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.
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.
Lifetime Mortgages – Important Points to Consider
- 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.
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.
At UK Property Finance, we provide the independent advice and support you need to make the right decision. Should you choose to proceed, we will conduct a whole of market search on your behalf to find the perfect equity release scheme from a panel of specialists across the UK.
Call anytime for an obligation-free consultation with a member of the team, or to discuss the available options with UK Property Finance.