Equity release schemes
Homeowners over the age of 55 are increasingly looking into equity release schemes as a means of freeing up cash from their properties.
There are many reasons why older individuals and couples choose to borrow back their equity in either a cash lump sum or smaller instalments. Many want to invest in large-scale home improvements; some want to be able to afford that once-in-a-lifetime holiday they’ve always dreamed about; others simply want to have more money in the bank to enjoy during their retirement. Whatever the motivation for releasing equity, you need to be aware of the long term implications of your decision – and you need to be sure that committing to this kind of arrangement isn’t going to leave you in financial difficulty in the future.
Here, we’ve put together a guide to the best equity release plans that are currently available in the UK, along with more information on the advantages and disadvantages of drawing out some of the capital in your home using the various products that are on offer from today’s lenders.
• How can I release equity from my home?
• How much capital can I release?
• Are there minimum borrowing figures?
• How much does it cost to release equity from my home?
• Am I eligible for equity release?
• What are the tax implications of equity release?
• Are there better alternatives?
• Are there any equity release companies I should avoid?
• How long does it take to arrange an equity release mortgage?
• Can I switch providers?
• Your equity release checklist
• Speak with one of our experts
For expert advice tailored to your unique circumstances, contact our mortgage brokers. We have a great deal of experience in arranging equity release mortgages for our customers, and we love nothing more than helping homeowners find new financial freedom with the right mortgaging solution!
How can I release equity from my home?
Lifetime mortgages are by far the most popular equity release products on the market. They allow you to borrow some of the equity you have acquired using a loan that is secured against your property, whilst still maintaining full ownership of your home.
You will eventually need to pay back this loan, with interest – but it won’t be repayable until your property is sold when you pass away or go into long term care.
There are several different types of lifetime mortgages for you to consider:
Under this arrangement, you can release an initial amount from your property, then keep the rest of this cash in a reserve account that can be drawn upon at a later date.
A drawdown lifetime mortgage is a very cost-efficient way of releasing equity, because interest will not be accrued on the money that’s still in reserve. It will just be ready when you need it.
Using a roll-up lifetime mortgage, you can receive a cash lump sum instead of accessing your money more gradually. You will eventually need to pay interest on the money that has been released, but not until you or the last person listed on the application dies or moves into permanent care.
If you see equity release as more of a short term solution that can help you supplement your income, you can take out a product that allows you to make voluntary payments back into the mortgage.
You are under no legal obligation to make these repayments, but the option will be there if you want to start building up your equity again, perhaps to increase the value of the inheritance that your dependents or beneficiaries will receive from your estate.
This kind of arrangement can help you reduce the amount you will need to pay towards your mortgage at the end of the term by allowing you to pay off a certain amount of the interest that has been generated every month.
Otherwise referred to as an impaired mortgage, an enhanced lifetime mortgage allows you to borrow money from your property based on your overall health. The healthier you are, the more likely you are to live longer – and the more cash the lender will let you release.
What are the pros and cons of lifetime mortgages?
One of the biggest benefits of lifetime mortgages is they can provide you with a much-needed boost in income, either as a one-off payment or as a series of instalments.
Choose to take out a lifetime mortgage, and you won’t lose your home; you won’t need to worry about repaying your debts until your property changes hands; and, if the property increases in value, your beneficiaries could receive some inheritance even after the mortgage balance has been cleared.
Some mortgage products will give you fixed rates, so you can be sure that costs won’t spiral out of control over the course of the term. Other schemes will guarantee that the total debt cannot exceed the value of the property, so your loved ones will never have to worry about any additional costs when you’re gone.
What’s more, the equity that’s released on your main property is tax free.
As with anything, however, there are some downsides to releasing equity using a lifetime mortgage.
Raising money in this way might affect your eligibility for certain benefits. This is because you will be perceived to receive more income, and therefore may no longer be eligible for certain payments or support schemes. It may also affect the amount you will be able to pass down to your beneficiaries upon death.
Even though you will have lost a percentage of your capital, you will still be responsible for paying your utility bills, settling your council tax and finding suitable insurance to protect your building and everything in it. Under the terms of the agreement, you will need to keep your home in good condition so as not to negatively affect its resale value – and this could mean spending some of your released equity on home improvements and vital repair works.
