How does equity release work?

If you’re wondering how Equity Release works and whether it’s a good idea, you’ve come to the right place.

If you want to release money from your home and still live there, Equity Release might be something you’ve looked into. Lots of people over 55 take out Equity Release agreements and 2021 is set to be no different, with rates remaining low with a range of UK lenders.

If you’re wondering how Equity Release works and whether it’s a good idea, you’ve come to the right place.

This guide answers those questions so that you can use the knowledge to find the best Equity Release lender for you.

If you’d rather speak to an advisor, call 023 8098 0304 or make an enquiry and we’ll have the right expert contact you with the information you need about Equity Release.

What is Equity Release?

Equity Release is a finance agreement between a homeowner and a lender, that is usually payable upon the death of the homeowner via the sale of the property.

There are lots of different policies which each vary in terms of what they offer and how the repayments can be made.

For example, some homeowners decide to take out a policy that allows them to make interest payments to reduce the overall debt whereas others prefer to take out Equity Release with no repayments at all.

The money borrowed or “released” from your property, will need to be repaid when you pass away or move into long term care

How does a lifetime mortgage work?

  • Must be a homeowner over 55
  • Borrow a portion of your home’s value at a rate of interest
  • Traditional lifetime mortgage plans don’t typically have repayments so the interest compounds can add up quickly
  • A drawdown lifetime mortgage lets the borrower make repayments
  • This type of agreement could also allow you to release money gradually so that interest doesn’t accumulate and you only borrow what you need up to an agreed amount

Lifetime mortgage compound interest explained

Lifetime mortgages that have the option of no repayments, as mentioned, can be costly. This is a concern for lots of homeowners who wish to access the equity they’ve built up in their home but are mindful of leaving their loved ones enough money for an inheritance.

Let’s look at an example of a lifetime Equity Release mortgage balance over the years. The homeowner has a property valued at £200,000 and borrows £50,000 at a rate of 5%, without making any repayments.

 

Year     Interest Charged     Total Owed
1 £2,500 £52,500
2 £2,625 £55,125
3 £2,756 £57,881
4 £2,894 £60,775
5 £3,039 £63,814
6 £3,191 £67,005
7 £3,350 £70,355
8 £3,518 £73,873
9 £3,694 £77,567
10 £3,878 £81,445

When the time came to sell the property, it would be independently valued and then sold so that the debt is settled.

If the property was sold at £200,000 during the tenth year of the agreement, this would leave a total of £118, 555 to be shared between any beneficiaries, and resolve any other debts that were secured against the property.

How does a home reversion plan work?

  • Must be a homeowner over 65
  • A lender pays a lump sum for a portion of your home at a below-market rate
  • When the property is sold, either on your move into residential care or death, the proceeds are split between your beneficiaries and the lender who acquires their share
  • If the value of the property rises or falls, so does the amount of money the lender receives as, for example, a 25% share of a property valued at £200,000 is less money than a 25% share of a property that has risen in value and is subsequently valued at £220,000.

What are the pitfalls of Equity Release?

Equity Release can be an expensive way to borrow money but the ability to not make repayments (until you die or move into long-term care) is often why many homeowners decide to go ahead. There are lots of reasons why someone might want to access cash and not have to worry about the repayments, especially if the equity built over the years is substantial.

For some, accessing just a small portion of their home’s equity is enough to fund their retirement, a dream holiday, a car purchase or perhaps a sum to gift to a grandchild who is a first-time buyer.

Nevertheless, borrowing more money than you need is something to carefully consider as this can be an expensive form of borrowing versus alternative forms of lending.

If you borrow a big chunk of money at once as opposed to borrowing as and when you need it, interest can compound as it has longer to accumulate, making some types of Equity Release like Lifetime mortgages, costly.

Equity Release drawdown mortgages allow borrowers to release cash over an agreed period of time and includes a pre-agreed reserve. This allows you to release a smaller amount of equity initially and then access more when you need it in the future, to avoid interest rolling up.

How much does Equity Release cost?

The cost of an Equity Release agreement will vary depending on the amount of equity you want to release, the interest rate your lender charges and the cost of the arrangement fee including application fees, fees for legal work and surveyor fees.

