How does equity release work?
Modern equity release comes in two forms: Lifetime Mortgages and Home Reversion Plans.
What is a Lifetime Mortgage?
Lifetime Mortgages are the most popular type of equity release. A lifetime mortgage lets you take a loan secured against your home whilst still owning it.
What is a Home Reversion Plan?
Home reversion Plans are where you sell all or part of your property for less than the market value. You stay in your home, but as a tenant.
Who is equity release for?
There are many reasons why people might want to release equity from their home the most common ones are:
- For people who would like to supplement retirement income
- To give to beneficiaries when they need it, for example for a deposit to buy a property.
- For people who don’t have beneficiaries and want to live to a higher standard in later life.
- People who have an interest only mortgage who don’t have the funds to pay
- For people who want to make home improvements
- For people who have an Inheritance tax issue liability and want to plan for their beneficiaries
- To pay for care home fees
How do the different types of equity release work?
There are several different ways of releasing equity from your property. Which you choose will depend on your needs and which product features suit you the best. The most common types are:
Interest Roll Up
Interest roll up means that you get a lump sum or are paid a regular amount and get charged interest which is added to the loan. This means you don't have to make any regular payments. The amount you borrowed, including the rolled-up interest, is repaid when your home is sold.
Interest Only / Retirement Interest-Only
Interest Only and Retirement Interest-Only (RIO) options are used mainly to pay off interest only mortgages at the end of term. You pay the interest each month, which means the amount you owe doesn’t increase over time. The loan is repaid on death or move to long term care.
Hybrid Equity Release
A flexible option that starts as an interest only Lifetime mortgage but leaves the borrower the option to revert to a roll up lifetime mortgage if monthly interest payments get too much.
This is where the loan for your home equity release can be drawn down in small increments when there is a need for the money. This means that the interest is only levied on the amount drawn down at the time. However subsequent drawdowns will be based on the new rate of interest.
This option allows the borrower to set aside a certain percentage in the property that will be protected from interest roll up and then to be passed to beneficiaries.
What are the pros and cons of equity release?
There are a lot of factors to think about when considering equity release. We have put together a quick overview of the most important.
The benefits of equity release
- The money released is completely tax-free and you can do what you want with it
- It can allow you to live to a higher standard of life
- You can reduce the size of your estate to mitigate against inheritance tax
- You get to stay in your home for life or until you move to long term care without needing to downsize or move to a cheaper area
- There can be no need to make any interest repayments and as the loan may only have to be repaid on death or move to long term care
- Personal flexibility - if you wish you can make repayments to reduce your outstanding loan
- Security - many providers offer a ‘no negative equity guarantee so your beneficiaries won’t have to pay a penny
Key considerations for equity release
- For Inheritance tax to be mitigated effectively you will need to put planning in place
- The inheritance you leave will be reduced
- Interest on a Roll up Lifetime Mortgage is added to the amount you owe each month. This means that the amount you owe will quickly increase over time
- If you pay over 10% of the loan off in any given year you will most likely be subject to an early repayment charge
- Releasing equity may impact your entitlement to state benefits
- Equity Release can be difficult to port to another property
- It is difficult to add people to the title deeds later should the need arise
How long does equity release take?
The equity release process usually takes between 10 and 14 weeks. There are three main stages to the process.
Get Independent Advice - Your adviser will check your eligibility and assess whether equity release is the right thing for you. Based on your wants, needs and circumstances they will be
Valuation and Offer – Once you are happy to proceed you will need to appoint a solicitor and get independent legal advice. The adviser will submit the application and the Equity release provider will contact you to arrange a valuation of the property. Once approved your solicitor will be granted an offer.
Receiving the Funds – If you are happy with the offer, the provider will release the money to your solicitor and the solicitor will then release the money to you. The exact timescale will depend upon your lender and solicitor.
Need some more help making decisions about whether to release equity in your home?
The number of equity release options available can be confusing and there are lots of things to think about.. As independent financial advisers qualified in equity release we can help you to understand the ins and outs of the process and access the whole of the market on your behalf.
Because we work alongside qualified Tax and Legal professionals we are able to simultaneously advise on issues like Tax & Estate Planning, Long Term Care and keep the whole equity release process under one roof for you if that is what you prefer.