Why do so many myths persist about equity release? Fact check.
Equity Release is an increasingly popular method of borrowing money for home owners reaching or already in their retirement. However the term equity release can have controversial connotations for many who mistake it for unregulated lending that used to be problematic in the past, leading some borrowers into negative equity in the 1990s.
Equity Release is in fact a highly regulated financial service that is only available to home owners aged over 55 and only those who are deemed suitable by a qualified specialist in equity release advice.
Rather than risk negative equity, it is possible to take a Lifetime Mortgage with a “No Negative Equity Guarantee” so that the borrower will never owe more on the property than it is worth.
To help dispel the most common myths, we have answered some of the most frequently asked questions about equity release.
Isn’t that where you sell your home and it gets rented back to you?
No. Equity release is a way of borrowing money against your home. You can do this in two ways – using a Life Time Mortgage or a Home Reversion Plan. Both of those options are explained in more detail below.
Is a Lifetime Mortgage another term for Equity Release?
No. A Lifetime Mortgage is just one of the methods that you can use to release equity.
Equity is the value of your home minus any debts or mortgage secured against it. Thanks to the rise in property prices over the years, older home owners may have significantly increased the equity value in their home. However they may not want to sell their home in order to benefit from it. This is where equity release can be a solution.
It’s a way to access some of the wealth tied up in your property without having to move out of your home. You can either borrow against the value of your home (Lifetime Mortgage) or sell all or part of it in exchange for a lump sum or a regular monthly income (Home Reversion Plan). Most people prefer to continue to own and live in their home.
Lifetime Mortgage in more detail
Lifetime Mortgages are by far the most common type of equity release. A lifetime mortgage is secured against your home, just like a normal mortgage. You still own your home. The interest is either added to the loan throughout your lifetime, known as interest roll-up, or you can pay back some or all of the interest every month. There is no end date and the loan is paid back when you move into long term care, or when you die.
You can protect some of the value of your property as an inheritance for your family, meaning that you can benefit from releasing equity while ensuring you have something to pass on to your children. Releasing equity reduces the value of your estate, but there are plans which will guarantee an amount for your loved ones to inherit. Specialist advisers can help you decide what is best.
Home Reversion Plan in more detail
With a home reversion plan, you sell all or part of your home to a reversion plan company in exchange for a cash lump sum. You are guaranteed a lifetime lease with no monthly repayments to meet. Most plans allow you to exchange more of the remaining value of your property at a later date, however, this is not always guaranteed.
A reversion plan can move with you should you choose to move home, although you would need to check the individual terms and conditions of your plan. Some properties are not suitable.
It is a last resort option isn’t it? You have to be desperate?
No. We have had equity release clients in many different circumstances who want to release equity to for a wide range of different reasons. It is used by the very wealthy as well as those who might find retirement a squeeze. Some clients have many different options open to them but choose equity release on balance, according to robust financial advice and their individual circumstances.
How does it work?
You are releasing some of the equity, or the ‘wealth’ tied up in your home. The amount you are able to release is calculated based on your age and a surveyor’s professional valuation. If you are making a joint application your partner’s age will be included.
Not everybody is eligible and some properties will not qualify. For example providers will generally not accept properties valued at less than £70,000.
A qualified adviser will help you understand the benefits, the risks and the costs involved before you proceed.
How do I know if I am eligible for equity release?
To qualify for a lifetime mortgage you need to be over 55 and a homeowner. If you are taking out the plan with your partner, then the age of the youngest borrower must be at least 55.
For a Home Reversion plan, you must be a minimum of 60 years old.
Each provider has their own criteria and your adviser will need to check that you are a suitable candidate for equity release.
Your adviser will also assess your circumstances and make a recommendation to you.
Does it mean I cannot leave an inheritance for my children?
No. This is something your adviser can help you with. You might want to guarantee a percentage of your home’s future value as an inheritance for example. You may wish to seek independent tax advice from a specialist.
It is always worth discussing your plans with family. You may decide as a family that it would be better for them to receive money now to help them get onto the housing ladder or to pay for university fees. There are many options to think about.
Equity release will reduce the value of your estate. After you and any joint partner on a plan die, your home will be sold. The amount owed to the lender will be paid and any remainder that is left will go to your beneficiaries.
How long is the process?
It usually takes around six to eight weeks for your application to complete.
Equity release is not suitable for everyone. That’s why the first step is to talk to a specialist equity release adviser and find out if it is an option for you.
Would you like to find out more? Arrange a call back.
The equity release service is provided by Access Equity Release – a trading name of Your Mortgage Decisions Ltd – which is authorised and regulated by the Financial Conduct Authority, number 459763.