< Equity Release

When could equity release be the right solution?

There’s estimated to be an incredible £12 trillion of private wealth in the UK 1. This is the number 12 followed by another 12 zeros! Pension wealth makes up the biggest slice, at about £5 trillion, with property wealth next at about £4.5 trillion. 

Over the past 20 years the average house price in the UK has nearly trebled, from £82,000 in 1999 to £230,000 today 2. So as people look to fund longer lives in retirement, it’s not surprising that more and more are turning to their property to help provide their income. Approximately 80,000 people did just that in 2018 alone 3

There are different ways of approaching this, so you don’t have to ‘downsize’ unless that’s your preferred option. ‘Equity release’ is a way of releasing value within your home by using a financial product – either a lifetime mortgage or a home reversion plan.

Using a lifetime mortgage

The most common way to release equity from your home, lifetime mortgages are available from age 55 onwards (although the younger you are, the less you’ll be able to release). The difference from a normal mortgage is that you don’t have to make any repayments of either the capital you’ve borrowed or the interest. However, the interest will roll up over time, quickly increasing what you owe. 

  • Lifetime mortgages allow the borrower(s) to remain living in their home until they die or move permanently into care (as defined by the lender’s terms and conditions). At that point, the house is sold. 
  • If the sale raises more money than the initial borrowing and rolled-up interest, the difference is returned to the borrower’s estate. 
  • If the sale realises less than the initial borrowing and rolled-up interest, there is usually no debt on their estate. This is because most products now carry a ‘no negative equity’ guarantee. In other words, you’d never owe more than the amount raised by the sale of your home, so long as it’s sold for the best price reasonably obtainable.

Some lifetime mortgages allow you to specify that a set amount or percentage of the final value of your home is returned to your estate to be distributed to your beneficiaries. If you choose this option, you won’t be able to borrow as much.

It may be possible to repay a lifetime mortgage early, in part or in full. You might do this if, for example, you inherited money. But there may be early repayment charges, which could be substantial.

Pros Cons

No need to move

You can stay in your home until the last person dies or moves permanently into care. Terms and conditions may apply.

Growing debt

You pay interest on the amount borrowed and also on that interest. This means your debt grows quickly over time.

 

Draw money when you need it

You may be able to choose a product that allows you to draw down money when you need it, rather than in one lump sum. You’ll only pay interest on money you’ve taken.

Borrowing limit

The maximum amount you can borrow is significantly less than your house is worth. 

Your home is still yours

Unlike home reversion, your home and any growth in its value still belongs to you – although you’ll owe money, against which any increase in value must be offset.

Early repayment charge

Repaying the loan early can be costly as there may be a charge for this in addition to the amount owed. It’s most likely to apply if interest rates have fallen since you took out the lifetime mortgage.

‘No negative equity’ guarantee

Most products now include this guarantee, so you won’t leave a debt on your estate. And, you may be able to repay the loan early, although charges could apply.

Less for your beneficiaries

The amount available to your beneficiaries will be lower, possibly nothing, unless you choose an inheritance guarantee option.

The cash is tax-free

You don’t need to pay any tax on the money you receive.

Effect on tax and benefits

Taking out a lifetime mortgage could affect your tax position and eligibility for means-tested benefits.

Using a home reversion plan

Less common in recent years, home reversion plans mean a financial services provider buys all or part of your home at a discount to its true market value. You’ll receive a lump sum or regular income payments and retain the right to live in your home until you die or move out, say into residential care (in accordance with the lender’s terms and conditions).

The younger you are, the less you’ll get as a lump sum. Or, looking at it the other way around, if you’re looking for a specific amount, the younger you are, the more equity you will need to surrender from your home to raise it. This is because you get to live there rent-free for the rest of your life, which is likely to be a longer period if you’re younger now.

As a rough guide, a 65-year-old couple who surrender all of the equity in their home would receive a cash lump sum of around 28% of its value. A 75-year-old couple would receive about 42% of the value of their home.

Something to think about with home reversion is that the property might grow in value by more than expected in the future, and you won’t get to share in that increase. Also, if you die or move into care earlier than anticipated, the shorter the period you’ll have been able to live rent-free. It’s possible to protect against these worries, but that’ll usually mean a lower cash value at the start.

Pros Cons

No interest payments

As the cash you receive is not a loan, you don’t have to pay any interest. 

You’re no longer the owner

You no longer own either all or part of your home.

No need to move

You can stay in your home until the last person dies or moves permanently into care. Terms and conditions may apply. 

Less than market value

The cash amount you receive is much lower than the market value of what you’ve sold. 

Tax-free cash

As long as your property is your principle private residence, the money you’ll receive is tax-free.

If you die or move out…

…soon after starting the plan, you’ll have sold your home for less than it was worth but received little in return to compensate. 

Protection options

You can protect against early vacancy and high house-price growth, but this will reduce the amount you get.

Ending the plan early

To do this you’ll usually need to buy back the part of your home that you sold. You may have to pay market value, which is likely to be a lot more than the lump sum you received.

 

Restrictions

You may not be able to move to a new house or accept new occupants without the agreement of the new owner, the plan provider.

 

Effect on tax and benefits

Taking out a home reversion plan could affect your tax position and eligibility for means-tested benefits.

Things to consider about equity release

We’ve summarised the pros and cons of the two options. And here we list some general points to think about if you’re considering equity release.

  • One common cause of complaint is the valuation of your home. Make sure you’re familiar and comfortable with the valuation and sale processes before you go ahead.
  • Another source of complaint could be the wider family – usually that they’ve lost what they thought was their inheritance. There’s no requirement to involve your family in your decision, but most families are likely to be supportive and it can help avoid bad feelings later on.
  • There are financial costs involved in arranging equity release, such as valuation fees and legal expenses. Although similar costs also apply if you downsize.
  • Many people consider using up savings before thinking about equity release.
  • Make sure you consider only releasing as much money as you need. There’s no point surrendering equity or paying interest on money that’s then moved to an account earning a meagre rate of interest.

Finally, you really should take financial advice before entering into equity release, and most providers will insist that you do. Some financial advice firms specialise in this type of advice. Take your family with you to see the adviser, so that they can ask questions too.

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