What is Equity Release and How Does it Work?

The value of your home, minus any outstanding mortgage or secured loan you may owe, can be described as your “equity”. For example: if you own a property worth £150K and you have have a small mortgage of £30K then the equity in your home is £120K, which is 80% of its total value.

The good news is that house prices continue to rise in the UK. According to the UK House Price Index (HPI) for June 2017, it shows an annual price increase of 4.9% with an actual increase since May of 2017 of 0.8% alone.
(source UK Gov House Price Index (HPI) for June 2017).

Currently the average cost of a home in the UK is approximately £223,257. Our example diagram below gives you an idea of what a house valued at £223,257 will be worth in 5, 10 and 20 years time assuming house prices continue to row at the annual rate of 4.9%.

Equity release is the process of unlocking some of this value, turning it into a tax-free lump sum of cash. You could then use this released equity to pay off any other debt; a mortgage, credit cards, for a one-off purchase such as a badly needed new car to improve your lifestyle or to help loved ones, such as a child or grandchild with their own house purchase.

If you are a homeowner aged 55 or over, you could be eligible to take advantage of releasing equity from your property by securing a Lifetime Mortgage. Equity release could improve your financial situation, giving you a more comfortable retirement.

Please be aware that all plans will reduce the value of your estate and may affect your entitlement to state benefits. This will be checked for you during the advice process.

How it Works

The lender gives you a tax-free lump sum (the equity released from your home) which can be used by you for any legal purpose. You can, with some products, make a monthly or sometimes yearly payment to keep the amount borrowed at the same level, or pay nothing at all as the interest is ‘rolled up’ into the loan.

There are some Lifetime Mortgage products available where you make no payment at all, some where you ,ake the interest only monthly payment in full, others allow flexible ‘ad hoc’ payments when you’re able or wish to. The amount borrowed plus any interest accrued during the lifetime mortgage is repaid out of the proceeds from the sale of the property after you die or o into long term care.

How much you can borrow depends on the value of your home and your age. The older you are the higher the percentage of your property’s value you can borrow. Generally, you will not be advanced more than 50% of the value of the property. Most loans are fixed interest for the life of the loan, thus reducing the risk to you of rates rising.

Lifetime Mortgages are currently the most popular type of equity release scheme. The information below is an overview including the advantages and disadvantages.

These plans enable you to raise a lump sum at a fixed rate of interest. There can be no monthly payments required to the loan if you so choose. Interest is charged monthly and added to the loan increasing the overall debt owed. This type of equity release Lifetime Mortgage is also known as a ‘roll up’ scheme. The total amount owed including interest ‘rolls up’ and will be repaid when the last home owner on the deeds dies or moves into long term care. The estate will usually have 12 months to sell the property once the last home owner on the deeds dies or moves into long term care.

There are flexible plans with monthly payments, sometimes called
‘interest only’ options. Some plans allow voluntary overpayments to be made to the capital owed without incurring any early repayment charges.

You can take an initial lump sum with potentially a reserve account giving further funds available to drawdown as you need them. Interest does not accrue on the money until you release it from the reserve account, which allows you to minimise the interest charged and have a safety net to fall back on.

There are many flexible schemes and our professional advisers can provide you with a free consultation and fully discuss all the options before making a recommendation based on what best suits your individual needs.

In summary; you can have no monthly payments at all or make monthly payments. There is the security of knowing you continue to have ownership of your home. You have the right to remain in the property for the rest of your lives and the plan is repaid when the property is sold which usually occurs when you die or enter long term care. You can of course sell the property at any time and downsize if you choose, you can pay off the mortgage completely or take it with you.

Example of:

(i) £170K House Value – Lifetime Mortgage Loan –

(The approximate figures above are based on a 65 year old couple, releasing £35K in equity with an annual projected house price increase of 4.90% and a fixed annual interest rate charged on the loan for life of 4.36% which is a typical interest rate available on a moderate LTV plan at the time of writing (June 2017) and paying approximately £129.67 per month.)

(ii) £170K House Value – Lifetime Mortgage Loan –

(The approximate figures above are based on a 65 year old couple, releasing £35K in equity with a fixed annual interest rate charged at 4.36% and paying no monthly payment, allowing the loan to “roll up”.)

Advantages of Lifetime Mortgages

• Plans are available from age 55 to age 95
• You will benefit fully from any future increase in property value
• Option of fixed interest rates for the lifetime of the plan
• Flexibility of making monthly payments or not, depending on the recommended product
• Optional guarantees to protect a portion of your estate for your family

Disadvantages of Lifetime Mortgages

• The Lifetime Mortgage balance will increase significantly over time if you make no payment to the mortgage
• Your tax position and eligibility for means-tested benefits may be affected
• Lifetime Mortgages usually cannot raise as much money as a home reversion plan
• Early repayment charges may apply
• Your beneficiaries may receive a reduced inheritance

The above described a “Lifetime Mortgage” product. To understand the features and risks, ask for a personalised illustration from one of our professional advisers.

Home Reversion Plan

This less popular plan, regulated by the Financial Conduct Authority, currently accounts for only about 10% of all equity release sales. Despite this, Home Reversion Plans are still an important consideration in the overall decision making process.

In return for selling part or all of your property to the reversion company, you receive a tax-free limp sum or you can opt for a lifetime income.

You also receive a lifetime lease, which guarantees residence in the property for the rest of your life.

Advantages

• Plans are available from age 65, or if poor health exists, from age 55
• A guaranteed percentage of the property will pass to your beneficiaries
• You will benefit from the increase in value on your share of the property
• There is no accumulation of interest, hence no growing debt
• The older you are, the more cash you can release
• It raises more money than a Lifetime Mortgage

Disadvantages

• You will no longer completely own your own home
• if you sell all your property, your estate will not receive any inheritance
• You will not retain any property price escalation on the proportion of the property sold
• Reversion companies are more selective about the properties they release on
• If you die shortly after taking out the plan, there could be a disproportionately high loss to your estate

The above describes a “Home Reversion Plan“. To understand the features and risks ask for a personalised illustration.