What is equity release?
Equity release is the process of freeing up the value of your house as cash that you can use now. Available for homeowners 55 and over, equity release enables you to have the money you need throughout your retirement at no risk of financial difficulty for you.
Rather than leaving the money you have invested in your home tied up in the property, you can release it as a lump sum, or even as regular smaller payments to your bank.
Who is equity release for?
You spend a lot of your working life paying for your family home, and it is relief to not have to worry about future mortgage payments once it is all paid off. It certainly helps to not have that outgoing in retirement, but as your house increases in value it can feel constricting to not gain anything from the growing housing market. Yes, you could sell your house and downsize to take advantage of the improved worth of your home, but it is your house that you love – should you be forced to move out just to realise the equity?
Equity release is a way for those homeowners who have put time and love into their house to have access to the cash of the investment they have made without being forced to move out of their home.
Through equity release, you can get the money you want for a comfortable and enjoyable retirement without having to lose the house you worked so hard to obtain. There’s no repayment needed within your lifetime, and no worry of a debt over your head, just a lump sum of money for you to use as you see fit that represents the shrewd investment you worked to realise.
Equity release advice with The Mortgage Hut
The available equity release options
There are two equity release options available from The Mortgage Hut – lifetime mortgages and home reversion.
Lifetime mortgage – a lifetime mortgage is one where you take out a new loan secured on your home that is paid off when you die or move from the property. You do not have to make any regular payments on the mortgage but can choose to do so if you want (to lower the accrued interest, for example). It is possible to ring-fence a percentage of the house in order to provide an inheritance for your heirs, making lifetime mortgages a good way to release capital in your home without adversely affecting your children.
Home reversion – with home reversion you sell a percentage of your home to a provider who then lets you live in the property rent free until you pass away (though you are still responsible for any maintenance and repairs). The percentage of your property sold remains the same even as your house value goes up and down.
The main difference between lifetime mortgages and home reversion is that with the former you agree to pay back a specified sum of money (plus interest), and with the latter you agree a percentage of the house’s final value upon sale.
Lifetime mortgages in detail
Lifetime mortgages are the more common of the two equity release options. Though it is a loan with interest (like a traditional mortgage), if that interest grows more slowly than the value of your home, then a lifetime mortgage will work out a better financial decision that the equivalent home reversion plan. Conversely, if your house value remains static, a home reversion plan offers a better return.
Repayments
You don’t usually don’t have to make any repayments while you are alive, but many lenders will allow you to repay the interest during this time if you wish, and a few even allow you to pay back the capital on the loan. Upon your death, or should you move out or into care, the house is sold at market value and the mortgage (including the interest) is paid in full, leaving you with the balance.
With a ‘no negative equity guarantee’ built in to the lifetime mortgage, if the final sale of the house doesn’t bring enough money to cover the total of the loan, plus any associated solicitor and agent fees, your estate is protected and neither you nor your heirs will have to pay the difference.
Mortgage value
You will typically be able to get a lifetime mortgage up to 60% of your home value. Thus, on a house worth £350,000, you would be able to immediately cash in for £210,000! The top threshold will depend on your age – plus of course, you can take out a lifetime mortgage for a lower value should you want to. Speak to our advisors for help determining the right level for you.
The interest rates on your lifetime mortgage are either fixed for the entire term, or variable with a maximum cap (meaning they can never go higher than this ceiling). This is in line with standards from the Equity Release Council to protect you and your estate.
Typically, interest rates are slightly higher than a standard mortgage, but remain competitive across the market. At The Mortgage Hut we work to get you the right deal and will advise on the current interest rate and market trends to make sure you take out your lifetime mortgage at the right time!
Eligibility
You are eligible for a lifetime mortgage if you are over 55, own 100% of your home and your property is considered viable by the mortgage lender. Examples of property likely to be rejected include:
– Leasehold properties with only a short time remaining on the lease
– Retirement homes forming part of a complex
– Mobile homes, static caravans, house boats etc.
– Flats above the 7th storey of a building
– Buildings made from non-typical materials
– Properties with a history of structural problems (such as subsidence or flooding)
Living in the property
With a lifetime mortgage you have the right to remain in your property rent-free for the remainder of your life, though you must abide to the restrictions of the lifetime mortgage contract. Once the home is no longer your main residence, either because you choose to move on, or because circumstances change (you move into full-time care, for example) then the property will be sold, and the mortgage will be paid off in full. Upon your death the house will be sold, and the estate will repay the mortgage (and all accrued interest) in full.
Lifetime mortgages are designed to take a potential move into residential care into consideration. If this happens, then the house will be sold, and the mortgage paid with no early repayment charges applied.
If you make a separate decision to sell the house and move on, either to another property or to live with a relative, for example, then you may be liable for additional early repayment charges as part of your contract.
