10 things you might not know about Equity Release!

The size of the equity release market has grown rapidly in recent years, up 17 per cent alone last year to £925.7 million according to the Equity Release Council, but what is equity release, how might it help your financial planning and what questions should you ask to decide whether it’s right for you? 

Here are ten things you might not know about equity release:

1) What is equity release and what isn’t it?

Your 'equity' can be described as the value of your home, minus any outstanding mortgage. Equity release allows homeowners aged 55 or over to unlock some of this value and turn it into a tax-free cash sum. The money released can be used any way you wish, for example paying for key purchases such as a new car or kitchen. Or if you can’t raise enough capital by selling your current home to buy your dream property, equity release could bridge this gap. Unlike a personal loan there are no monthly repayments.

2) What types are available?

Primarily there are four different types of equity release available.

Lifetime Mortgage: You release a lump sum from the value of your property, whilst maintaining 100% ownership of your home. This amount, plus any interest accrued, is repaid from the money made when the property is sold.

Drawdown Lifetime Mortgage: This is similar to a lifetime mortgage, but with added flexibility. The cash can be released over time, as and when you need it. You only accrue interest on the funds once you have taken them; this can reduce the amount you pay over time (when compared with a lump sum).

Interest-Only Lifetime Mortgage: This is like a standard lifetime mortgage; however, you make regular payments so that the amount you owe remains constant. The remaining balance is then paid from the sale of the home, typically once you have passed away.

Home Reversion Plan: Here, you sell some or all of your property in exchange for a lump sum of money, while maintaining the right to remain living in your home, rent free, for as long as you live.

3) What are the alternatives?

Alternatives to equity release include downsizing to a cheaper property, seeking help from a family member, cashing in other savings or investments, or generating additional income by taking in a lodger or tenant into part of your property.  Best advice is use any savings before taking equity release.

4) What are the possible pitfalls?

While there are more safeguards than ever to protect borrowers, everyone should be aware of all the implications before entering into equity release. 

Because the funds you release, plus any interest accrued, are paid back from your estate, a lifetime mortgage will reduce the amount that you will be able to pass on to your beneficiaries after your death, although some plans do allow you to protect an inheritance. 

It is also possible that the additional funds made available through equity release could affect your entitlement to means-tested state benefits.

Some plans impose early-repayment charges if you decide to pay them off before your death, but these vary so need to be checked. 

A specialist equity release adviser will be able to explain the pros and cons to you.

5) Equity release can fund long-term care costs

Equity release is one way to help fund long-term care costs. If this is something you are considering, do let your equity release adviser know so they can provide the best option for you.

6) Can I still move home afterwards?

All lifetime and drawdown lifetime mortgages are ‘portable’ so you can still move home. But do check lenders’ criteria and if early-repayment charges may apply.

7) Why is equity release increasingly popular?

With house prices doubling roughly once every eight years on average since 1950, many people who have reached or are approaching retirement have a wealth of housing equity but insufficient savings and income to support living costs.  Plans are clearer, more flexible, and better value than ever before.

8) Poor health can still make you eligible

Like annuities, health can be a rating factor in equity release plans. You should outline your circumstances to your potential provider, as some will lend more to people with certain health conditions.

9) How do I choose a provider?

Look for an independent, qualified adviser who will offer a ‘whole of market’ search tailored to your needs and who will spend time making sure they understand all your personal circumstances beforehand.

The adviser will help you assess whether equity release is the right option for you, research all the plans available in the market and provide a recommendation that outlines the best plan to meet your needs.

10) What questions can help me make decision?

Your equity release adviser should be able to let you know whether equity release is right for you.

Key questions to ask:  How much cash may I be able to release? What are the interest rates? What are the fees?  What effect would the equity release have on my estate over time?  How you I can protect my estate? How can I protect an inheritance?  Will my entitlement to means-tested benefits be affected? (if appropriate).

Equity release may involve a lifetime mortgage or home reversion plan.  To understand the features and risks, ask for a personalised illustration.