Equity release mortgages
Equity release is a means of using the value of your home to receive either a lump sum of cash, or regular monthly instalments. Basically, you can release cash from your property, while continuing to live in your home.
In all instances, age is the primary factor in determining the percentage of the value of your home that can be released. A person of an older age can release a higher percentage of the value of their home than a person of a younger age, because they are simply not expected to live as long.
The product you choose will depend on your circumstances; no one loan is perfect for everyone. The amount of equity required, how much you can unlock, your age, life expectancy and health, attitude towards risk, the amount of inheritance you want to leave, and whether you require a lump sum or regular payments, are all important points to consider.
The interest rates of equity release mortgages are rather high compared to standard mortgages, so think carefully about if you really need to follow this route.
Why use equity release?
You may look to an equity release mortgage for a number of reasons. If you want to keep your large family home rather than downsize, but also want to supplement your income, then you could try equity release.
You may do this due to a low pension income, or in order to experience more luxuries in life. If you’ve always wanted to travel to many different countries, buy a fancy new car, or purchase expensive gifts for your children and grandchildren, you could make use of an equity release to manage this, when otherwise you would be unable to do so.
There are two main equity release options available: a lifetime mortgage and home reversion. Like normal mortgages, they vary between lenders, and can have a fixed or variable rate, so you should always shop around for the best deals. They are both regulated by the financial services authority.
The majority of people who take out an equity release use a lifetime mortgage. You take out a loan which is secured on your home (as long as it is your main residence), receiving a tax-free lump sum for that amount.
The maximum you can borrow is usually 60 per cent of the property’s value. The property value and your age affect how much money can be released from the property, while medical conditions can also have an impact.
Normally, you do not have monthly repayments, with interest building up over time instead. After your death, or the sale of the house (whichever takes place first), the loan plus interest accrued during the length of the loan is repaid.
This therefore means that the longer you have the loan, the more interest will have accrued, and so more money will be owed. After the outstanding loan is repaid, the remaining proceeds from the house sale go to your estate.
Advantages and disadvantages
You retain full ownership of your home, so if the property’s value rises during the term of the loan you will receive the benefits.
Conversely, if the value of the property falls, you will feel the effects, although you should at least be covered by the no negative equity guarantee (see below) .
If such a thing happens, it could therefore mean you have no inheritance to leave to your family, so think through your plans before deciding on an equity release scheme.
With a home reversion you can sell up to 100 per cent of your home, to a home reversion provider.
In return you either receive a tax-free lump sum of money, or regular payments, in addition to a guaranteed lifetime lease. When the house is sold, whether it is before or after your death, the lender will receive its percentage share back.
Essentially, you are entering into a joint ownership with the equity release company because you are selling them a share of your house.
Advantages and disadvantages
This can be a good choice for people who wish to leave their family with an inheritance, because you are guaranteed to still own at least some proportion of your home once the scheme ends.
However, you are not the sole owner of your property, unlike with a lifetime mortgage, which may be unappealing to some people.
No negative equity guarantee
With an equity release mortgage, ensure it has a no negative equity guarantee in place, which prevents the final debt from exceeding the value of the property sold.
When you sell your property, the money is used to pay solicitor and agent fees, followed by the outstanding loan. If there isn’t enough to cover the entire loan, then this guarantee prevents you or your estate from having to pay the remaining amount.
Eligibility for equity release mortgages
There is no official maximum age limit for equity release, although applications are not usually granted for anyone over the age of 95, or under the age of 60 years old. This minimum age requirement must be met by both applicants, if it is a joint application.
Unsurprisingly, you must be a homeowner, and your property needs to meet certain requirements. A surveyor will need to value the house, check it is in a reasonable state, and confirm that it is suitable for loan purposes.
Equity release schemes are not suitable for everyone. You should check your financial situation thoroughly, and consider the alternative options.
Alternatives to equity release
Downsizing may be a better option for you than equity release. If your children have moved out and have their own homes, it makes sense to move to a smaller, cheaper house, and free up money to use during your retirement, in addition to reducing your monthly outgoings.
Equity release isn’t great for leaving an inheritance to your family either, because the value of the property you are passing on will be reduced.
Some people are actually eligible for certain benefits (or Local Authority repair grants, if the property is damaged), which could effectively negate the need for equity release, so you should investigate whether you qualify for any.