Equity Release: What Does It Mean for You?
Equity release is a way of freeing up cash from a property, and there are many ways to do it. However, it’s not right for everyone, and it’s always worth checking out what your options are and what your financial situation requires. With that said, it is a useful financial tool for many, and it can help people to become financially stable during their later years.
What is equity?
Equity is the value of an asset. This asset could be a company, for example, but when talking about equity release, it refers to the total value of a property. The amount of equity that you hold is defined as the total value of the property less any outstanding mortgages or loans secured on that property. Therefore, if you have a property that:
- Is worth £250,000
- Has a mortgage of £60,000
- Has a secured loan on it of £10,000
Then your total equity invested in that property is £180,000.
This is because by securing a mortgage and a loan on that property, you essentially give the loan and mortgage providers a charge on that property, which reduces your equity on the property and increases their equity.
What is equity release?
Equity release, therefore, lets you free up money from that property. In some cases, this might be a remortgage, whereas in other cases, this might be a different kind of financial instrument. We deal with remortgaging your home in another article, so for this article, we will assume that you are looking for a product that is specifically marketed as an equity release product.
Releasing equity from your house essentially puts cash in your pocket, which you can use to fund a retirement or for another purpose.
What different types of equity releases are there?
The most common two types of equity release are the lifetime mortgage, which is aimed at those aged 55 or over, and a home reversion scheme, which is typically aimed at those over 65 and both types of equity release are regulated.
The lifetime mortgage is essentially a mortgage secured on your home, and it allows you to retain ownership providing that the home is your main residence. Notably, it allows you to put off payments and interest until the home is sold, and any outstanding equity becomes part of your estate.
This means that unpaid interest is added to the loan, so the total debt can add up very quickly. This is a major disadvantage of the lifetime mortgage. However, interest rates are usually fixed or capped, so you can calculate the potential maximum you have to pay should you live to any particular age. However, a lifetime mortgage cannot take your property into negative equity – a situation where you owe more than the property is worth. This means that any interest plus the loan and solicitors fees are essentially capped at the maximum value of the property.
You can usually only borrow a maximum of 60% of the value of the house, although this varies substantially with age. The older you are, the more you are likely to be able to borrow. In addition, lifetime mortgages generally allow you to borrow more if you have certain medical conditions. The reason for this is highly practical albeit a little gruesome: it’s based on life expectancy and the likelihood of the company recovering the money. Given that house prices have generally risen above interest rates over the past 30 years, it’s a fairly safe bet.
Some schemes allow you to repay the interest as well (an interest-only lifetime mortgage), and if you come into a large chunk of money, you may also be able to repay the lifetime mortgage – but expect heavy charges if you choose this option. In addition, some versions of the scheme let you take out the cash in portions, which means that you only pay interest on the amount that you have withdrawn. This can reduce the interest substantially.
Finally, you may be able to move home under this scheme, if the company financing the lifetime mortgage agrees to it.
This equity release scheme is somewhat different, as you essentially sell your home or part of it to the provider. This means that the home is partly or fully owned by the provider, but you still get to live in it. These products are usually aimed at those aged between 60 and 65.
Home reversion schemes, however, usually offer significantly below-market prices for homes, as they have to make up the interest through the difference between the market price and the loan price. Expect between 20% and 60% of the market value of your home in advance. Again, life expectancy is a big factor as to the amount of money that you’ll get from the provider.
Like the lifetime mortgage, the home reversion scheme may allow you to release equity in chunks, and it can allow you to move, providing the provider agrees to it. In addition, it cannot go into negative equity, and you can’t be forced out of your home by the provider unless you breach the terms and conditions of the contract. Typically, this only happens if the property falls into significant disrepair, but it always pays to read the contract carefully. If in doubt, seek legal advice before committing to anything that affects your finances.
Equity release: The bottom line
Equity release schemes can be beneficial, but they are often much more expensive than a typical mortgage. You will rarely get the market value of your property, and it can result in more expense in the long term. In many cases, it can be preferable to downsize and release the money that way, although this involves an expense, as well.
In addition, you have to consider how this will have an effect on your finances, particularly if you may be eligible for means-tested benefits. Finally, if you change your mind, it can be difficult to exit the arrangement and that may involve significant expenses.
Ultimately, it pays to check out your options and take advice from an independent financial advisor, who can apply the advice to your particular situation. There are significant drawbacks to both forms of equity release, but there are major advantages, as well.
Who can you speak to about this?
As with all financial products you have a choice of searching the market yourself or speaking to a qualified adviser to help you wade through all the possibilities.
Often going to the high street yourself takes a lot of time and if for any reason you do not qualify or don’t get accepted for the loan or mortgage you are looking for then you have to start all over again from scratch.
The alternative is to speak to a qualified adviser who will take all your details in one go and then look for the best possible deal for you. If for some reason you do not get accepted for the loan or mortgage you are looking for then it is up to them to try to find an alternative.
We have partnered with TMG Direct to offer this help.