If we look at equity release 10 – 15 years ago, it was a lot more restricted and there wasn’t the choice of products available like there are now. It was just one-size fits all – here’s a lump sum of money from the equity in your home, based on you staying in your property for life.
There wasn’t just the worry of having no inheritance to leave family or the beneficiaries of your estate, but a real fear of being in negative equity and leaving that burden with your children after you passed away or went into long-term care.
Equity release ended up having a really bad reputation.
Fortunately, there are now so many options and products for customers, many of the big objections have now been mitigated, with most lenders offering a ‘no-negative equity guarantee’ – meaning you cannot owe more than your house is worth.
You can also ring-fence a portion for inheritance and make your equity release portable – nowadays many lenders allow them to be moved over to another property – meaning customers are free to sell and move and even downsize – and in some instances up-size.
Most notably, it’s regulated by the FCA and adheres to the Equity Release Council standards – this means all advisors are obligated to give the best possible advice.
That said, it is a financial product and the “mortgage” connotation, where you don’t have to make repayments or pay any of the compounding interest – until you pass away or go into care – does come at a cost, and of course with many products you’ll owe a far greater value than you borrowed.
For many though the benefits still outweigh the disadvantages, equity release is something that gives people in later life the option to stay in their own home and splash out on home improvements, wipe out a current mortgage, take dream holidays and just generally make better lifestyle choices they can enjoy during their retirement.
With equity release the loan is based on your house value, how old you are and the current state of your health, therefore it still has customers mulling over an array of big questions and objections. Worrying they will not own or still hold the title to their home, as well as the flexibility concern, where their equity release product is not portable.
Also Read: What is Equity Release? And what are the pros and cons?
So what are my Equity Release options?
Home Reversion Scheme
With a home reversion scheme an equity release company buys a fixed share or all of your property from you, with you still having the legal right to continue living in it until you die or move into care.
Say you take a lump sum equally to 20%-25% of your equity value, the lender now waits for the value of that share to increase. Because it won’t get its hands on any cash/return until the property is sold, the amount the company offers you is well below the actual value – so releasing 20-25% you could be surrendering as much as 70% of your property’s value.
Some lenders require a customer to be 60 or 65 years of age, because with home reversion the older you are and the poorer health you have counts towards getting a larger share of the value of your home, with the maximum value in many cases being 60%.
A Lifetime Mortgage is for sure a more popular equity release than the home reversion scheme.
A Lifetime mortgage is a loan that comes with a fixed interest rate, there are no monthly instalments, and your debt is rolled-up on an ever-increasing total. You borrow this lump sum in the form of a mortgage, which is eventually repaid from the sale of your home either, when you die or when you move into care.
The percentage you can borrow is rather age-dependent, typically the older you are the more cash you can release. The amount is approximately between 20% and 50% of the property’s total value.
Lenders guarantee you against negative equity, so you can never own more than your house is worth. Some lenders will let you pay off a bit of interest as you go, however, if you choose to pay off the mortgage when you die with the proceeds of your home, there may not be a lot left.
This is why independent financial advice is absolutely key, and often if you have family or people to leave your property to, downsizing may be the first thing to look at – as an alternative option to free up cash. Or choosing a product where you pay back some of the interest over the term is a great option, this is known as an Interest Paying Mortgage.
Just to give an idea, £65,000 at 6.4% of compound interest over 12 years = approx. £137,000 to repay.
Everyone’s situation is so different, which is why the products are matched to people’s criteria and varies massively depending on your age, how much you want to release and the value of your home.
By speaking with an advisor, you will be able to discuss the right product for you and any potential risks involved with releasing equity, which will enable you to make the right decision. Also, you should seek legal advice and have all contracts looked at, as you would when buying a house, this can avoid nasty surprises like early repayment charges, which can cost you as much as 25%.