What is Equity Release?
Equity release describes a range of products only available to the older generation, typically for those over the age of 55. It is a way of unlocking the value of your property, without having to move home. Money is paid out as a lump sum in cash or a regular income. There are no stipulations on how you can spend this money.
Equity release plans, also called lifetime mortgages, home reversion or home income plans, are a way of releasing cash, whether to buy a new car, to pay for a holiday or home improvements, or simply to make daily life more comfortable. These schemes essentially allow you to borrow money against the value of your home, with the debt being repaid from the sale proceeds after your death, or you leave the property to go into long term care.
It is advisable to seek independent advice before making any commitment to an equity release plan as there may be more suitable options. One of the biggest downsides to Equity release plans is that they do impact on your 'estate' which you may want to leave to your loved ones.
Who qualifies?
- Generally anyone over 55 for a Lifetime mortgage
- But you usually have to be 65+ to get a Home Reversion plan
- A property owner with no mortgage, or just a small one
- People who need a minimum of £15,000 - £25,000 - Equity Release is a complex tool and it is unprofitable for companies to get involved in small amounts of money
How does it work?
You can either borrow money which is secured against your home, or sell part or all of your home. This can give you a lump sum, a way of topping up your income, or both. Not all Equity Release schemes pay money in the same fashion. You may:
- Receive a cash lump sum (or the ability to drawdown money when needed)
- Receive an income for life, or
- Both a lump sum and an income for life
Equity release schemes are divided into two main categories namely, lifetime mortgages and home reversion plans.
Lifetime mortgages
With lifetime mortgages, homeowners take out a loan on a property to raise a lump sum that they can spend as they choose. The interest is higher than with an ordinary home loan, and it is simply left to accumulate. It is repaid from the sale of the house on the death of the planholder or the surviving spouse, or you leave the property permanently. Main features include:
- You borrow money which is secured against the value of your home
- The money is paid out via a cash lump sum, or a regular income, or a combination of the two
- You continue to own and live in your home until you die, or your spouse dies, whoever lives the longer or you both go into long term care
- Interest is charged but this is added to the value of the loan so that the amount of the original loan will therefore rise over time
- The loan and the interest charges are repaid when you die or leave the property permanently
If the value of the original loan, plus the interest, is higher than the money raised by the sale of the house, the equity release company has to shoulder the loss - planholders' heirs or estates cannot be asked to make up the difference. But if the loan value plus interest is less than the sale proceeds, the excess goes into the planholder's estate to be distributed according to their will.
The main downside is that as nobody knows when they will die there is also no way of knowing how large the loan will become. As interest is charged on interest, so-called compounding, a loan taken out today for £50,000 will roughly double every 10 years. Live a long time therefore and the amount to be repaid on your death could be extremely high leaving little or no value on the property to pass on.
An increasingly popular form of lifetime mortgage is known as the drawdown lifetime mortgage. Instead of taking a lump sum, you decide at the outset on the maximum amount of equity you want to release and take the cash in stages when you need it. This helps to keep interest to a minimum.
Home Reversion Plans
With home reversion plans, homeowners agree to sell a share of their property in return for a lump sum. When the homeowner or surviving spouse dies, the company receives the agreed proportion of the sale proceeds. The main features include:
- You sell your property, or a percentage of it, to a reversion company
- You are allowed to live there until you die, or your spouse dies, whoever lives the longer or you both go into long term care
- No interest is charged on the loan
- When you die the property is sold and Reversion company takes it's profit
- For example, if you sold 40% of your home and it was sold for £100,000 your estate would receive £60,000 and the Reversion firm the balance of £40,000
