What is Equity Release?
Equity release is a way of releasing the wealth tied up in your property without having to sell it and move home.
You can either borrow against the value of your home or sell all or part of it in exchange for a lump sum or a regular monthly income (although this is becoming less common). Some plans give you the option to “draw down” further equity (cash) at a later date, based on your requirements.
It is designed to help customers aged 55 plus who either own their property outright or have relatively small mortgages left to pay, although you can use it to buy a property as well.
You can either take out a loan against your home or sell part or all of it to a third party who gives you the right to live in it for life.
The loan is repaid upon your death or if you move into long term care and are unlikely to return.
A lifetime mortgage is a long term commitment which could accumulate interest and is secured against your home. Equity release is not right for everyone and may reduce the value of your estate.
What types of Equity Release are there?
There are three main types of equity release: Lifetime Mortgages, Retirement Interest Only Mortgages and Home Reversion plans. Both types of plan are regulated by the Financial Conduct Authority (FCA). By using an equity release product, a home owner can draw a lump sum or regular smaller sums from the value of their home, while continuing to live in it.
A Lifetime Mortgage is a type of mortgage where you can choose to extract your funds in a single lump sum or in smaller amounts over time up to the maximum limit agreed with the plan provider. You can also elect to retain some of the value of your property as an inheritance for your family, meaning that you can benefit from releasing equity while ensuring you have something to pass on to your children.
The vast majority of equity release deals taken out today are lifetime mortgages
You retain full ownership of your home and interest on the loan can be fixed or rolled up. The loan and the rolled up interest is repaid by your estate when you either die or move into permanent long term care.
If you are part of a couple, the repayment is not made until the last remaining person living in the home either dies or moves into permanent long term care. In other words, both you and your partner are free to live in your home for the rest of your lives.
With some plans you can make monthly interest repayments in part, or in full. That way, you can maintain the debt to the initial amount of the loan before interest. Some lenders charge a lower rate of interest if you do too. If you choose to make interest repayments, you still have the option to move to a roll up arrangement at a later date if you wish. There are even some lenders who can offer you the option to pay some capital throughout the plan.
How much can be released is dependent on your age and the value of your property. Some providers may be able to offer larger sums to those with certain past or present medical conditions. Some providers may offer larger sums to those with certain past or present medical conditions, or even ‘lifestyle factors’ such as smoking habit.
Home Reversion Plan
These plans are seldom sold now for three main reasons. First of all, you sell all or part of your home to the provider so you no longer own it. Second, there are very few providers in the market place and finally, lifetime mortgages have evolved to offer more choice whilst becoming more affordable and allowing clients to still own their home (albeit with a mortgage).
Please note - Family First Finance does not arrange Home Reversion Plans.
Retirement Interest Only Mortgages (RIO's)
This is a relatively new product. They are standard mortgages designed for older clients what want to have access to a standard mortgage but who want to keep the cost down by not repaying the interest each month. In such cases the lender will assess your ability to repay based on your retirement or pension income. They can be be cheaper as the fixed rates with these types of mortgages tend to be shorter term rather than a lifetime fixed rate (e.g. fixed for 2, 3 or 5 years). In some cases they can be automatically converted to a lifetime mortgage at a future date if you can't afford to pay the interest each month e.g. if one spouse dies and the surviving spouse's pension is reduced.
Are there alternatives to Equity Release?
Before taking out an equity release plan, you should check what the alternatives are. For instance, you may have other investments, savings or assets to draw on, or you may wish to continue some form of paid work. You could downsize to a smaller property or one of lower value – perhaps by moving to a smaller home or to a different part of the UK where house prices are cheaper. Alternatively, you could look at more traditional mortgages.
Frequently Asked Questions
Will I still own my own home?
If you take out a lifetime or Retirement Interest Only mortgage, you will still own your own home (albeit with a mortgage on it) but not if you take out a home reversion plan.
Can equity release be transferred?
