Equity Release Explained

If you’re a homeowner over 55 looking to free up cash or set up a more comfortable retirement, equity release could be the answer. It’s usually pretty easy to do, but it’s not without risk and it can be an expensive way to get extra money, so there’s a few things you’ll need to consider.

In this guide, you’ll find everything you need to know about equity release - the Good, the Bad and the Alternatives.

Think carefully before securing any other debts against your home - it could be repossessed if you don’t keep up your repayments.

What is equity release?

Equity release is a specific mortgage product that allows you to access the money tied up in your home in the form of a loan. You’ll need to be over 55 and own your own home, but you don’t need to have paid off your mortgage completely to do this. 

There are two equity release options: Lifetime Mortgages (the most popular option) and Home Reversion Plans. 

What are Lifetime Mortgages? 

Lifetime mortgages are long-term loans which are secured against your home. You can get the money transferred to you as a lump sum, in instalments, or a combination of the two. The interest on the loan will build up over the time it’s borrowed for, but like the debt, it won’t need to be repaid unless you go into long-term care or pass away.

What are Home Reversion Plans? 

Home Reversion plans let you use some of the money that’s tied up in your home, but some providers may insist you’re over 55. You’ll need to sell all or part of your home to a ‘reversion company’ in order to release the money in a lump sum or monthly instalments and you’ll be allowed to remain in the property as a co-owner. But you'll usually only get 20-60% of what your property’s worth, so it’s not always an appealing option.

Whether you’re interested in Lifetime Mortgages, Home Reversion Plans or just looking for general advice, make an enquiry to speak to one of our Mortgage Experts.

What types of equity release are there?

If you decide to apply for a Lifetime Mortgage, it’s good to know about the different types. It’s all to do with the way you can access your cash and how you pay off the interest. The most common types are as follows:

• Roll-up. You can take out a lump sum and you won’t need to make any monthly payments. The interest will build up over time, but this is paid off along with the debt itself at the end of the agreement (normally when you die or if you go into long-term care).

• Drawdown. This is similar to roll-up, but you’ll be able to withdraw the equity in set instalments and pay interest-only on the money you take out.  

• Flexible. You’ll be able to take out your equity as one lump sum and you can make repayments whenever you like during the term. This will help to bring down the amount that’s due at the end.

• Enhanced. This is only for people that have certain health conditions, but with this you’ll be able to borrow more equity at a better rate. 

• Interest-only. You can pay off a set amount of interest each month which means you’ll have less to pay off at the end of the term. 

If you’re considering a Home Reversion Plan then following the sale of all or part of your property you’ll become a co-owner of the property. But you won’t pay any rent on the percentage of your home that no longer belongs to you. When the property is eventually sold, the home reversion company will take its share of the profit.

Will I qualify for equity release?

If you’re looking to use an Equity Release Scheme there's a few things that determine if you’re suitable and how much you can borrow. Your age, health and the value of your property will all have an impact.

• Age. You need to be over 55 to qualify for a Lifetime Mortgage or a Home Reversion Plan. But generally, the older you are the more money you can borrow. At 65, you can usually borrow between 25-30% of your property’s value. If you're older, you could borrow up to 50% of the value.

• Health. During the application process you’ll normally be asked by lenders to complete a health questionnaire. Those in poor health or with serious health conditions will often qualify for a higher loan.

• The size of the loan. It depends on the lender, but most will only approve applications where the loan is over £10,000. In some cases, lenders can set the bar as high as £100,000.

• Property. Most lenders have a minimum property price that they’ll consider loaning on. They won’t normally consider your application unless your home is worth at least £70,000.

How much does equity release cost?

Equity release interest rates are typically somewhere between 1% to 2% above the Bank of England base rate. But you won’t normally have to pay the interest or pay off the debt until the end of your deal term.

It varies between lenders, but other costs you should prepare for include valuation fees, admin and application fees, broker fees and legal costs. 

The downsides of equity release

Lifetime mortgages certainly have their perks, such as being able to stay in your home and access to tax-free cash to spend however you like. But there’s a few drawbacks you’ll need to be aware of too:

Costs

It depends on how much you want to borrow and your specific situation, but the cost is usually quite high. Lenders can end up taking the whole value of your home away, so you’d have nothing left for you or your family to inherit. You’ll also have to pay admin fees for the arrangement of the plan, valuation fees, broker fees and sometimes legal costs. This can be worth it to release the money you need, but it’s something to prepare for.

Rules and regulations

If you take out equity you’ll legally have to agree to keep the house in good order, make sure it’s insured and you can’t leave it empty or rent it out. Make sure you can afford to follow these rules before you take out a plan.

Moving home

If you’ve got an equity release plan you should be able to take it with you after selling your current home. But moving can be difficult if the new property is more expensive than the equity you have left in your old one. It’s something you’ll need to weigh up.

Benefits

Releasing equity may mean you lose eligibility for benefits such as pension credit and council tax benefit. Get advice from Citizens Advice first.

Early exit fees

Lifetime mortgages are seen by lenders as lifelong commitments. In some cases you may be able to exit early, but there’s usually a hefty fee to pay. It’s up to the lender to decide how much they want to charge you, so it’s always best to check this before you agree to the deal. 

Alternatives to equity release

Older people now have more options than ever when it comes to borrowing against their home. There’s interest-only mortgages for retirement that allow you to take out a mortgage and only repay if you go into long-term care, sell the property or pass away. With these deals you’ll normally only need to pay off the interest each month which means when the property is finally sold it’ll be the loan only (no interest) that’s repaid. This can allow you to give your family more inheritance.

To find out your options, start an enquiry and one of our friendly Mortgage Experts will get in touch.

Tips for getting the most out of your equity release scheme

Here’s our top tips for getting the most out of your equity release scheme:

Borrow as you go

The sooner you borrow, the more interest you’ll pay as it builds up over time. This can get expensive. Borrowing a smaller amount at the start can help reduce the interest you’ll pay before you need to borrow again. For example, if you need to borrow £50,000 from your home to cover the next 15 years, taking out £20,000 in the first instance could be a more cost-effective way of borrowing.

Do your homework

You need to make sure you use a company that's a member of the Equity Release Council as they must promise a 'no negative equity' guarantee. This means your estate will never owe more than your home is worth.

Speak to a specialist

When applying for equity release it’s always best to speak to a specialist mortgage broker that knows the market, which equity release lenders are best for you, and how to give your application the best chance of being accepted.