Equity release means making use of the money that is tied up in your home without having to move out of it. There are a number of financial products that are designed to provide release the equity in your home and they have the same principle in common: the money you receive will be secured against your home in the form of a loan or partial sale of ownership.
Equity release is only available to people aged 55+ (often 60 or older), and it is designed for people who have small mortgages, or no mortgages, on their homes.
Depending on the type of equity release product you use, you will be able to take the money from your home as a cash lump sum or as income that will be paid on a monthly basis. You also have the option of using ‘Drawdown’ which enables you to take money from your home at different stages, thus reducing the overall interest charge made on your loan.
Equity Release Versus Traditional Mortgage
People aged over 60 can find it hard to obtain a traditional mortgage and so equity release products can be used to satisfy this market because they do not require any form of repayment and you can continue to live in your home.
However, the amount of money that is repaid using an Equity Release Lifetime Mortgage may be far greater than the original loan because of the way that interest is compounded on the loan.
Taking out an equity release scheme is regarded as a long term course of action and so you carefully consider all your options before committing to it. You should receive independent financial advice and, preferably, consult with member of your family or other beneficiaries of your estate.
During the 1980s and 1990s, equity release acquired a poor reputation as a result of misselling and under-regulation. However, this has changed and equity release is now one of the most regulated financial products in the UK. Advisers and providers of all types of equity release schemes are regulated by the main industry regulator, the Financial Conduct Authority (FCA) which strives to ensure the industry operates to the benefit of the consumer.
Equity Release Advisers
Equity Release Advisers must be authorised and regulated by the Financial Conduct Authority (FCA), and are required to have one of the following qualifications in order to be able to provide you with the necessary recommendations:
- Certificate in Equity Release (CER) awarded by the Chartered Insurance Institute
- Certificate in Regulated Equity Release (CeRER ) awarded by the Institute of Financial Services
The Equity Release Mortgage Advice & Practice Certificate (ERMAPC) used to be awarded by the Chartered Institute of Bankers in Scotland but it was discontinued some time ago.
No Negative Equity Guarantee
Equity release products give you the right to continue to live in your home until you need to move into care or die. Many schemes are also transferable which means you can move into a smaller property yet continue with the plan.
There are two scenarios where your loan may become worth more than the home and therefore lead to negative equity:
- The value of your home has fallen in value by a large amount since the equity release product was taken out.
- The value of the loan has exceeded the value of your home which can occur when the interest rolls-up each year over a long period.
You should ensure that any equity release product you take out includes a ‘No Negative Equity Guarantee’ which means that you will never owe more than your home is worth; in the event of your death, there will be no outstanding debt to pay off.
Equity Release Implications When You Die
Using your house as security for an equity release loan can mean that there will be little or no residual value in it when you die. It is therefore important to ensure that any potential beneficiaries of your estate are aware of this, and you should try to involve them in discussions with an equity release consultant.
Types of Equity Release Schemes
There are two types of financial products that are designed to enable you to release the equity in your home and they work in different ways:
1. Lifetime Mortgages
Lifetime Mortgages allow you to borrow money that is secured by the equity in your house. You can choose between taking your money as a cash lump sum or in the form of income which is usually paid monthly.
Interest is charged on the total sum of money you borrow but you do not have to make any repayments because the loan is paid off when you die or sell your home.
Find out more about the different types of Lifetime Mortgage.
2. Home Reversion Plans
Home Reversion Plans allow you to sell a share in your house in exchange for a cash sum. This means that you know exactly what portion of your property will not included in your estate when you die and your home is sold.
The amount of money you receive from your Home Reversion Plan will therefore be less than the amount that is sold. For example, you may receive £20,000 from a Home Reversion Scheme where the lender has bought a £40,000 share your home.
Find out more about Home Reversion Plans.