Equity release: The fundamentals
Equity release is a series of products that help you access the equity tied up in your home, as long as you’re over a certain age (typically age 55). Money can be taken out in a lump sum or in smaller, periodical amounts. However, it is not for everyone, so we wanted to explore some of the fundamentals involved to help you make informed decisions when it comes to equity release.
Why equity release?
Equity release helps people who are property rich but cash poor. Rather than taking out a loan from a bank, you can use an asset you already have (your home) to generate income. It also works for people who want to bring in some extra income or funds for a specific goal. This might be to boost your income, go travelling around the world or help a family member get onto the property ladder.
You take out a mortgage, using your main residence as the collateral, while still retaining ownership of the property. You can either begin to make repayments on the loan or let it gain interest. The loan and any interest is then repaid when you die or when you enter into long-term care. With all that being said, here are some extra factors to be aware of:
- There is a minimum age for taking out a lifetime mortgage. The typical benchmark at the moment is age 55. The amount of equity that can be released will also depend on your age, state of health and the total value of the property.
- The interest rates are sometimes fixed. However, if the provider uses a variable interest rate, there must be an upper limit that will remain fixed for the duration of the loan. Though this is only true if the Lifetime mortgage provider is a member of the Equity Release Council.
- If you want to move to another property during the life of the loan, then you may be able to, but consent from the lender is likely to be required.
This is where you sell all or part of your home to a home reversion specialist in return for a lump sum or regular payments. You’re allowed to keep living at the property as long as you don’t break the terms of the agreement. For example, you agree to maintain and insure it. At the end of the plan, the property is sold and the money from the sale is divided according to the remaining percentages of ownership. Here are some extra elements to consider:
- Some providers may insist that you need to be age 60 or 65 to apply, but it can vary between providers so it’s worth going elsewhere if you don’t meet the lender’s lending criteria on the grounds of your age.
- The percentage of the market value you receive may increase the older you are, but this will vary between providers.
Here are some of the ways in which equity release benefits product holders:
- The cash comes tax-free – you won’t have to pay any income tax or capital gains tax on the money released from your home.
- With the lifetime loan, repayments are not mandatory. So if you would rather leave it to be sorted when you pass away or when you move into long-term care, you can.
- Lifetime Mortgages can come with a guarantee of no negative equity, meaning that after the property is sold and all the agents/solicitors fees have been paid, even if the remaining amount is not enough to repay the outstanding loan, neither you nor your estate will be liable for the difference.
- You get access to the money when you need it, to do with as you see fit. It can offer a helping hand when you need it whether you need more money to help out your family or carry out some vital home improvements.
There are some drawbacks, however, so make sure to read carefully when deciding whether equity release might be for you.
- Lifetime mortgages can come with higher interest rates than ordinary mortgages, and the debt can grow quickly as the interest ticks over. This is because your provider needs to factor in the no negative equity guarantee and the fixed interest rate in their calculations.
- Your home may be repossessed if you fail to abide by the terms of the contract as detailed within the Lifetime Mortgage offer.
- Most Lifetime Mortgages don’t allow the loan to be repaid early. If you decide to repay the loan early, an early repayment charge may apply.
- Money released now means that you may not be able to leave your property as part of your estate when you pass away.
- Home reversion plans might not give you the best value for money in comparison to selling the property on the open market.
- With Home Reversion, as a tenant, your right to occupy the property will be subject to you abiding to the terms within the tenancy agreement.
- There may be arrangement fees incurred as you will need professionals involved in the process to make sure everything is done correctly. There may also be charges should you change your mind.
At Questa we have a team of equity release specialists who can help you to select the most favourable products for your situation. If you’re interested in taking out an equity release product or would like more information surrounding equity release, feel free to get in contact.
This is a lifetime mortgage or home reversion scheme. To understand the features and risks, ask for a personalised illustration. In some circumstances Questa may apply a fee. Any applicable fees would be disclosed before processing the application.