It may be possible to transfer your lifetime mortgage to another property if you want to move. In this instance, the new property must be approved as suitable by the mortgage lender and the security for the loan will be transferred to the new house. You will not be able to make a transfer if the property you are moving into would not satisfy the conditions for a new lifetime mortgage (it is a retirement home in a complex or mobile home, for example). In these cases, you would have to sell the house and pay early repayment charges as above.
Getting the money
Once the process and application for a lifetime mortgage is complete, the money is available to you as a lump sum or, at your choice, a number of smaller deposits over the coming years. One advantage of the latter option is that the overall interest accrued is lower – sometimes considerably so.
Home reversion plans – the fixed percentage alternative
With a home reversion, you sell a percentage of your house to the provider for an agreed sum. There is no loan or mortgage – you receive the proceeds of that sale and now own only part of your house.
The key difference between a home reversion plan and a lifetime mortgage is in terms of potentially increased house value.
If your property greatly increases in value then both you and the home reversion provider will benefit from that boost – with a lifetime mortgage, you would still own your whole house (with a loan secured on it), and thus the increase in overall value would benefit you alone.
The inverse is also true, and a home reversion plan is of far lesser worth to a provider if your house decreases in value over the term.
Value of a home reversion plan
Home reversions are typically offered at 20% to 60% of your home’s market value depending on the size of the portion you are willing to sell. This is less than you would get if you sold the property outright on the open market and moved, but with the home reversion you are entitled to remain living in the house and can free up the equity without the displacement and disruption of moving home.
Your age will also play a part in the money you will get for the home reversion, with older homeowners able to command a better rate than younger ones.
Eligibility
Home reversion plans are typically available for those aged 65 or older, though some providers will consider applicants at 60. You must own the portion of the home that you are looking to sell – typically this would mean that you get a home reversion plan when you own 100% of your house, mortgage free, but you can return to the provider at a later date to make a second sale for another cash release of equity.
Like a lifetime mortgage, some homes are excluded from home reversion plans; including homes that form part of a larger complex; houses not made from brick, stone or block; and those with a short leasehold.
You have the right, protected by the Equity Release Council standard, to remain living in the home until you die or move to long-term residential care. The terms of the contract will have to be adhered to, which will include the home remaining your main residence.
If you choose to move early, either because you wish to downgrade or move in with family, for example, then you may have to pay early repayment charges. Moving to another property and transferring the home reversal plan will be possible if the new property adheres to the standards the provider holds for a home reversal. Like other rights, this option to move is part of the Equity Release Council standard.
Maintaining the house
Under a home reversion plan contract, you are required to keep the house in good order, which means keeping up (and paying for) any repairs or maintenance that needs doing.
This is important to hold the value of the house and failure to comply could result in additional fees or a breach of contract. It is important that you factor the cost of your house maintenance into the financial plans you have going forward.
The ‘no negative equity guarantee’
Home reversions come with a no negative equity guarantee, which means that at no point will you or your estate be liable for paying any additional amounts on the sale of your house should there be a fall in value. This includes solicitor’s and agent’s fees and protects both you and your heirs being responsible for paying for the provider’s loss in any instance.
Equity release is a great way to get the money you have invested in your home out of the bricks and mortar and into your bank account, but it’s important that you understand it fully before signing a contract.
1. You may be able to consider a traditional re-mortgage in place of equity release. A range of different interest rates could make this a better financial alternative. Speak to our specialist re-mortgage advisors to find out more.
2. Equity release is not without additional costs. Arrangement fees could run to £3,000 in some cases and you will be expected to pay all legal expenses. You will not be able to use your house as collateral for other financial products once it has been utilised for equity release.
3. Many homeowners rely on the equity in their property to pay for late-life long-term care bills. If you have already released the equity, then you will not be able to do this.
4. Undoing an equity release plan, whether a lifetime mortgage or home reversion, can be quite costly and complicated. Consider all your options before making a final decision.
5. Equity release is tied to the homeowners – the named applicants on the lifetime mortgage or reversion plan. If the house isn’t in joint names, then your spouse or partner may have to move out and the property sold upon your death. Be sure to take out your equity release contract as a pair if you both live in the house.
6. Equity release will affect the value of your overall estate when considering your family’s inheritance.
Equity release isn’t the right option for everyone. Many people, for example, are happy to immediately downsize their property as soon as the family is all grown and moved away, swapping their five-bedroom semi-detached home for a two-bedroom bungalow.
For them, this downsizing works effectively as equity release, giving a large cash injection into their bank account amounting to the difference in price between the 5-bed and the bungalow.
Sadly though, moving to a new house means leaving behind many memories and potentially losing contact with friends and even family. As you approach your older years, keeping those connections becomes ever more important.
Equity release provides a way to get the cash you need from your home without ever forcing you to move away and start a potentially frightening new life elsewhere.
If you are looking to fund your later years without losing your home, then equity release is often the perfect option. Do consider all your plans and whether you might want to stage the equity release rather than take a huge lump sum with all the temptation that brings!