Equity release on your home – what does it really mean?

January 24, 2019 1:50 pm Published by

What is equity release?

Talking to some friends recently, I realised people often talk about ‘equity release’ when they’re thinking about getting some funds for refurbishment projects or paying some debts. What they actually mean is a remortgage, where the money in the current mortgage is released for whatever needs they may have. There are no age restrictions on a remortgage and, done regularly, it’s a great way to ensure you’re always on the best available deal. Have a look at our remortgage section for more information or give us a call to talk through your needs.

Equity release is slightly different. You still release cash from your property but you do it through a specialist loan secured against your home (lifetime mortgage), or through selling your home or part of it while continuing to live in it (home reversion plan). Importantly, equity release – as opposed to remortgage – has a typical minimum age requirement of 55 years or over.

How does equity release work?

People choose equity release for various reasons: home improvements, repaying debts, cash gifts for loved ones, improving standard of living or even going on holidays. I always take the time to understand your needs and help you understand if equity release is the best option for you. If you go down this route, the two types of equity release I mentioned have different pros and cons.

Lifetime mortgage

It tends to be the more popular option because you remain as the owner of your home. It means that you borrow money against your house and when you die or if you move into long-term care, your estate pays off your debt.

Pros

  • You retain ownership of your home
  • You can apply at the age of 55 years
  • Flexibility on interest rates – they can be rolled up into your loan, or you can pay them monthly, ensuring the borrowed amount remains unchanged
  • Your property benefits from market value increases
  • You can arrange your loans over years – it doesn’t have to happen in one go, saving you money on interest.

Cons

  • The amount you can release is likely to be lower than the home reversion plan
  • Estate left to your loved one when you die will have to pay this debt.

Home reversion plan

Here you sell off all or part of your home, releasing funds and continuing to live in your home until you die or go into long-term care. This option is available for 65s and over only.

Pros

  • It usually allows you to release much larger equity than lifetime mortgage

Cons

  • You lose ownership of your home so you won’t benefit from market value increases
  • The equity will be less than the current market value of your home.
  • The estate you leave to your loved ones is smaller than in the lifetime mortgage option

It’s also worth remembering that receiving a lump sum of money could affect any benefits you receive or could receive in the future. Benefits such as pension credit, council tax support, etc. are means-tested – your big injection of cash could reduce your benefits or you could lose them altogether.

Similarly, if the local council provides care for you at home, they could start charging you for that too.

You can find out more about advantages and disadvantages of equity release on the Age UK website.

How much does Equity Release cost?

This varies on the loan you end up taking. Moneysavingexpert says the typical lifetime mortgage rate is 5.14%, but the lowest rates in recent times have been under 4.00%. This is higher than your standard mortgage – this is why I’ll always take you through all options and work out the best solution for you. There may also be an arrangement fee payable to the lender of up to £995. Some products, aimed at those borrowing smaller amounts won’t have a fee, but the interest rate is likely to be higher, and not so good for those borrowing a larger sum. I’ll always work out which is likely to be the best option.

You’ll need specialist legal advice from an Equity Release conveyancer. They’ll make sure you understand the agreement, and carry out the legal work required for the lender to release the funds to you. Costs can vary from one firm to the next, but you can expect quotes from around £700 to £1,500. Get in touch if you’d like us to help you find a conveyancer.

There is usually a fee to pay your mortgage broker to arrange Equity Release. To give advice on either a lifetime mortgage or a home reversion plan, the adviser must hold the specialist qualification and discuss the alternatives. Our typical fee to arrange an Equity Release is £995. We’ll always confirm our fee before any work becomes chargeable.

How long does it take to have my funds released?

Some of our clients have received their money in as little as three weeks, but the typical time from application to completion is four to six weeks.

Is Equity Release tax free?

Yes, the good news is equity release is tax free, making your money go further.

Equity Release advice – making the right choices

It’s vital that you understand all possibilities when it comes down to equity release and this is why it’s so important to seek advice from an equity release specialist (*cough*). It may be that you could have other options, such as downsizing or a conventional mortgage. But, if equity release is what you want, I’ll take you through everything you need to know to allow you to make an informed decision.

If you’d like, you could have your family present when we chat, as ultimately equity release affects their inheritance – of course we can chat without their presence too.

Do get in touch with your equity release questions, even if it’s just for a chat, with no obligation.

 

This is a lifetime mortgage/home reversion plan, to understand the features and risks ask for a personalised illustration.

 

 

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Categorised in: Information and advice

This post was written by Steve Moses