Equity release is a way to free up cash that’s tied up in your home. You might be thinking about it if you want to make renovations to your home, help your children onto the property ladder, or go on that dream holiday you always wanted to take.
It’s only available to people aged 55 and over, and there are three ways to go about it: (i) a lifetime mortgage (ii) a home reversion plan (iii) a retirement interest-only mortgage.
Lifetime mortgages
The most common product for equity release is a lifetime mortgage. The lender gives you a loan for a percentage of your home’s value at a fixed, or capped interest rate.
You can either repay the interest regularly, or it can accrue until the end of the mortgage. If you choose the latter option, then the interest is paid in full when your home is sold. Be aware that the interest will compound, so there could be quite a lot to repay by the end.
The good thing about a lifetime mortgage (and one of the reasons why they’re so popular) is that you retain full ownership of your home.
Home reversion plans
With a home reversion plan, you receive a tax-free lump sum from the provider in exchange for a proportion of your home. When your home is sold, that agreed percentage will go back to the lender, and the rest goes into your estate.
It’s only available to people aged 60 and over, but it’s worth knowing that you don’t retain full ownership of your home with this option.
Retirement interest-only mortgages
A retirement interest-only mortgage is like a lifetime mortgage, but you have to make monthly payments. With a lifetime mortgage you can choose to make monthly repayments if you want to keep the interest at bay.
But with this option, the regular repayments are mandatory so you need to be confident that you can afford it. In light of that, it works out cheaper than a lifetime mortgage because you’re paying off the interest regularly.
Pros and cons of equity release
A financial adviser can run through the advantages and disadvantages that are specific to you. Here are a few generic pros and cons:
Pros
- You receive a lump sum of tax-free cash.
- Or you can choose to receive regular smaller payments.
- You retain ownership of your property (if you choose a lifetime mortgage).
- There’s a no negative equity guarantee. That means that you never owe more than the value of the home when it’s sold.
Cons
- The interest will compound, so the amount you owe increases all the time if you don’t make regular repayments.
- That means that the sooner you borrow, the more expensive it is.
- If you live with dependents, they might have to move out when you die, or move into care.
- The value of your estate will reduce, so your family will inherit less.
- Any means-tested benefits like universal credit and pension credit may reduce.
- If you choose a home reversion plan, then you are no longer the owner of your property.
What is the process?
Step one is to book an appointment with a financial adviser to discuss your options for equity release. You must do this under the rules of the Financial Conduct Authority. But it will help you to clarify if equity release is the right decision for you, and which product will work best in your circumstances. If you decide to go for it, you make an application to your lender.
You don’t have to commit to it until you’ve agreed to the offer from the lender and signed the agreement. Up until then, you can change your mind at any time.
Do you need a solicitor for equity release?
You must have at least one in-person meeting with a solicitor when you make an equity release application. It’s usually worth retaining the solicitor for the entire equity release process (usually 6 – 8 weeks) so that they can:
- advise you on the legal risks and benefits.
- organise a property valuation.
- carry out searches on the property and title deeds.
- review the offer from the lender.
- prepare and arrange signatures for the contracts to change your mortgage.
- communicate with the lender on your behalf.