Your lender may not be very accommodating if your circumstances change. For example, you may need to ask permission for a relative, carer or new partner to move into your home.
Home reversion plans differ from lifetime mortgages. They involve selling off some or all of your home to a home reversion company at a percentage of its current market value. Once you have taken out the home reversion, you will receive your cash in either a lump sum or monthly instalments, whichever you prefer.
You will still technically co-own your property, and you will be granted a lifetime lease that allows you to live in it, rent-free, for the remainder of your life.
Bear in mind, however, that your provider will normally only pay you between 20% and 60% of the property’s price in exchange for the equity you have released.
What are the pros and cons of home reversions?
These kinds of equity release plans can be a viable option for homeowners who want to free up cash quickly and still remain in their home. However, mortgage brokers and financial advisors are often reluctant to explore home reversions in the first instance. In fact, home reversions account for less than 1% of all equity release products sold in the UK.
Why? Because they are high risk products in terms of the amount of capital you could lose, and the additional expenses you could incur.
First of all, by selling some or all of your property to a home reversion provider at less than market rate, you are already set to lose a considerable amount of money. If you are keen for your home to retain its value for your children or other family members, you may benefit from taking out a lifetime mortgage instead.
Secondly, despite giving away some of your equity in return for cash payments, you will still be responsible for maintaining the property. You may need to set aside some money for any unexpected repair bills.
Finally, your landlord – the home reversion company – can ask you to follow the terms of their leasing agreement now that they own a significant stake in your asset. This could affect how you can use the property, and/or the alterations you can make to it. Under this new lease, you could also be liable to pay ground rent and other maintenance fees, which could drive up your overall cost of living quite considerably, especially if you have retired and have no source of substantial income.
As you can see, there’s a lot to consider when taking out a home reversion plan. To discover if this is the right equity release plan for you, contact our experienced mortgage brokers. They will happily talk you through all the advantages and disadvantages of home reversion products and help you get to grips with their longer term implications for your financial security.
How much capital can I release?
You can normally draw out between 20% and 60% of your home’s value. But the exact amount of equity you can release will depend on:
The type, size and value of your property
Lenders will heavily base the loan amount on how much your property is worth. They will factor in the demand there is in the local area for homes like yours, and whether or not it is of standard construction. If you have a more unusual property, you may not be eligible for an equity release scheme.
As a rule, the older you are, the more equity you can release (and the less interest you will accrue if you have chosen a roll-up lifetime mortgage).
If you suffer from an underlying medical condition or have serious health issues, you may be able to access more capital.
You can use online equity release calculators to work out roughly how much you could borrow on your home. For a more accurate assessment, though, we would recommend getting in touch with our mortgage advisors, who have many years’ experience in sourcing and arranging equity release mortgages. They can help you get clear-cut quotes from lenders that are likely to accept your application.
Are there minimum borrowing figures?
Some equity release companies will only want to lend to you if they think it’s worth their while. Many of today’s providers will not let you release any less than £10,000 from your investment using a lifetime mortgage or other equity release scheme. So if you want to borrow a smaller amount than this, you may want to skip down to the equity release alternatives
later in this article.
How much does it cost to release equity from my home?
When you take out a lifetime mortgage, your lender will add interest to your loan. The interest rate you pay will be determined by the length of your term and the type of plan you choose.
Equity release interest rates are significantly higher than those on residential mortgages. That said, they are much lower than they used to be. According to research from Defaqto, the average rate as of January 2020 is just under 5%, but some providers are offering attractive rates of just 3%.
Remember that if you are entering into a roll-up lifetime mortgage, the amount of interest you owe will compound every year. So the interest rate can have a profound impact on how much you need to eventually pay back to the lender.
One way to keep your interest rate to a minimum is to ask a professional mortgage broker to find you the best deal. Whole of market advisors, like those here at CLS Money, can source and compare lifetime mortgage products from a huge range of lenders, and can often introduce you to providers that can offer more flexible and competitive terms than Aviva, Canada Life, Legal & General, Liverpool Victoria and other big High Street names. The offers that are available to you will depend largely on how well you fit the criteria we listed above – but finding a rate that’s fractionally lower than the best quote you’ve received after approaching lenders directly could save you thousands of pounds over the course of your agreement.
