Equity Release - What is it?
Equity Release is a form of retirement lending that enables homeowners to unlock cash from their homes. The money you release is completely tax free and can be used to provide for a more comfortable retirement amongst many other uses!
By releasing equity in the form of either a Lifetime Mortgage, a Drawdown Lifetime Mortgage, a Retirement Interest Only Mortgage or a Home Reversion Plan* it will allow you to remain in your home and raise money for things such as:
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providing an additional retirement income
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to provide lifetime gifts to relatives
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to repay an existing mortgage
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for home improvements
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to fund long term care
Equity release is typically available to homeowners over the age of 55 who have a significant amount of equity but have a shortfall of capital or income for the lifestyle they want to maintain. Some providers will require your property to have a minimum market value but most base their criteria on your age, health and property. As a professional Equity Release Adviser I can help you ascertain whether equity release could be a viable option for you.
OK, so how does it work?
A Lifetime equity release mortgage enables you to borrow the equity in your home by securing a loan against it. You still own the property and the amount you owe is repaid only when the property is sold.
Advantages of a Lifetime mortgage​​
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No mandatory monthly payments. If you choose to make regular payments it will save some or all of the interest compounding.
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Not based on income or affordability. Lending is based on your age against the value of your property.
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Can be used to repay an Interest Only mortgage at the end of its term. If you don’t have the means to repay your loan or do not want to downsize, a lifetime mortgage may be a good option to consider.
Disadvantages of a Lifetime mortgage​​
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Reduced Inheritance. Your family will not get the full value of your property.
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Means tested benefits may be impacted. You may not qualify due to the loan
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State Benefits affected. This type of scheme may reduce eligibility to some state benefits
A Drawdown equity release mortgage offers a more flexible option than simply one lump sum. Drawdown equity release products usually offer smaller lump sums initially with a facility to drawdown additional amounts within that facility as required. The big benefit here is that you only pay interest once you drawdown from your facility.
Advantages of a Drawdown equity release mortgage
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Reduced interest charges. You will only pay interest on the amount you have actually drawn down. Funds remaining in the agreed facility have no interest added.
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Larger potential inheritance. Your family will potentially benefit as the amount of interest that accrues is likely to be lower.
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Means tested benefits likely to be less impacted. As you can control when you drawdown funds with careful planning it will have less effect on any state benefits.
Disadvantages of a Drawdown equity release mortgage
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Potentially higher interest rates. Other types of Lifetime mortgages may have slightly lower interest rates
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Drawdown Limits. There may be a limit to the number of withdrawals you may make each year.
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Early Repayment Charges. These can be quite punitive if you wish to exit the arrangement early.
A Home reversion plan* works by selling all or part of your home below market value in return for a cash lump sum regular instalments or a combination of both. You can continue to live in your home as a co-owner, but the property will pass to the home reversion provider on your death or going into long term care.
Advantages of a Home reversion plan
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Retained Home Ownership. You remain the owner of your property.
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No Debt Accrual. There is no interest to pay, so no big debt at the end of the agreement.
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Flexibility. You can choose how you take your money. A lump sum, monthly income or a combination of the two.
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Access more equity. Potential to sell up to 100% of your property in exchange for cash.
Disadvantages of a Home reversion plan
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Age restricted. Usually over 65’s only.
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Reduced value of your estate. Depending on how much of your property you sell your inheritance could be much smaller or non-existent.
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More complex to arrange. Providers tend to be more selective about who they will deal with.
*Please note - Abode Mortgages Limited do not offer Home Reversion Plans to our clients due to the high levels of risk involved.
A Retirement interest only mortgage will allow you to leave a greater amount of equity in the property as an inheritance for your family by making either regular or ad hoc interest payments.
Advantages of a Retirement interest only mortgage
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Ideal if you have surplus income
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Nearing the end of a pre-arranged Interest Only residential mortgage
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Have a specific date when you will have funds to repay the mortgage
Disadvantages of a Retirement interest only mortgage
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Affordability is Income Assessed
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Interest MUST be serviced for the life of the loan
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Maximum age usually 85
Is Equity Release right for me?
It is fair to say that whilst Equity Release will work for many, it doesn’t mean it is necessarily right for you!
This is why as a practice we take our time explaining how it works and what the advantages and pitfalls are to not just you, but also to your family. It is important to us that your family fully understand what you are doing and why you are doing it… after all your decisions today will potentially affect your family in the years to come.
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Let’s take a quick overview of some of the pitfalls:​
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it could impact on your ability to claim certain state benefits and your personal tax position
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potentially erode or completely remove any inheritance planned for loved ones
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impact local authority grants/other grants for essential home improvements
These are just a few of the potential issues that need serious consideration. There are of course alternative routes you could take that need to be properly explored before heading down the equity release road, such as moving to a smaller home, utilising any savings or investments, renting or even moving in with children or other relatives.
We can help!
As a professional Equity Release adviser, I will help you through this complex market, explaining everything in plain English. If you don’t understand something just ask and I will explain again to ensure a full understanding.
Please remember, there is no such thing as a daft question…if it is worrying you, then it is important!
We offer unbiased Equity Release Advice to help you explore your options. If you are considering using an Equity Release service it is important to choose a reputable provider regulated by the Financial Conduct Authority (FCA) that can provide a clear personalised illustration of your financial options.
As with most mortgages, you can expect to pay arrangement fees which will need to be factored into the equation. In addition, you may also need to pay an additional advice fee if your circumstances are complex and you need specialist legal advice.
A lifetime mortgage is a long- term commitment which could accumulate interest and is secured against your home. Equity release is not right for everyone and may reduce the value of your estate.