Equity Release Explained

Feeling asset rich but cash poor? Worried that your pension alone won’t support your preferred standard of living? Then it is likely that you may be considering entering into an equity release scheme to support your finances.

What is Equity Release?

Equity release is an often misunderstood or altogether overlooked financial product which enables you to release the equity (cash) tied up in your home. A range of products available to those over the age of 55, equity release schemes have no fixed term and allow you to remain living in your home for the rest of your life, unless you are required to move into long term care.

When considering Equity Release

Freeing up a lump sum of cash from the equity built up in your home can help fund retirement in the lifestyle you desire. It can also be a consideration for tax planning reasons.

Yet, while receiving a lump sum of cash sounds great, opting for equity release can be a big decision that shouldn’t be taken lightly, which is why it is recommended you seek advice from a financial adviser with a qualification in equity release before going ahead with entering an equity release scheme. Browse our list of equity release advisers to find one in your area.

How does Equity Release work?

Equity release schemes typically fall into two broad types – lifetime mortgages and home reversion schemes. While equity release schemes are only available to those over the age of 55, it is worth reviewing the details as different limits can apply to different schemes. When searching for equity release products, you may come across sale-and-rent-back schemes. Be wary of these as they are not a type of equity release.
 

Lifetime Mortgages

Lifetime mortgages, or “roll-up” mortgages as they are sometimes referred to, allow you to take out a loan secured against the value of your home. Typically, you can borrow around 20% to 50% of the value of your property, depending on the lender and your age, at a fixed interest rate of between 6% to 8%.

However, unlike traditional mortgages, you are not required to pay anything back until you die, move permanently into long term care or your house is sold. Instead, over the period of your lifetime mortgage, the interest is compounded either monthly or annually and added to your loan, or “rolled-up”, and the loan plus interest is then repaid when the house is sold.

The downside of this type of scheme is that your debt can accumulate quickly and you may find yourself with insufficient equity should you decide to move to a different property, or require equity for other purposes. This can be a potential pitfall, especially with the recent decline in house prices on the property market. Many lenders however, offer a “no negative equity guarantee”, which ensures you can never owe more than your house is worth.
 

Home Reversion Schemes

Home reversion schemes involve selling part of, or all of your property to a reversion company in return for a lump sum of cash. When you sell your share, you will not receive the full market rate, instead between 20% and 60% is the typical going rate, though this can vary depending upon your age and gender. While someone else will now own part of, or all of your home, you will be allowed to continue living in it until you die or move out.

When your home is sold, the reversion company takes it’s share at the full market rate. However, the advantage of home reversion schemes are that they provide certainty over exactly how much of your property you will still own, as well as providing a lump sum of cash which could then be invested to accrue a greater rate of interest.
 

Choosing the right scheme

You don't have to take advice before choosing an equity release scheme. But the FSA caution that this is a complex area and you should really seek independent legal and financial advice if you are uncertain about anything.
 
It is also worth keeping in mind that, if you choose not to take advice and the scheme you choose turns out to be unsuitable, you will have less grounds for complaint.