Interest rates aside, there are other costs that need to be considered when releasing equity from your property. You will normally need to pay to have your home valued, plus there are application fees, broker fees and myriad legal fees that cannot be avoided. Again, an experienced mortgage advisor can provide you with a detailed breakdown of all the costs you can expect to pay based on the product you want and the kinds of deals that are available to you.
And, as we mentioned earlier, you will still be responsible for insuring and upkeeping your property while you’re living in it. You will need to set aside money to cover improvements, repairs and adequate building and contents cover.
Am I eligible for equity release?
There are certain criteria you will need to meet to successfully apply for an equity release plan.
• If you are an individual, you will need to be at least 55 years of age before you can get a lifetime mortgage. You will need to be over 65 if you want to take out a home reversion plan
• If you are applying for equity release as a couple, the younger homeowner must be 55
• The property must be in the UK
• The property must be your main place of residence
• You (and your spouse or civil partner, if applicable) must already own 100% of the property
• Your home must be valued at £70,000 or more
• If your property is leasehold, there must be at least 75 years left on the lease.
When you take out the equity release plan, you must make sure the property is not left vacant at any time. You will not be allowed to rent it out under this kind of arrangement, either.
What are the tax implications of equity release?
The equity you initially release is tax-free. However, if you are planning to place these funds into an another investment vehicle, be aware that any interest or income you make on this could be subject to tax, unless it is held in an ISA or another kind of tax-exempt personal savings account.
Equity release schemes can also help you reduce your inheritance tax liability, leaving your loved ones with more to enjoy when you eventually pass away. Contact our lifetime mortgage brokers for more information on how you can release equity from your property as part of your tax planning strategy.
Are there better alternatives?
If you’re over the age of 55 and you need to unlock some capital, equity release products can seem like the ideal solution. But in most cases, they will reduce the value of your home – and they are certainly not free from risk.
Instead of entering into a lifetime mortgage or a home reversion plan, you could:
Moving into a smaller, less expensive property, perhaps in an area that commands lower house prices, will free up some of your capital. You may also benefit from reduced bills and maintenance costs.
However, downsizing is only a viable alternative if you are happy to go through the process of moving again (and can afford all the fees that accompany the conveyancing process). Some people prefer to stay put, even if it means losing a percentage of their home or reducing the value of their loved ones’ inheritance.
You should still be able to downsize after you have taken out a lifetime mortgage. All plans that have been approved by the Equity Release Council will allow you to move into a cheaper home and clear your debts without having to pay an early exit charge.
Instead of taking out a specific equity release plan, you could apply for a larger home loan. This is sometimes referred to as an equity release remortgage, and it’s a way of extending the amount that’s being borrowed to free up a lump sum.
One of the biggest problems with this type of arrangement is this: most mainstream providers won’t lend to borrowers who will be over the age of 70 or 75 when their term ends, and this is the demographic that will benefit the most from a lifetime mortgage.
There are some lenders with higher upper limits, though. A mortgage broker who has dealt with cases like yours may be able to connect you with a company that will be willing to consider your case. Regardless of your age, you will have access to more competitive rates if you can prove you have a consistent retirement income and a large amount of equity in your existing property.
Additionally, when you release equity with a standard remortgage, you will need to continue paying back the mortgage with interest until the term finishes. This is why it’s not always the most affordable or efficient option.
Take out a retirement interest only mortgage:
The mortgage market is much more accommodating to later life borrowers these days – and as such, there are a range of products available that allow you to release some funds without permanently reducing the value of your estate.
Retirement interest only (RIO) mortgages are similar to lifetime mortgages, but they enable you to pay off any interest you have accrued in monthly instalments or with lump sum payments, if you want to. Because you are only paying back interest, your monthly repayments will be relatively low (although you will still need to prove to the lender that you will have the means to cover them, either with your pension income or capital from other sources).
Sell a property from your investment portfolio:
If you own a Buy to Let property, either outright or with an investment mortgage, now could be the time to sell it on and use the funds in your retirement.
Alternatively, you could consider refinancing this rental property on an interest-only basis, or taking out a secured loan that can be comfortably paid back either via your rental income, your pension income, or other investments.
