Equity Release – How Does it Work?

Equity release refers to the process of freeing up equity in your property while you continue to reside in the property. This will allow you to withdraw either a lump sum or monthly amount from the value of the property.

How does it work?

Equity release is a form of lending. A lender will have to approve your application and will give you either the lump sum or regular monthly amounts against the value of the property. When the property is sold or upon death, the lender will claim the amount borrowed from the property.

There are two primary types of equity release:

Lifetime Mortgages – A lifetime mortgage is the most popular option. A lender will borrow you money which will be against your property and is payable when the borrower dies or moves into a care facility. Some lenders may agree to allowing the interest to be paid on a monthly basis to reduce the overall amount.

Home Reversion – This is where the property or part of it is sold to the lender. The lender will usually take ownership of between 80%-40, unless only a portion of the property is sold to them. The lender will allow the borrowers to remain in the property until they die or opt to move into long term care.

What are the main differences?

In a home reversion, the property is to some extent sold to the lender with consent for the borrower to remain in the property on a rent free basis. The biggest disadvantage is that the borrower will not benefit from any increase in property value during their period of ownership. Whilst with a lifetime mortgage, the property is still owned so any increase in value will be for the benefit of the owners and can be used to pay off the existing mortgage.

There is no interest payable in a home reversion because the property is purchased by the lender for less than the market value. With a lifetime mortgage, the interest collects and can accrue for years unless your lender allows monthly payments.

If you are considering equity release, we recommend you take the below into consideration before doing so:

• If the owner and any occupiers are allowed to reside in the property.

• The age of the applicant.

• How much can be borrowed? Traditionally it you opt for a lifetime mortgage, this will be around 60% or 20-60% if you intend to pursue a home reversion. This will be dependent on a number of personal factors such as age and general health. Older people or those who have medical conditions are normally eligible for a higher amount.

• Interest Rates - Ensure interest rates are fixed. If they are variable and continue to grow, check if there is a cap on repayment.

• Do you have right to buy or sell the property? Will the affect your equity release?

• Negative Equity Guarantee - This means that if your debt to the lender is greater than the value of your property, you will not need to pay anything.

• Is it better to obtain a lump sum or smaller monthly payments?

• Can a portion of the property be protected to pass under inheritance?

Who qualifies for equity release?

Equity release is usually marketed for people who are 55 and older. There are usually limits on what portion of a property can be borrowed against. It is important to note that age is a varying factor and the younger you are, the more debt you are likely to accrue. The lender may also insist the property is your main residence as a term.

Are there any risks?

If you take the loan out fairly early, there is the risk of a large interest accruing until the date of repayment. If the equity released is worth more than the property value, the property will be in negative equity and any surviving family may have to foot the bill. There are many lenders who do provide a no negative equity clause which will protect against this.

It is also important to consider that the receipt of any equity payments could have an affect on any means tested benefits that you may receive, this includes items such as council tax exemptions amongst other benefits. We always recommend speaking to an advisor before committing to an equity loan so you have a better understanding of the benefits and risks.

What are the advantages?

The main advantage for equity release is that you will have access to more money. A property is usually the greatest asset acquired and equity release serves as a mean to acquire additional funds once you have obtained a certain age. It allows the money to be used for gifts, travel, enjoyment and renovations. The main benefit is that you are able to reside in the property after having obtained equity release and will have little effect on day to day living.

Is equity release right for me?

It is very important to consider the circumstances in your life and assess  whether equity release is right for you. The biggest consideration being age which has been discussed above. The older and more medically vulnerable you tend to be, the higher chance there is of being accepted. It is unpleasant to say, the older you are, technically the less years you have to live. For this reason it is a suitable choice for people who have exceeded 55 years in age as they would be eligible for the best deals.

Another factor to consider is if you are willing to remain in your current property for the remainder of your life term or until the equity loan has been repaid.

Overall, if you are good with finances and can withdraw cash amounts as necessary rather than large chunks, it can help you enjoy your older age. Equity release can be a great tool as it will serve as a means of accessing money to use for things you would usually be unable to.

If you have no surviving family you intend to leave the property to, equity release seems like a good idea as it allows you to enjoy the benefits of the money in your property with little consequences.

Are there any alternatives?

There are other options of funding if you are looking for immediate access, this would usually take the form of a loan. A personal loan is the easiest option but it wouldn’t likely be taken for the same reasons as an equity release.

It may be ask possible to down size on your property and use the funds from the sale of your initial property to your liking. This is only recommended if you have sufficient equity in your original property to make it financially profitable after the payment of all  other expenses.

What fees should I expect?

When looking to free up equity in your property, there are several fees associated  with to take into consideration:

• Legal Fees

• Equity Loan Application

• Property Valuation

• Financial Advisor (if necessary)

Whilst a home reversion does tend to take slightly longer, the entire process can be completed in less than six weeks.

If you need any further assistance with your equity loan, please contact us for more.