Equity Release Mortgages
Equity Release: Tax free cash in your home
Equity Release is available for two main uses. It can be used to make up the shortfall on a property purchase in the same way as a standard mortgage. The benefits of an Equity Release product instead of a standard mortgage is that the borrowing amount is determined by age i.e. the older the client, the more can be raised. Income, credit, affordability etc are much less important, if at all.
What is Equity Release?
Equity release is a popular option for homeowners and purchasers over the age of 55 who are looking torelease some or all the equity tied up in their property or to complete a purchase.
Equity release for homeowners gives the option of tapping into your home’s value by raising a large lump sum or a series of smaller payments.
- Age 55 upwards (the older the client, the higher the potential borrowing)
- Client remains the legal owner of the property & does not become a tenant
- Schemes are available with free valuation & legal fees
- Equity can be released for virtually any legal reason such as repayment of an expired mortgage, home improvement, income top up etc.
- Income is unimportant as monthly payments are not normally required
- Long term fixed rate deals, however the client will never be asked to leave the property at the expiry of the term. The client leaves the property either by choice, death or moving into long term care. The property will then be sold, the equity release mortgage repaid & any remaining capital will revert to the client or the client’s estate
- Adverse credit acceptable
- Interest rates are currently at historic lows
- For clients who are cash poor but asset rich
- Schemes offer a “no negative equity guarantee” i.e no matter how long the client lives, the loan will never exceed the sale price of the property
- Money can be raised on an existing property or to complete a purchase
- Usually portable
- Used as a form of inheritance tax planning
- Part or full repayment options are available
- Agreed drawdown facility for future requirements without the need for a new application
There are various points that should be considered before entering into an equity release scheme or choosing which of the available schemes is right for you.
What is Equity Release for Homeowners?
Equity release schemes provide homeowners with access to cash they have tied up in their properties. As your home is usually your most valuable asset, you may wish to make use of some or all of the equity you have built up over the years.
The equity you have in your home is calculated as the market value of your property minus any remaining mortgage balance, for example:
- Your home has a market value of £400,000 and your outstanding mortgage debt is £150,000, so you have £250,000 equity
- Your home has a market value of £200,000 and your outstanding mortgage debt is £15,000, so you have £185,000 equity
The more equity you have in your home, the more money you may be able to access. You will however not be able to access all the equity tied up in your property, but the equity will determine how much you can release, which varies from one lender and scheme to the next.
Release some of the value in your home
Equity Release is however more commonly used as the process for releasing equity (tax free cash) from a home whilst continuing to live in the property. Equity release mortgages are designed for people who are aged 55 or over and who either own their own homes outright or have a small mortgage. Equity Release is only a very small part of the overall mortgage market but is incredibly useful for customers who would be described as asset rich and cash poor.
The two main types of Equity Release products are Lifetime Mortgages and Home Reversion schemes. Income, credit rating or reason for the advance is not important with Equity Release mortgages. The maximum loan amount available is instead determined by age, gender and property value. Both Lifetime Mortgages and Home Reversion products can be used to release additional regular income or a one-off lump sum. A reserve amount can also be implemented which will allow further amounts to be taken in the future without the need for another application. Once an Equity Release scheme is in place, the client continues to live in the property for life or until they chose to leave i.e. sell or go into long term care. The client will continue to be responsible for most of the day to day upkeep on the property although help could be available for large maintenance.
Professional advice is recommended to explain the differences between the two main Equity Release schemes. This can be provided by an expert brokerage such as UK Property Finance and will enable you to select the most appropriate product for your needs.
Equity Release Options – How Does Homeowner Equity Release Work?
The lifetime mortgage is the single most popular equity release product in the UK, accounting for around 99% of all equity release products provided by lenders.
With a lifetime mortgage, you take out an entirely new mortgage on your property but retain full ownership of it in the same way as you would with a standard mortgage product. An equity release mortgage enables you to free up some or all of the equity you have tied up in your home, after which the total loan balance along with all interest and borrowing costs are repaid when you die, when you move into long-term care or when you decide to sell.
Equity release schemes have advantages and disadvantages like most financial products, which should be discussed in depth with an independent adviser before going ahead.
Before Applying for Equity Release
Equity release provides a convenient, affordable, and relatively straightforward option for raising capital based on the value of your most important asset. Nevertheless, equity release is not for everyone and there are important negatives to consider alongside the positives.
Before submitting an equity release application, it is essential to bear the following in mind:
- A specialist equity release mortgage could be more expensive than a conventional mortgage, charged at a higher rate of interest and with additional borrowing costs to factor in. All of which should be discussed with an independent broker, before going ahead.
- You cannot access all the equity tied up in your property.
- An equity release scheme may have restrictions i.e. you may be unable to perform certain home improvements, alterations or works without first seeking permission.
- While the money accessed through an equity release scheme is 100% tax-free, it may affect your entitlement to state benefits. Equity release will also reduce the value of your estate to be passed on to your beneficiaries after your death.