Take out a personal loan:
You could arrange an unsecured personal loan in place of an equity release plan, if you can find a company that will be willing to let you borrow the funds you need. As you will be presenting quite a high level of risk to the lender, you may not be able to borrow as much, and you may fall victim to slightly higher interest rates than you’d like – but crucially, you won’t need to offer up your home as collateral.
Use a credit card:
If cash flow is an issue, or you need to access the funds for a one-off purchase quickly, you could consider taking out a loan on a credit card. Only go down this route if you know you will be able to afford the repayments, otherwise sky-high interest rates could leave you with escalating debt.
Rent out a room in your home:
This is often considered to be the last resort for those in later life who need to top up their retirement fund. However, if you are comfortable with bringing somebody else into your home, renting out part of your property could be a fantastic way to boost your income.
You don’t have to advertise for a permanent tenant straightaway. There are plenty of home sharing and temporary accommodation platforms that allow you to rent out your property on a more flexible, short term basis, so you can get used to the idea first.
If you’re not sure which of these finance options is the best fit for you, contact the team at CLS Money today. We’ll put you in touch with a specialist broker who will explain the benefits of each of these workable alternatives to equity release mortgages.
Are there any equity release companies I should avoid?
All lifetime mortgages and home reversion plans in the UK are regulated by the Financial Conduct Authority (FCA), and the brokers or advisors recommending them have to undergo specific training to ensure they understand the benefits and implications of each type of equity release scheme. For these reasons, equity release is generally safe.
To make sure you end up with a plan that suits your financial situation, always seek advice from the professionals. Experienced advisors will be able to assess your circumstances and weigh up the best options, then present you with products that will help you achieve your goals from lenders that are highly likely to accept your application. To speak to a FCA regulated professional advisor for free advice click here.
How long does it take to arrange an equity release mortgage?
You can expect your lifetime mortgage to take an average of 8 weeks. You’ll be able to access your funds when the deal completes. Home reversion plans can take a little longer to process.
Can I switch providers?
It is possible to move between lifetime mortgage providers, as you would when you remortgage your home in the more traditional sense.
Schemes often become less competitive as time goes on and newer products are introduced to the market, so it can make sense to see what else is out there with a view to switching lenders if another company can offer better rates or more flexible terms. After all, any reduction in interest will have a significant impact on your mortgage balance – especially if you have chosen to enter into a roll-up lifetime mortgage. If your health has deteriorated recently, you may want to look into moving onto an enhanced scheme, which could provide you with a higher lump sum.
And, as we mentioned earlier, you can always remortgage to raise extra capital.
Before making the decision to switch, be sure to ask one of our advisors for their recommendations. What might seem to be a better deal on the surface could in fact not improve your financial position over time; having somebody else on board to check through the fine print and put the product into perspective is invaluable. You must also remember that switching providers will often incur valuation fees, application fees, solicitors’ fees and brokers’ fees.
Your equity release checklist
• Speak to one of our advisors in the first instance. He or she will explain the pros and cons of the different types of equity release plans, and help you gain a better understanding of what’s out there
• Make sure you fit the eligibility criteria for equity release mortgages
• Consider the merits of all the available products to make sure you choose your best-fit solution
• Think about the tax implications of your decision to enter into a lifetime mortgage or home reversion plan, and also how it will affect your family’s inheritance when you are gone
• Explore equity release alternatives
We’re here to provide extra peace of mind during an understandably daunting time for you and your family.
Making provisions for later life is never easy, especially when significant amounts of money are involved. But there’s no need to make these big decisions alone.
The team here at CLS Money are highly experienced in sourcing suitable equity release products for our customers to ensure they can retain as much of their property as possible whilst accessing the funds they need to live comfortably and happily in their twilight years.
We’re professional, we’re capable, and we’re fully trained to deliver solutions that will work for you and your loved ones in the longer term. But we’re also friendly and approachable. We’ll never bombard you with jargon, and we’ll never rush you to make a decision. We truly are here to make sure you have access to the best products at the best prices, and come away from the experience feeling confident and secure in your choices.
Interested in learning more about lifetime mortgages and other equity release plans? Book a free, no-obligation consultation with a member of our team now. We offer appointments between the hours of 8am and 8pm, 7 days a week – so you’ll be able to pick a slot that fits in nicely around your other commitments.
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