Is it Time to Think About Equity Release?

Deciding whether to release equity from your home can be a difficult decision to make. Whilst it can help you financially and alleviate issues you may be encountering in the present, it may create new problems in the future when the loaned sum must be paid back, with interest.

That is why it’s always best to speak to a mortgage specialist about such considerations. Companies like Mortgage Saving Experts, for example, have equity release experts on hand to help advise you on the best options for your current circumstances.

What is equity release?

If you are a homeowner and have been looking at how to afford much-needed home improvements more easily or clear an escalating debt, equity release may help.

Equity release is a form of loan specifically aimed at homeowners aged over 55. It enables them to access the equity held in their property and use it as deemed necessary. Paid out in a tax—free sum, it is often an attractive option for many as it also allows those releasing the equity to remain living in the property. There are two forms of equity release, both offering different benefits.

Lifetime mortgage

The lifetime mortgage variant of equity release offers a lump sum of cash for the equity held in the home. Paid to the homeowner in one bulk payment, in monthly instalments, or accessed via a drawdown as and when needed, the funds don’t require a monthly payback and instead accrue interest over the time the loan is active. The balance is then cleared upon death or moving into care, resulting in the sale of the home. Any funds left over are then distributed among the estate.

Home reversion plan

This form of equity release means the entire home, or a portion of it, is sold to a home reversion provider at a lower-than-market-value amount. In return, a tax-free sum or a monthly income is paid to the homeowner. The homeowner can then remain living at the property without paying any form of rent. Profits from a sale are split between the owner and the plan provider depending on the shares owned.

Why would anyone release equity?

There are lots of reasons equity release is appealing to homeowners. They may see the funds as a great way to enhance their retirement pot, they may see it as a way to help a family member out, or it could be used to help develop the property and increase its value. Whatever the reason, it is always advised to give equity release a great deal of thought. It is a loan and will need to be paid back. This could mean less left for family members to inherit and potentially, if the home has depreciated, a debt for the family to help clear.

How much equity can be released?

In most cases, anything from 25%-50% of the equity can be released, but various factors are taken into account. As a result, it wouldn’t be wise for anyone to go planning exuberant purchases with funds that may not materialise.

A lender will look at age, property value and health to determine how much equity can be released. Typically, the older the applicant, the more equity there is available, however, if you are at the younger end of the equity release eligibility scale but are in poor health, you may be classed as an older person and be eligible to release a higher amount of equity.

As a rough guide, the table below shows what kind of equity release may be possible.

Property Value	55+	65+	75+	Up to 84
£200,000	£43,000	£63,000	£83,000	£101,000
£350,000	£75,250	£110,250	£142,250	£178,500
£500,000	£107,500	£157,500	£207,500	£252,500
£650,000	£139,750	£204,750	£269,750	£331,500
£800,000	£172,000	£252,000	£332,000	£408,000

It should be noted that these amounts are not guaranteed, and if your house is not of standard construction or is in poor condition, you may not be eligible to release the equity at all.

How does equity release get paid back?

The equity release loan can be paid back in monthly installments but there is not a requirement to do this.  In most cases, people settle their equity release loan by selling the property upon passing away, or when moved into care. Interest does accrue monthly, so chipping away at it can be beneficial. Should the equity release loan be paid back in full through an early sale of the home, an early repayment charge, also known as an ERC, could be applied. These can be expensive, so it is always advised to seek advice first if this option becomes a possibility.

Is an equity release loan safe?

Yes. Lenders will be bound by strict FCA regulations, and many will also be members of the Equity Release Council. Both groups aim to protect customers and ensure that financial institutions act in the best interests of those who use them.

Should you ever be unsure, you should speak to an independent mortgage specialist for impartial advice and guidance.

Pros and cons of equity release

There are a host of pros and cons to consider for any homeowner looking to release equity via home reversion or a lifetime mortgage.

Cons of equity release

•       Equity release can work out more expensive than a regular mortgage. Lifetime mortgages normally have a higher interest rate than ordinary mortgages meaning you could be paying back much more.
•       Home reversion plans will never offer true market value for the home. This is because you are selling your home (or a portion of it) but still living there.
•       If claiming any form of benefit, a release of equity could impact what you claim.
•       Fees to set up equity release could cost thousands of pounds.
•       If you clear the loan early, the early repayment charges could be quite large.
•       Interest on a lifetime mortgage equity release plan is calculated on the amount borrowed and the interest already added.
•       Less funds will be left behind for loved ones as the sale of the home will repay the equity release loan first.

Pros of equity release

•       If using a lifetime mortgage scheme, you’ll still own your home.
•       If you choose to draw down rather than a lump sum, you’ll only pay interest on the amount you draw down.
•       In some cases, you can transfer a lifetime mortgage to another property if you move.
•       If you take an equity release plan with a no negative equity guarantee, your family will not be saddled with any debt upon the sale of the property.
•       Funds received through equity release can be used to help clear debts, assist family members, treat yourself or upgrade your home.
•       A more stress-free retirement is possible with more financial freedom.

Of course, each person’s circumstances are different and where equity release works for some, it may not for others so consulting an independent mortgage specialist is advised.

Questions to ask before applying to release equity in a property

Before any equity release plan should be taken out, there are a few questions any homeowner should ask.

•       What age is the plan for? In most cases, homeowners must be aged 55 or above but some reversion plans state that 60 or 65 is the minimum age.
•       What is the minimum percentage that could be borrowed? The percentage available to a homeowner will vary depending on age, property value and the general health of the homeowner.
•       Is the interest rate fixed or variable? In many cases, rates are fixed but there are also many variable rate products available. These variable rates must have a cap which will not change for the duration of the loan.
•       Does the equity release plan have a no negative equity guarantee? With such a guarantee, when the property is sold and all legal fees are covered, if the amount left does not cover the outstanding loan balance, nothing more needs to be paid.
•       How interest payments are to be made? Find out whether you can pay back, some, none or all of the interest during the time of the loan. Paying back the interest monthly will reduce the amount owed when the property is sold.

 

Equity release can be a great way to free up some cash that can benefit you or your family but it should only be taken after a great deal of thought has been put into it. Speaking to a company like Mortgage Saving Experts will help, and then you can make an informed decision that can benefit you all.