Cost is an important consideration and understandably, you’ll want to get the best deal but to find the best Equity Release package overall, work with an Equity Release advisor.

They’ll ensure you use a company that’s a member of the Equity Release Council as doing so protects you in the event of your home falling into negative equity.

Ensuring you have a no-negative equity guarantee, is just one of the many services that our experts provide.

They scour the UK market and compare lenders, looking at interest rates, terms and conditions, incentives and customer reviews, all to locate an ideal lender for you, based on the information you provide, either by phone, email or via a face-to-face appointment.

Can Equity Release affect my benefit entitlements?

If you access some of the equity built up in your property as cash, your gross annual income during the year you drawdown will increase which can affect your entitlement to lots of means-tested benefits.

An example of this would be care home funding which is reliant on local councils assessing the income and savings of applicants to make a decision about whether they can provide funding for placements in local care facilities.

In the UK, if you have savings worth more than £23,250, you aren’t entitled to help with the cost of care from your local council.

Even if the money you access through Equity Release is intended to be spent over a long period of time, having a lump sum sitting in the bank could result in you missing out on funding that you may need in the future.

That’s why you should always seek financial advice as well as guidance from an Equity Release broker who can calculate your entitlement for benefits with different Equity Release amounts.

What benefits can Equity Release affect?

  • Pension credit
  • Union credit
  • Housing Benefit
  • Council Tax Reduction
  • Cold Weather payments

What are the alternatives to Equity Release?

Downsizing in 2021

Selling your property and buying a cheaper one could help you to avoid applying for Equity Release and depending on your circumstances and property, could be a cheaper alternative. Hypothetically, the excess money from the sale could be used to fund your retirement or spend however else you wish.

Departing from your much-loved home can feel daunting but it could also be an opportunity for a new chapter of your life, in a more manageable building.

Stairs might not be a consideration now but they may be in the distant future and moving to a smaller property earlier could save you the hassle and upheaval that comes with moving.

Smaller properties require a lot less maintenance and cleaning and can be much more cost-efficient to run too.

Before making a decision about downsizing instead of applying for Equity Release, always take advice from professionals and people around you that you trust. Our Equity Release advisors can be contacted on 023 8098 0304 or by making an enquiry via Your Funding Expert website.

Remortgaging in 2021

Remortgaging instead of releasing money through Equity Release could also be cheaper depending on the circumstances. A remortgage, either with your current lender or a new one, could allow you to borrow against the equity you’ve built up in your home by taking out a new mortgage that is larger than your existing mortgage.

For example, If you owed £50,000 to your existing mortgage lender, but you get a new mortgage of £60,000, you would be left with £10,000. This could be used to spend as you wish, (once any fees like arrangement fees have been settled).

Interest rates remain low in the UK for remortgages in 2021, however, they should still be a consideration to bear in mind. Like an Equity Release agreement, a remortgage is charged with interest, which can accumulate over time.

The term length of your remortgage can affect this and shorter terms naturally mean less interest builds up.

Is Equity Release a good idea?

It’s a big financial decision that can affect you in the long-run but it’s a viable option for hundreds of homeowners who want to access cash.

That being said, it’s always best to weigh up your options and carefully consider a range of lenders, preferably with an advisor who can explain the pros and cons and highlight the key differences between your choices.

Should you apply for Equity Release?

You should never feel rushed or pressured to sign an agreement and working with a reputable broker can help you to avoid this by:

  • Thoroughly checking and comparing lender agreements
  • Providing you with the pros and cons of each
  • Giving you plenty of time to make a decision you feel comfortable with

Contact an Equity Release broker

Our professionals are ready to help you with your search for Equity Release whether it’s for home renovations, to help a loved one onto the property ladder or to fund your retirement.

Talking through your options can widen your net and help you avoid missing out on a deal that you otherwise might not have been able to access without a broker’s help.

Call 023 8098 0304 or make an enquiry for more information or to request a callback.

Equity release

FCA disclaimer

*Based on our research, the content contained in this article is accurate as of the most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The information on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs.

Some types of buy to let mortgages are not regulated by the FCA. Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.

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