- Some equity release schemes have high exit penalties when the mortgage is repaid.
Is Releasing Equity the Right Option for You?
Eligibility for equity release is established primarily on the age of the applicant, gender, property type and the equity tied up in your property. However, there is much more to consider when establishing suitability for equity release.
Examples of which include your income, your general financial position, the amount of money you would like to release, the value of the estate you would like to allocate to beneficiaries following your death, your plans for the future and so on. You also need to ensure that you fully understand all the costs that accompany equity release schemes.
*It is important to note that equity release schemes can also be used to make up the shortfall of any new property purchase. Some equity release products are now also available for Buy to Let purchases or capital raising.
Equity Release – Lifetime Mortgages
- Most lenders impose a minimum age restriction on lifetime mortgages of 55.
- Equity release schemes rarely have regular monthly payments. The interest generated is instead added to the initial loan balance and repaid when the property is sold.
- Lifetime mortgages are typically available for a maximum of 60% of the total value of your property, though this varies in accordance with your age and the type of scheme you enter.
- In accordance with Equity Release Council regulations, interest rates on a lifetime mortgage must be fixed or there must be an upper limit (cap) on variable rate loans that will never be exceeded.
- If you abide by the terms and conditions of the contract you enter, you have the right to continue living in your home until you die, move into long-term care, or decide to sell.
- All lifetime mortgages must be provided with a “no negative equity guarantee”, which means that even if the funds generated by the sale of your home do not cover all outstanding costs, your estate and beneficiaries will not be held liable.
- It is possible to move to another property after taking out a lifetime mortgage, though you will first need the approval of your service provider to ensure the property is considered acceptable to port or move the mortgage to the new property or you will need to repay the mortgage on the sale of your current property.
Lifetime Mortgages enable a borrower with minimum income to obtain a mortgage which will release equity stored up in their homes in exchange for cash. Monthly interest payments are rarely required with this type of product and instead the payments are rolled up and paid when the mortgage is redeemed (see example below). With a Lifetime Mortgage you are not selling your house as you retain full ownership. When a client dies or moves, the property reverts to the estate and is usually sold. The Lifetime Mortgage and accrued interest is then repaid and the balance returned to the estate.
Example: Clive and Ellen are in their early 70s and have a house valued at £300,000 with no mortgage. They take out a lifetime mortgage of £100,000 at a fixed interest rate of 3.6% where the monthly payments are rolled up i.e. no monthly payments required. Clive and Ellen now have £100,000 to spend how they wish. They have the right to remain in the house until their death or when they sell at which point the £100,000 plus rolled up interest is repaid from the sales proceeds and the remainder goes to the estate.
Equity Release – Home Reversion Plans
The main difference between a Lifetime Mortgage and a Home Reversion scheme is that effectively with a Home Reversion scheme you sell a percentage or all of your property to a third party and with a Lifetime Mortgage you retain full ownership. The remaining criteria is similar however health issues are also a major factor in determining the suitability of a Home Reversion scheme because if a client is terminally ill from the outset, this product can be overly expensive. When the customer either dies or leaves the property it is sold by the Home Reversion company. Depending on the scheme, the balance (if any) is then paid to the customer or their estate. As mentioned with this type of Equity Release product the client loses full ownership of the property and a nominal rent (usually about £12 a year) is standard.
Clients tend to choose Home Reversion schemes when a higher loan amount is required.
Before selecting an Equity Release scheme, we will help you consider the following:
How Equity Release will affect your current income. Some schemes could reduce your entitlement to certain state benefits leaving you with less disposable income.
Future restrictions – taking out an Equity Release plan could limit your options to move to a smaller property in the future. This is due to the reduction in the equity left in the property once the lender has been repaid.
Many local authorities offer various schemes for home improvements that could be used instead of Equity Release.
You may wish to invest a lump sum of the money received into a guaranteed fixed income or variable income scheme. The rate of interest received from the investment should favourably compare with the rate of interest received from the plan chosen.
If you prefer to keep the amount received from your Equity Release plan in a savings account the interest obtainable is very important. If interest is being accumulated through the Equity Release scheme at 3.6% it would not be wise to withdraw the money and invest into a savings scheme where you would receive only 1%.
Inflation could also be a concern if your investment has a long-term fixed rate. This may depreciate the real value of your money in times of growing inflation.
Fees and Costs
Depending on the scheme, arrangement and application fees for Equity Release schemes are either free or added to the loan amount.
The valuation fee is also usually free but if not, it is payable in advance.
Legal costs can be free depending on the scheme although if not these fees will also be payable in advance.
As with most home ownership, buildings and contents insurance is an annual cost that requires payment.
Early repayment fees are normally payable if a lifetime mortgage is repaid early.
All fees & costs are listed on your quotation at commencement, so you can choose not to proceed if you prefer.