Five minute guide to Equity release
What is equity release?
While many retirees are cash-poor, they often have plenty of money locked into their homes as they have little or nothing left to pay on their mortgage. Equity release is a way of raising money from your home to give you an extra income in retirement, but without you having to move house.
How do the schemes work?
There are two types of schemes – lifetime mortgages and home reversion plans.
The lifetime mortgage works in the same way as a standard mortgage, allowing you to borrow money against your property. You'll be charged interest, although most plans roll the interest into a big chunk, so it's paid off either when you die or when you move or sell your home.
A home reversion plan involves a company buying all or part of your home at between 20% and 60% of its market value in return for providing you with either a lump sum or a regular income. The company will earn its money by selling your home when you die or move into care.
Who is eligible?
Typically, equity release is available to those aged between 55-70 who own their own home. The property must be worth at least £30,000 and be in good condition. Bear in mind that the younger you are and longer you have to live, the more expensive it will be.
Why have they got such a bad reputation?
Before the arrival of the equity release trade body Safe Home Income Plans (SHIP) in 1991, equity release products weren't regulated. Old-style equity release schemes, such as the shared appreciation mortgage scheme, were badly structured.
This meant that customers could risk falling into negative equity and end up owing more than the value of their home. But providers have since cleaned up their act. The market is now tightly regulated and they must follow the industry code of conduct set down by SHIP, which includes a safeguard that ensures you can't ever slide into negative equity.
It sounds good but could it affect my benefits?
Any savings you have, including any equity released from your home, will be taken into account when assessing means-tested benefits such as housing and council tax benefit.
Presently you can have up to £10,000 in cash or savings before your benefits are affected. The upper limit for receiving any benefits is £16,000; after this you won't be eligible for any state help.
Should I seek advice?
Always get independent legal and financial advice before making an equity release application. Many providers will insist on this. You should also discuss your plans with family as it will affect any inheritance.
It's a complex process, and while it's a good option for some, it might not be suitable for others.
OK, but how much is it going to cost me?
When releasing value from your home you risk selling a large amount of equity in return for a relatively small amount of cash. For example, if you take out a lump sum of £45,000, that will grow to nearly £90,000 on a 7% interest lifetime mortgage plan.
There are also additional charges to watch out for. As with a mortgage, arranging an equity release plan will involve a valuation fee, linked to the value of the property, but often around 1% of the property's value; an arrangement fee that can cost up to £750 and legal costs, which could cost anything from £300 to £700.
With a home reversion plan, you may also have to pay a nominal amount for rent. And of course, releasing equity from your home also means that there will be less money to leave for your loved ones.
I've taken out an equity release plan but now I want to move – am I stuck?
Contrary to popular belief, an equity release plan will not force you to stay in your home until you die. Many lifetime mortgage plans will allow you to transfer to a new property, although this depends on the lender.
Home reversion plans are also portable, as long as the property meets certain conditions laid down by the provider.
Members of the equity release trade body SHIP – including Aviva, LV= and Northern Rock – all guarantee that customers are free to move house without suffering a financial penalty, but you should always check with the provider first before taking out a plan.
The circumstances in which a property is worth less than the outstanding mortgage debt secured on it. Although it traps householders in their properties, the Council of Mortgage Lenders (CML) says there is no causal link between negative equity and mortgage repayment problems. At the depth of the last housing market recession in 1993, the CML estimated 1.5 million UK households had negative equity but most homeowners sat tight, continued to pay their mortgages and eventually recovered their equity position.
A catch-all phrase that can range from assessing the price of a property or vehicle before offering it for sale or the net worth of assets in an investment portfolio to the prices of shares on a stock exchange.
An equity release scheme, where the money borrowed against equity in the property (up to a maximum of 50%) is subject to interest charges and although the borrower makes no payments during their lifetime, the monthly interest repayments will roll up and be added to the original debt, which will be settled on the borrower’s death. A lifetime mortgage is distinct from a home reversion scheme in that the lender never owns part of the property. But most lifetime mortgages are sold with a no negative equity guarantee. This means that if the loan is greater than the property’s value it’s a problem for the original lender and not the homeowner.
Home reversion plan
An equity release scheme whereby you sell part or all of your property to a home reversion provider, in exchange for a cash sum or income and you are guaranteed occupancy for life. On your death, the agreed proportion of the proceeds from the house sale reverts back to the provider and the rest is distributed to family. Although you don’t repay the loan until you die and have lifetime occupancy, the cash raised will not reflect the true value of the part of the property sold and you lose the right to any future growth in the part of the property you sold.
A term to describe financial products or ‘plans’ that help older homeowners turn some of the value (equity) of their homes into cash – a lump sum, regular extra income, or sometimes both – and still live in the home. There are two main types of equity release: lifetime mortgages and home reversion plans (see separate entries for both). Whichever type you choose, you borrow money against the value of your property, on which interest is charged, and the loan is repaid when the house is sold after your death.
A charge some brokers (and, increasingly, lenders) make for arranging your loan or mortgage, either as a flat fee or a percentage of the amount you wish to borrow. In order to look ultra-competitive in the best-buy tables, some mortgage lenders will offer mortgages with an attractive low rate and recoup any losses with a hefty arrangement fee.