This quick guide helps to identify the various options available and important things to consider before making such an arrangement.
Note: Always seek Independent Financial Advice. Equity release is not right for everyone and may affect your entitlement to state benefits and will reduce the value of your estate.
What is housing equity?
Your ‘housing equity’ is the market value of the home you own minus any mortgage or debt held against it.
For example, if you have had your home valued at £200,000 and you still owe £50,000 on your mortgage (with no other charges on the property), your housing equity is currently £150,000.
What can equity release be used for?
The equity release market has grown significantly over the past 20 years and can be a valuable option for unlocking capital, such as:
- Making repairs, improvements or adaptations to your home
- Meeting the cost of daily living
- Paying for care at home
- Purchase of annuities or care fee plans
- One off lifetime events such as a special holiday or cruise or visiting relatives abroad
- Financial assistance to relatives and loved ones
- Repaying any outstanding mortgage/debts, if making your mortgage payments are a struggle or you are coming to the end of the term for an Interest Only mortgage and are unable to repay the outstanding capital
- Enabling you to keep your home if you are divorcing or separating from a partner
Common eligibility criteria and conditions
There are usually certain conditions that you must meet in order to be eligible for an equity release scheme. They vary between providers but some of the most common are:
- You must usually be 55, but some schemes may only be for the over 60s
- A maximum amount you can borrow or sell, typically 18% – 50% of the property value You must own your home and it must be of a certain value
- You will be required to pay off any outstanding mortgage in full either from the equity you release, or from other funds
- You have to borrow a minimum amount of money , typically £10,000
- There may be restrictions on the type and condition of property acceptable to lenders
Types of Equity Release
There are two main types of Equity Release scheme:
Lifetimes mortgages: You borrow a lump sum secured on the home. The outstanding mortgage is repaid from the sale of the home when you move out (eg. to a care home) or when you die. You remain the owner of your home (and fully responsible for its upkeep).
Home reversion: This involves selling your home (or part of it) to a company for a set fraction of its market value. In return you usually continue to live in the home, normally rent free, for as long as you wish. In most cases you remain responsible for the cost of maintaining the home.
Questions to ask before taking out Equity Release
The financial consequences of pursuing equity release must be carefully considered as it has the potential to cause difficulties in the future:
- How will borrowing a lump sum or increasing your income affect your entitlement to means tested benefits?
- How will borrowing a lump sum or increasing your income affect your tax liability?
- How will having an outstanding debt against your property affect your future housing options? Could you end up owing more than your property is worth?
- What will happen to anyone living with you when you die or if you move? – Will they lose their home?
- What happens if you die very soon after taking Equity Release – particularly a Home Reversion Plan?
- How will it affect the amount of money or property you can leave in your will?
- How will inflation affect the value of any fixed income you receive?
- What happens if you need long term care?
- How much does it actually cost to take Equity Release?
Seek Independent Financial Advice
We would strongly advise that you or your family member seeks Independent Financial Advice (IFA) before committing to an Equity Release product. If you do not already have a IFA then you may wish to find one that is registered with the Society of Later Life Advisors (SOLLA).