What is equity release? Our comprehensive guide

You might have heard of equity release, but want more information about what it means, if you are eligible and what impact it may have on your finances.  We hope our definitive guide to equity release will provide the answers you are looking for.

What is equity release?

Equity release is a way of releasing money from property that you own while still being able to live there. Equity release is only available to people over the age of 55, and is usually offered as a tax-free lump sum or as regular payments. It is a loan that is only paid back when the last borrower dies or enters long term care.  

What are the different types of equity release schemes and the key features of their plans?

There are two main types of equity release financial products. Applicants can either take out a lifetime mortgage or a home reversion plan.

Lifetime Mortgages

A lifetime mortgage is a loan secured against the applicant’s home. The money borrowed has interest charged on it, but you can choose to defer the interest (roll-up), and you don’t have to pay any of the loan back until after you or your spouse dies or enters long term care. Taking out a lifetime mortgage does not affect the value of your home.

Home Reversion Plans

A home reversion plan is a form of equity release scheme in which the homeowner sells all or part of their property to a home reversion plan provider. You still get to live in the property for as long as you want to, and can even move home. You don’t have to pay anything back, but your beneficiaries will have to buy back the share owned by the plan provider if they want to keep the home when you die or move into long term care.

How does equity release work?

Equity Release Process

• Take financial advice

Before you apply for equity release, get some advice from an independent financial adviser, especially one who specialises in equity release. They will be able to give you the best advice about the options available to you, and which type of equity scheme to go for, taking into account your age, health, family circumstances, lifestyle and income.

• Submit your application

You will need to employ the services of a solicitor, because equity release is a property transaction. Choose a solicitor who has experience of the equity release process. Your plan provider will arrange for credit ID and title checks.

• Valuation

Your lender will arrange for a valuation of the property by a surveyor. This is only a basic valuation to establish current market value. fee will also need to be paid to your lender.

• Completion

A completion date will be set by your solicitor. This is the day when funds will be released to you, and all other costs are settled, such as legal fees. The whole process of equity release is much simpler than a standard house sale, so the process should take no more than eight weeks from start to finish.

Equity Release Repayment Structure

The standard way to repay an equity release loan is through your estate after you pass away. Most lifetime mortgages are repaid from the proceeds of selling the property it is secured against, or from your estate, covering both the capital and the interest. If you, your beneficiaries or members of your family want to repay before the plan is due to end, you will have to pay a redemption fee or early repayment charge, similar to a standard mortgage product.

Who is eligible for equity release?

Lifetime mortgages are open to anyone over the age of 55, who own property in the UK and use it as their main residence. You have to be over 60 to apply for a home reversion plan. Your property should be of a certain minimum value. The more debt you already have tied up in the property (such as an existing mortgage) will affect your eligibility. Health conditions will also be taken into account by plan providers, but a medical is not part of the application process.

Benefits of Equity Release

• It supplements retirement income

If you want to boost your regular pension, perhaps for a major life event or to cope with unforeseen circumstances, equity release can provide a tax-free lump sum, or regular payments.

• Help a loved one in need

You can use equity release to make a gift to a member of your family.

• Fund home improvements or renovations

Equity release can be used to pay for improvements to your property. You may feel that the money you take out in the form of equity release will more than be made up for when the property is sold, after the renovation, refurbishment or extension has added value.

What should you consider before choosing to release equity?

What impact does equity release have on inheritance?

Many people use equity release to gift money to their children to help them with a major life event, like buying their first house or getting married. But this will reduce the size of a person’s estate and the amount of money that is included in an inheritance. In a home reversion scheme, beneficiaries will only inherit the share of the house that remained within their family member’s ownership.

What effect does equity release have on means-tested benefits?

Receiving a sum of money through equity release will affect a person’s entitlement to means-tested benefits. If you are receiving publicly funded care at home, the local council may ask for you to contribute financially to the costs of your care.

What is the long term financial impact of equity release?

Ultimately equity release will have a financial impact, but it is one that will usually be felt by members of your family or beneficiaries after you die or move into long term residential care. The value of your estate will be reduced by using equity release, and the only way your beneficiaries may be able to take back ownership of a property as part of a home reversion plan is to sell other parts of your estate. Of course that might not be possible, as properties tend to form the largest part of anyone’s estate.

Is equity release a good idea?

When considering equity release, think about a range of factors – your age, income, health and future financial plans. 

Have I explored alternative financial options?

It could be that you achieve your long term financial goals through other means – for example, releasing capital by downsizing to a smaller property. You won’t be saddling your children with a lifetime mortgage to repay, selling a share of your property or reducing the value of your estate. You could still benefit from rising property values too.

Can I sell my house if I have equity release?

You can usually move house, with the permission of your equity release plan provider. However, you need to make sure that you have enough equity left to be able to afford to buy another property.

Can you get equity release on a leasehold property?

Yes you can, but your lender will stipulate that the lease has a minimum number of years left to run. This is usually between 80-90 years. Lifetime mortgages and home reversion plans require that the properties being borrowed against contain sufficient security. The condition and location of the leasehold property will also be assessed during an equity release application.

Can I rent out my house if I have equity release on it?

Most lenders will not allow you to let equity release properties. If they do, it is usually only as part of informal agreements with lodgers rather than tenants. The property should be your main residence and remain so for the rest of your life, or before you need full-time residential care.

What documents are required for equity release applications?

• Proof of Identify and Residence
• Property Title Deeds
• Mortgage Statements

What safeguards and regulations are in place for equity release?

All companies advising on equity release are regulated by the Financial Conduct Authority, and you should choose advisers that are members of the Equity Release Council. All its members are bound by a voluntary code of practice, which gives customers assurance that their interests will be protected. Equity Release Council members ensure that the following safeguards will be in place as part of an equity release plan:

• You can continue living in the property until you pass away or go into full-time residential care
• You can move your plan to an alternative property
• You or your beneficiaries will never owe more than the value of the property the loan has been secured against
• The rate of interest you pay on a lifetime mortgage is fixed for each release of funds or, if you have a variable interest rate, the rate is capped for the life of the loan
• You can choose to make penalty-free repayments on your lifetime mortgage

Let us value your property

If you are thinking about equity release, we can provide a free valuation of your property, which will give you an idea of how much equity you might be comfortable with releasing.