Helping you understand
If your house has increased in value since you bought it you may want to release some of the equity you’ve accrued. The products explained are equity release products. To understand the features and risks, ask for a personalised illustration.
Frequently asked questions
What is Releasing Equity?
Equity is the value of your home minus any outstanding mortgage or debts against the property. Unfortunately, as this equity is tied into brick and mortar, it may not be ideal for older individuals looking to cash in on their net worth. Equity release provides a way to access these assets through a tax-free lump sum of cash or regular income payments. It can be used for lifestyle improvements, one-off purchases or gifts to loved ones.
What are the basics of releasing equity?
Equity release can come in two forms, lifetime mortgages and home reversion plans. Both approved and regulated by the Financial Conduct Authority (FCA). In a lifetime mortgage, the equity release comes in the form of a loan based on a percentage of your home’s value. With a home reversion plan, a portion of the home is sold in exchange for cash. More details can be found in the guide above.
What are the lifestyle rewards for releasing equity on your home?
There are a variety of reasons people choose to enter into an equity release scheme. While each individual circumstance is unique, the majority of people tend to use their newly obtained capital for one or more of the following reasons: escalating costs, increased life span, desire for luxury items such as a car or boat, holiday, travelling, gifts to relatives, home improvement and added financial flexibility.
How does it work?
The equity release provider will effectively unlock the value of your home and transform it into cash. In exchange, they will charge interest (lifetime mortgage) or pay you less than market value (home reversion plan).
Why is my life expectancy so important?
Many of the choices involved in selecting an equity release plan hinge on your age and life expectancy. It will influence not only what type of plan is suitable but the interest rate on a lifetime mortgage and the percentage of market value you are offered on a home reversion plan.
Generally, individuals with lower remaining life expectancy will be able to withdraw larger sums but at higher interest rates, whereas younger clients will see lower interest rates but more limitations on the amount they can borrow.
This because the longer you live, the more an interest rate will compound, allowing companies to offer a low initial rate. However, younger borrowers also represent more of a risk that the principal will not be paid back, and thus have smaller maximums.
What are the benefits of releasing the money in my home?
Although the financial particulars depend on the type of equity release plan you choose, the benefits are typically the same. You will receive a lump sum or regular income for the rest of your life, make no payments until after your death, and be allowed to stay in your home during that time. In the case of lifetime mortgages, you also retain ownership of your home.
What are the types of lifetime mortgages?
There are four types of lifetime mortgage schemes. Roll-up lifetime mortgages essentially ‘roll up’ all interest payments until the time of death or move into long term care, at which point the loan and interest will be paid off by the proceeds from the sale of the home. A drawdown lifetime mortgage works by having the homeowner withdraw from the loan at his or her own pace.
Interest only applies to the amount withdrawn, slowing its overall metastasis. For those who wish to prevent the compounding of interest entirely, an interest-only loan gives the homeowner the opportunity to pay down the interest while keeping the principal sum.
How flexible are these plans?
In general, equity release plans are a lifetime commitment and provide little flexibility in comparison with other mortgage vehicles. Nevertheless, there are situations or contingencies available from plan to plan, although there may be penalties involved if you wish to cancel. Although lifetime mortgages have a set maximum, they usually allow for an increase in the principal loan as your life expectancy further dwindles.
For home reversion plans, if the homeowner sells less than 100% of the property, the provider will often guarantee to buy the remaining share at any point in the future.
Both products allow you to live in your home provided you meet the maintenance requirements and any rent agreed upon in a home reversion deal.