of your estate and can affect your eligibility for means-tested benefits.
Equity release can be more expensive than a traditional mortgage.
There is no “fixed term” by which you need to repay a Lifetime Mortgage loan, therefore accrued interest may escalate quickly.
Home reversion plans are likely to offer you much less than the market value of your property.
Releasing equity in your property now may leave you short of funds at a later date.
If you move home, you may need to repay some of your mortgage, particularly if you are intending to downsize.
Monies received through Equity Release may affect your state benefit entitlement.
The Financial Conduct Authority does not regulated Estate Planning and Inheritance Tax Advice.
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