What is equity release?

Equity release simply means secured lending for older people – those aged 55 and over – mostly from well-known major lending institutions. Over 55 equity release schemes free up some of the capital in your home, while you continue to live there. Equity release schemes are provided by well-known, major financial institutions, which are subject to industry regulation.

Over 55 equity release schemes are increasingly popular as a way for older homeowners to boost their retirement income, with the amount of equity released breaking through the £3 billion barrier in 2017.

Investing in Property is the second most trusted way of saving for retirement.

You can choose to receive the equity released from your home either as a lump sum or as regular payments, or a combination of both. There are almost no restrictions on how you use the money (although lenders won’t give it to you for gambling or investing). 

There are two types of equity release schemes: lifetime mortgages and home reversion plans. 

Lifetime mortgages account for 99% of the over 55 equity release scheme market; under a lifetime mortgage you retain full ownership of your home. Under all schemes regulated by the Equity Release Council, the lender will never sell your home until after you die or move into long-term care.

Lifetime Mortgage

The first option available to you is known as a Lifetime Mortgage. A Lifetime Mortgage is a loan against the value of your home and can be taken either as a lump sum, a monthly income, or both. No capital and interest repayments are made until the property is sold. Instead, the interest is rolled up and added to the total amount of the loan.

Some Lifetime Mortgage providers allow you to take the capital in stages, which is called drawdown’. The benefit of drawdown’ is that the interest only becomes payable when you actually take the capital; the total debt builds more slowly, so interest grows more slowly as well. Although there is no guarantee that property values will rise in future, any rises in property value will offset the effect of the rolled-up interest on the loan.

Advantages

  1. You will have a substantial lump sum or regular income to spend as you wish, without making any interest payments until the scheme ends.
  2. You still own your or house, so will benefit from any increase in value.
  3. The plans are available to borrowers as young as 55.
  4. You can still move home if you wish.
  5. You don’t have to make a monthly repayment, although you may be able to do so.
  6. You can elect to protect’ a percentage of the eventual sale of your home, so ensuring a guaranteed inheritance is available to your beneficiaries.
  7. It may be possible to draw higher amounts if you are in ill health.
  8. All Equity Release Council members have a No Negative Equity guarantee. Providing you do not break the terms of the agreement, there is also a No Repossession guarantee.
  9. Some providers offer Interest Only mortgages, which would require a monthly interest payment. The advantage of this arrangement is that, so long as the payments are maintained, the debt does not increase over time.

Disadvantages

  1. The loan debt accumulates rapidly. The younger you are when you borrow the money, the greater the potential debt due to greater life expectancy.
  2. The value of your estate is reduced, leaving less for your beneficiaries.
  3. Interest rates may be high due to the long-term nature of the loan.
  4. Further loans may not be possible.
  5. There may be early redemption costs.
  6. When you take out the mortgage it isn’t possible to know how much the final cost of the mortgage will be.
  7. Equity Release may affect your eligibility for means-tested state benefits, such as guaranteed pension credit and savings pension credit.

Home Reversion

A Home Reversion scheme is when you sell all or part of the equity in your home to a specialist reversion company.

You may not receive the full market value of your home, as the reversion company gives you the right to live in your home rent free for the rest of your life. However, now there are reversion companies that will allow you to draw the maximum share for your age, gender and property value for a percentage share in your property.

When the property is sold, usually after death, the reversion company receives its share of proceeds from the sale.

So, for example, if you sold a 50% share of your home, the reversion company receives 50% of the proceeds when it’s sold.

Advantages

  1. You will have a substantial lump sum or regular income to spend as you wish.
  2. You don’t have to make a monthly repayment.
  3. You will not build up any debt.
  4. Beneficiaries know the proportion of your home (if not the value) that they will receive from your estate.
  5. Unless you have sold 100% of your property, you continue to share in the rise in value of your property.
  6. You can take further cash depending on the amount you originally sold.
  7. Minimum age is 65.
  8. You can usually draw more from a Home Reversion scheme than a Lifetime Mortgage.
  9. It is usually possible to draw higher amounts if you are in ill health.

Disadvantages

  1. It will reduce the value of your estate and therefore the amount left to your beneficiaries.
  2. If you die soon after starting the plan, you could have effectively sold off your house (or a share of it) cheaply. Some schemes may give a rebate if death occurs within the first few years of the start date.
  3. Some schemes can take a long time to arrange, and some companies are very selective about the properties they consider.
  4. Equity Release may affect your eligibility for means-tested state benefits, such as guaranteed pension credit and savings pension credit.

‘We have used 55+ Equity Release on two properties. We have always received immaculate service and good, competitive charges – completely satisfied! Thank you for all your help.’

B Blanchard, successful over 55 equity release scheme applicant, London

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