Here we explain what equity release is and the types of equity release schemes available in the UK today.
How does equity release work
You’ve probably heard of it, but may be wondering what is equity release. Very simply, it’s a way to access some of the money tied up in the value of your home, whilst continuing to live in it until you die or move out permanently.
So, if you find yourself with equity in your home but limited cash to live as you’d like in your retirement, it’s a potential solution. The extra money it gives you could be used to live more comfortably, make home improvements, help children or grandchildren with a mortgage or university fees, it’s up to you - the money is yours to spend as you wish.
Here’s a simple introduction and the most popular schemes available in the UK today.
What is ‘equity’?
The equity in your home is simply the difference between the market value of your property and any outstanding mortgage or other debt secured on it.
Over recent years, property values in much of the UK have gone up significantly and many homeowners, particularly those who bought their property some time ago, could now find themselves with a decent amount of equity.
Here are a few examples:
- If your home is worth £350,000 and your mortgage is paid off, you would have £350,000 equity
- If your home is worth £250,000 and you have an outstanding mortgage of £50,000, you would have £200,000 equity
- If your home is worth £150,000 and you have an outstanding mortgage of £20,000 and an additional secured loan from your mortgage lender of £5,000, you would have £125,000 equity
You can usually release somewhere between 20% and 50% of the equity in your home. The exact amount will depend on your age and personal circumstances.
Types of equity release
There are two main ways to release the equity tied up in your home without having to move. You can either borrow money against the value of your house with a lifetime mortgage or receive cash in return for selling part or all of your home through a home reversion scheme.
1. What is a lifetime mortgage?
Open to UK homeowners aged 55 and over, a lifetime mortgage is a loan for an agreed amount of tax-free money secured against your home.
You continue to own the property and don’t make monthly repayments. Instead the money you borrow is repaid plus interest when the house is sold, which is usually when you die or go into residential care. If there is any money left over once the loan has been repaid, this will go to your estate.
Lifetime mortgage considerations
House price fluctuations
As house prices fluctuate you can’t predict how much, if any, of your home’s value could be left to go to your estate. If this is a concern, look for lifetime mortgages that guarantee to provide an inheritance to your family
Lifetime mortgages usually have a fixed rate of interest, although variable rate products are available. It’s important to understand that the interest can build up quickly because each year interest is calculated based on the loan amount plus the interest added in previous years. In other words, you pay interest on the interest. However, some lifetime mortgages do let you pay off some of the interest each month.
Just like a conventional mortgage, if you decide to pay off the loan early you may incur early repayment charges.
Types of lifetime mortgage
There are different types of lifetime mortgage and a range of features to choose from including:
- Drawdown – Allows you to take the cash in stages as it suits you
- Enhanced – Allows you to release more money from your home if you have a qualifying health condition
- Protected – Guarantees an inheritance for your family
- Combined – A combination of these options to tailor your plan to current and future needs
- Interest payment plans – Pay off some of the interest that builds up over the lifetime of the loan
2. What is a home reversion scheme?
Open to UK homeowners aged 65 and over, a home reversion scheme lets you sell part or all of your home in return for a tax-free lump sum or a regular income. The price paid by the scheme provider is below market value because you also get the right to stay in your home rent-free until you die or move out permanently.
At this point, your home will be sold and you or your estate will receive the sale proceeds, less the percentage share you sold to the equity release provider originally.
Home reversion scheme considerations
House price fluctuations
If the value of your home has risen by the time it is sold, you or your estate will only benefit from the increase in your share of the property.
If you only sell part of your home, you’ll know exactly what percentage of your home’s value will be left to your estate on your death.
If you die or move out permanently soon after taking out a home reversion plan, you may lose out because you have been paid below market value and not reaped the benefit of living rent-free for a significant period of time. However, some plans do provide some protection against this.
What’s the difference between the two schemes?
There are two major differences between a lifetime mortgage and a home reversion plan:
With a lifetime mortgage you still own 100% of your home. With a home reversion scheme, you don’t because you sell all or part of your home
With a lifetime mortgage, compound interest builds up over the years, increasing the amount owed when the property is eventually sold. With a home reversion scheme, there is no interest to pay or repayments to be made. The provider allows for interest in the price they pay for the share you sell them and you continue to live in your home rent-free
All types of equity release product will reduce the value of your estate and could affect your eligibility for state benefits.
Is it a good idea?
Today, not only are equity release schemes, providers and advisers regulated by the Financial Conduct Authority but the products themselves offer assurances to the customer.
Most providers are now members of the Equity Release Council and abide by its standards and principles. This includes a ‘no negative equity guarantee’, which makes it impossible to ever owe more than the value of your home and the freedom to transfer your scheme to another property without penalty. Always check the ERC register, to make sure the person or company you’re dealing with has signed up to this industry body’s code of practice.
What to think about
As with any financial commitment related to your home, it is a big decision. As well as providing a roof over your head, it’s also a valuable asset and may form a significant part of your estate. There’s a lot to consider, so it’s important to get professional advice from a specialist, a solicitor or both before deciding if it’s the right option for you.
SunLife offers a range of straightforward and affordable products including over 50s life insurance, funeral plans, life insurance, equity release, pet insurance, home insurance, car insurance, ISAs and Will writing services