We look at how equity release works and outline some of the key pros and cons, and explain how our newly Equity Release Advice Service can help you find all the answers. Learn more.
Equity Release – How it works, pros & cons
Equity Release – i.e. borrowing a percentage of the market value of your home – is an increasingly popular financial product that’s aimed at homeowners over 55 who are looking to raise and spend a significant lump sum. But there’s a lot to think about and you must seek professional financial advice.
How does it work?
Your equity is calculated by working out the difference of the value of your home minus any outstanding mortgage on the property. Looking at a simple theoretical example; if you bought a property 25 years ago for £100,000 with an £80,000 mortgage and today it was valued at £400,000, with £20,000 still owing on the mortgage, then your equity would be £380,000.
However, you won't be able to release the full equity amount, as Equity Release schemes usually only allow you to borrow a set percentage of the property’s value. Depending on the lender, this percentage amount available will increase as you get older, often up to a limit of 50%. So in this example, the maximum loan might be 50% of £380,000 = £190,000. Depending on the scheme chosen, you could choose to receive that amount either as a one-off lump sum or through smaller, regular payments.
How is the loan repaid?
When it comes to paying back what you owe to the scheme’s provider, the amount owed for the Equity Release loan is deducted from the sale price once your property is sold – usually, this occurs following your death or when you move full time into a care home. Reputable Equity Release providers offer a No Negative Equity Guarantee so that you don’t end up owing more than you borrowed.
What are the main kinds of Equity Release?
- The most commonly available forms of Equity Release are Lifetime Mortgages and there are two types of these, Interest Only or Roll Up.
With an Interest Only Lifetime Mortgage, there’s a fixed level of debt against your estate, but you’ll be making fixed interest payments for life and your estate will be reduced by the value of the loan.
With Equity Release Roll Up, there are no payments or loss of income while you’re living in the property, but as the name implies, each year the interest is rolled-up and added to the loan. The interest is compounded – i.e., it’s calculated on an ever-increasing total.
- Home Reversions are an outright sale of a portion of the property to the lender at the time the money is released. The lender then owns their share of any future growth in the property which is paid to them when it’s sold. Usually, you will only receive a maximum of 60% of the market value of your home, and often much less (as little as 30%). Also, it’s not unheard of for a 20% advance resulting in the borrower giving up 70% of the property's value.
Pros and cons
The main benefit to equity release is an obvious one; you’ll be able to access a significant tax-free cash lump sum, without the considerable upheaval of having to sell up, downsize and move house, and you’ll still be able to live in your home and retain your current status as a homeowner. And, depending on the type of scheme chosen, you may not need to pay anything until you pass away or move into long-term care.
However, there are numerous other factors to consider, for example, after a lifetime of a lifetime paying off the mortgage, you’ll need to feel comfortable with the fact that you’ll be giving up a percentage of your home’s value forever, and that the loan is ultimately secured on your home. And, if you take on a lifetime mortgage, you’ll need to think about the impact on your disposable income with a loan that’s payable for life.
There’s also the issue that equity release is a debt against your estate that can reduce the value of the inheritance received by your beneficiaries after you pass away.
Having large sums of money in your bank account may also reduce the benefits you’re entitled to receive – importantly, this includes help with the cost of care. So long as you live there, the value of your home is not included in any means testing, but cash in the bank will be.
Many Equity Release schemes allow you to transfer your lifetime mortgage to a new property, but this can be difficult to arrange and if you want to make early repayments, many equity release schemes impose a penalty fee for paying off the policy early, sometimes this is as much as 25%.
It pays to talk
It's essential in our view, to consult with your family so they fully understand your plans. A lot of stories we hear about equity release come from the offspring of parents who took out equity release without the family talk. These children are dealing with their parents’ estates and face the shock of a large debt to be repaid before they can receive their inheritance. Whilst most will be pleased equity release helped their parents improve their quality of life, the expectation of receiving a level of inheritance is often factored into people’s financial plans. To suddenly have to adjust them in later life can have a long-lasting impact.
Talk to an expert
As you can see, there’s a lot to consider and before you enter into equity release, you will need to seek professional advice. This is precisely what free2’s Equity Release Advice Service is all about.
free2 will introduce you to Money Advice & Planning Ltd to provide you with expert, independent Equity Release advice.
It’s a three stage service with an independent financial adviser involving;
- A first free initial consultation to get to know all about you, your needs and your future wishes.
- An assessment of your needs and then research for a solution across the whole equity release market. This also includes considering other solutions to raise a lump sum before equity release is advised.
- An advisory meeting to present the recommended approach. If you decide to proceed your adviser will manage all the application paperwork and an advice fee of £595 is payable on completion.
To get started, why not visit our equity release calculator and see how much you could borrow?
Please note: This blog was believed to be accurate at the time of writing and is intended to provide general information only to the reader – it does not constitute advice of any kind. Before making any decision about your savings, investments and your pension, you should consult an Independent Financial Adviser.
Free2 Limited (trading as free2) is an Appointed Representative of RS Consumer Finance Limited (RSCF) which is authorised and regulated by the Financial Conduct Authority (the FCA). free2 is a credit broker, not a lender, and will only offer loans from RSCF – an offer of credit is subject to status and affordability. Example Loan: 60-year-old non-smoker, £30,000 over 10 years with fixed monthly payments of £344.56, interest rate 6.73% and an APR of 6.97%. Terms & Conditions apply.
Customers wishing to use the free2 Equity Release Advice Service, once registered, will be introduced to partners Money and Advice Planning (MAP). The free2 Equity Release Advice Service provides a free initial consultation followed by an advisory meeting, for which a fee of £595 is charged on completion of a successful application.