Equity Release explained
Put simply, if you’re over 55, Equity Release is a way of accessing the value tied-up in your home, without having to sell up and move out. People often say “my home is my pension,” with Equity Release effectively used by many for just that; to top-up income in retirement.
But you can pretty much use the tax-free cash for whatever you like. For example;
- Home improvements
- Holidays, a new car, buying another property
- Gifting to the family (IHT – Inheritance Tax planning, weddings, house purchase, business start-up, made redundant, divorce, etc.)
- Repaying mortgages, loans, credit cards, and other debts
- Paying for private care at home (or sometimes in a residential or nursing home)
Lifetime Mortgage
The most popular type of Equity Release plan is called a Lifetime Mortgage. Some other developed countries (USA, Canada, Australia, New Zealand, and South Africa) have these too but refer to them as ‘Reverse Mortgages’.
A Lifetime Mortgage works a bit like an ordinary mortgage, in that a lender offers a cash sum on which it charges interest, and ultimately expects to be repaid. The main differences of a Lifetime Mortgage over any other type of mortgage are;
- No fixed term. The loan only becomes repayable when the last borrower dies or moves into Long Term Care.
- No regular payments of interest or capital are required. Instead, the lender will roll-up interest against the loan, meaning that the amount owing will increase over time.
- With some Lifetime Mortgages, you can choose to make monthly payments of the interest, typically choosing an amount from £25pm, up to 100% of interest charged. Any amount you choose not to pay is automatically rolled-up to the loan, so you can have a part interest-only / part rolled-up mortgage.
- With many rolled-up interest Lifetime Mortgages, you can make occasional capital repayments without penalty – typically from 10% or even 40% each year.
- No affordability checks by the lender, No credit scoring (just credit checking – not the same thing!)
- The older you are, the more you can borrow. A 55-year old can typically borrow up to 26% of a property’s value, (referred to as % LTV; Loan-To-Valuation) a 70-year old 45% and those aged 80 or over can raise around 55 – 58% of valuation. People with certain medical conditions, and / or lifestyle factors (e.g. smokers) can sometimes raise larger sums for their age, without needing to have a medical.
There are 2 main types of Lifetime Mortgage plan; lump sum, and drawdown, which can share many common features. With a Drawdown plan, a Cash Reserve facility forms part of the agreement, enabling the borrower to take further cash withdrawals when required, typically from just £2,000 upwards each time.
Common Features and Options on many lump sum, or drawdown plans
- Fixed interest rate: for the whole life of the loan.
- Inheritance Protection Option: on some plans, allowing you to ring-fence for inheritance a certain percentage of the future property value on the eventual sale.
- Free valuations and cash-back incentives: helping towards advice and legal fees (sometimes up to 5% of the loan amount, boosting the overall sum available)
Equity Release can be taken on a property you wish to buy, not only on the one you already live in.
Home Reversion Plan
The oldest form of Equity Release is a Home Reversion Plan, offered to homeowners aged 60 and over, which involves exchanging a percentage of your property for a cash sum, or regular income. These are no longer popular due to their inflexibility, accounting for less than 1% of all Equity Release plans arranged, and generally don’t offer the best value for money. However, a good financial adviser would be able to advise on such plans, so any company that doesn’t do this is not a true Equity Release specialist and should be avoided.
This is general information to help you understand some of the basics about Equity Release, so please do not mistake for advice. Equity Release might not be right for you in your circumstances, so sound advice from us will always be necessary.
If you would like a FREE initial consultation, please contact us now!