Understanding equity release

Equity release offers a way of unlocking some or all of the considerable cash value locked up in a home in which practically the whole of any mortgage has been repaid – you own the equity, which you may release in the form of a cash payment.

How it works

Equity release typically takes one of two basic forms – both of which are regulated by the Financial Conduct Authority (FCA) for the protection of consumers:

Lifetime mortgages

• to qualify for a lifetime mortgage, you generally need to be over the age of 55;
• the mortgage is on your home and the maximum amount you may borrow is typically capped at 60% of the property’s current value – you may use a free equity release calculator to gain some idea of the amount your home might release;
• just as with any mortgage, there is interest to pay on the amount advanced and this may be at a fixed or variable rate (although the latter needs to be “capped” at a maximum rate throughout the term of the mortgage);
• however, you pay no interest on the lifetime mortgage until the property is eventually sold, when the whole of the accumulated interest is repayable;
• Equity Release Council standards also require that the lifetime mortgage carries a “no negative equity guarantee” – to ensure that when the property is sold and the cost of the sale is also taken into account, you will not be required to repay more than the amount realised by the sale;
• throughout the term of the lifetime mortgage, you retain the right to continue to occupy your home – which you also continue to maintain, upkeep, and insure – until you move to another house or into long-term care;
• provided any new home continues to offer the equity release provider acceptable security, you might also be able to move from one house to another as your principal residence;
• some variations of the lifetime mortgage allow you to withdraw smaller amounts of equity at a time, rather than the whole amount – so saving some of the interest that otherwise accumulates.

Home reversion

• an alternative form of equity release is known as home reversion and involves the actual sale of a share in the ownership of your home – you take payment by way of a single cash sum or regular payments;
• it is a competitive market and different providers may offer a different price – typically the rate is between 20% and 60% of the current market value of your home and is naturally higher the older you are (the provider assumes less risk on the eventual value of the property);
• age limits are again likely to apply and – at ages 60 or 65 – these may be slightly higher than for lifetime mortgages;
• the Equity Release Council code of conduct again ensures that you retain the right to continue to live in your home and may be able to move to another home as your principal residence on the agreement of your equity release provider;
• you retain the right to live in your home until you die or until you move into long-term care.

Whichever option you choose and from whatever provider, equity release is clearly a major decision affecting the ownership of your home and may not be suitable for everyone.