Equity is the difference between the value of your property and the amount you owe on it. Equity release is a way to unlock that value and have it available to spend. Money gained via equity release is tax-free.
There are two main equity release products available: a lifetime mortgage or a home reversion plan. It typically takes four to six weeks to complete a lifetime mortgage deal and six to eight weeks for a home reversion plan.
With a lifetime mortgage, you borrow some of the value of your property at a rate of interest that’s either fixed, or variable but capped. To qualify, you must be aged 55 or above. You don’t need to be mortgage-free, although it’s likely only a small mortgage will remain outstanding.
You may take the cash as one lump sum, draw money as and when you need it, or opt for a combination of the two. There are no monthly payments to make.
You retain ownership of the property and have the right to live there for life. When you die or move into permanent residential care (or the last deedholder does, if the property is in joint names) the property is sold and the loan and interest repaid. Anything left goes to you or your estate.
There are three main types of lifetime mortgage:
Drawdown – you choose how much you want to be able to access in total. You take the amount you want straight away, then the balance goes into a reserve account until you need it. That gives you flexibility as to how you draw the money, and you aren’t charged interest until you draw it.
Roll-up – you take a single lump sum and interest is charged on the full amount from the start.
Flexible – you can make payments towards the mortgage if you choose. Some come with interest payment options. However, you don’t have to and you can stop at any time without penalty.
How much does equity release cost?
The rate of interest will depend on your particular deal, but around 5% is typical. Arrangement fees generally cost between £1,500 and £3,000.
A drawdown lifetime mortgage is cheaper overall than a roll-up deal because of the effect of compound interest. A flexible deal allows you to have even more of an impact on the final interest charges.
A condition of a lifetime mortgage is that any other mortgage or loans secured on the property are repaid. You can either use savings or some of the funds you release.
Equity release has an impact on means-tested benefits, so pension credit will be affected. The state pension is unaffected.
It might be possible for you to remortgage to release equity rather than access an equity release scheme. Whether you are able to take out equity more than once will depend on your initial plan and the amount of equity left in your property.
Home reversion plan
With a home reversion plan, you sell part or all of your home for a discounted rate in exchange for a lump sum or regular payments. To qualify, you generally have to be aged 65 or above.
You’re guaranteed the right to live in your home rent-free for life. However, you might be given, for example, 20% of the current value of your property in exchange for 70% of the ownership. When you die or go into permanent care, the property is sold and you, or your estate, receive your percentage share of the sale price.
It’s worth noting that home reversion is not that popular and is used by less than 1% of people looking for equity release.
What if I want to move?
You can sell your house with a lifetime mortgage, but there are conditions attached. You’d have to move to a property that would sell easily on the market, so probably not a retirement home, for example. The new purchase must be approved by the lender, and if the new property is valued at a lot less than your current property, they might require some or all of the loan to be repaid.
Some equity release plans include an option for downsizing at a later date. If you take this option and want to repay the loan when you downsize, you can do so without penalties.
With a home reversion plan, you are no longer the sole owner of your home, so would likely have to first buy back the percentage that you have sold.
Ask an expert
Before you commit to any kind of arrangement, speak to an independent mortgage broker or financial advisor to get expert advice. If you go ahead, make sure the company you use is a member of the Equity Release Council, so the deal comes with a guarantee that your estate will never owe more than your property is worth.