Potentially, yes, You can sell your home. We only recommend, equity release plans that comply with the Equity Release Council's standards and these allow you to move to a "suitable alternative property", but some properties won't be eligible (such as retirement complexes). If you are moving to a smaller property, you may have to repay part of what you borrowed/released. It will all depend on the amount of equity that will be left. Some plans come with a "downsizing guarantee" however to give certainty if this is a potential option.
Can equity release be repaid before your death?
Yes, but it is generally designed to be repaid if the property is sold and you move into long-term residential care - normally for a year. In this case, the property will be sold and the loan repaid, plus any accrued interest. Some providers let you make lump sum payments and others allow you to pay all the interest each month but there can be significant early repayment charges too so it's important to discuss this with your adviser in advance. If you are outside of any early repayment charge period you can pay it off or remortgage to another provider, e.g. to get a more competitive rate.
Is equity release taxable?
The cash lump sum released from your home is tax-free but you may have to pay tax on any interest if you invest the money. It is always a good idea to seek independent tax advice in such circumstances.
Will equity release affect inheritance?
Yes, in that it can reduce it. Depending on how much you release, and the type of plan you hold, your children or beneficiaries may not receive any financial legacy from the value of your property, so it's important to discuss this with anyone who stands to benefit from your inheritance. It can also potentially reduce inheritance tax liabilities but it's important to speak to a qualified tax adviser about this in advance.
What about inheritance tax?
Because you'll be passing on less of your asset to your beneficiaries, they'll be required to pay less inheritance tax. Even if you use the money you release to give to loved ones, it won't be counted in your inheritance tax bill, as long as you live for seven years after you gifted the money.
Please note that Family First Finance and our employees are not qualified to offer legal advice on inheritance matters or advice on taxation and you should seek the services of a solicitor and/or a suitably qualified tax adviser for advice on such matters.
Will equity release impact my spouse or partner?
If you take equity release in your sole name (either because you meet someone after taking it out, or because your partner is younger), sometimes it may mean that your spouse or partner has to move out of the home when the plan ends. Check the situation regarding this before entering into any agreement.
Does equity release affect tax credits, benefits or pension entitlement?
If you're currently eligible for certain tax credits or benefits, bear in mind that taking out equity release can affect that eligibility because many benefits are means-tested. Your state pension isn't normally affected. We can help check this for you.
Do I need to earn an income to be eligible?
No, for home reversion plans and lifetime mortgages you do not need to have an income as you can add the interest to the loan each month rather than needing to repay it. With Retirement Interest Only mortgages (RIO's) you do need to be able to demonstrate an income.
Can I go into negative equity?
No. All of the providers we recommend are members of the Equity Release Council and all of their products all come with a no negative equity release guarantee. As a result, no matter how long you live, you will never owe more than the value of your home. In addition, you can also ask to guarantee that a certain proportion of equity will remain for your beneficiaries but this can reduce the amount that you can borrow at the outset.
What can funds raised be used for?
They can be used for a wide variety of things. Some people raise capital to improve their home, some to modify it so there. A number of customers are using equity release to repay interest only mortgages taken out many years ago which will soon need to be repaid. Other people give the money to family, or to provide themselves with an income or to top up their pension whilst others use it to have a better quality of life, travel and live life to the full whilst they still can.
Can I use a lifetime mortgage to purchase a property?
Yes, you can use one to top up your deposit to potentially by a more expensive property
How old do I have to be?
The minimum age with the majority of lenders is 55 but there is no maximum age. The younger you are the lower the proportion of the equity in your home that you can release. If you are in poor health you can potentially access more than a healthy person of similar age. This will depend on individual circumstances.
Do I have to take any money released as a lump sum?
No, you can take it as monthly income amount. You can also apply for a drawdown facility whereby you are pre-approved at outset for an additional amount should you ever need it. The rates are typically those that are available at the time you drawn down the money but it is simpler than starting a whole new application.
Can I do equity release on a Buy to Let property?
Yes, there are some providers that have bespoke propositions. This can be a useful way of access funds in Buy to Let properties without paying Capital Gains Tax.