What Are the Benefits of a Home Equity Release Scheme?
The advantage of equity release is that if you have a low pension income, you can borrow against your home without making regular repayments.
You don't normally pay anything back, but the interest is rolled up and added to the loan balance on top of the amount you have borrowed.
When you pass away or go into care, the lender sells the property and uses the proceeds to pay back the debt.
Equity release is one of many options if you're retired and want to use the cash in your home to help a child raise funds for a mortgage on a first home.
You might also consider downsizing or a second charge mortgage as a couple of solutions - depending on your eligibility and whether you have the income to pass an affordability assessment on a new mortgage product.
What Different Products Do Equity Release Companies Offer?
Although not an exhaustive list, there are two primary types of equity release.
- Home reversion plans aren't loans but the sale of your property or a proportion of the home. The provider regards the property as an investment and agrees on a tax-free lump sum, normally significantly below market value.
- Lifetime mortgages are a more attractive equity release scheme and mean you borrow against your equity but retain full ownership.
In both cases, the property is sold when you die or move into care.
Home reversion plans pre-date lifetime mortgages and mean you sell some or all of the home but have the right to live there rent-free for life.
Because the provider can't know how long you will live or if the property will go up or down in value, their offer will be well below market price.
The upside is that the percentage sold doesn't change with the home's value.
For example, if you sold 50% of your home, worth £200,000, it might be worth £300,000 when you go into care a decade later.
The provider owns 50%, so when the home is sold, they get the £150,000 and your beneficiaries the rest.
However, home reversion plans are increasingly less popular since they don't have the features or flexibility of a lifetime mortgage.
Are Equity Release Rates and Lifetime Mortgages the Same?
Lifetime mortgages are a type of equity release product - that means releasing the equity as a lump sum or regular payment but retaining ownership.
Borrowers don't need to pay any capital or interest repayments unless they wish to.
The accrued interest is added to the outstanding balance, which is repaid when the lender eventually sells the property.
This scenario differs from a regular mortgage, where the balance drops over time as you gradually pay back the balance.
Lifetime mortgage debt increases over time until you die or move into a care facility.
Some providers refer to equity release lifetime mortgages as reverse mortgages, and this term is more commonly used outside of the UK but means the same product.
How Do Equity Release Mortgages Pay Out?
There are two options: a lump-sum payment or a drawdown facility.
The latter means that the lender sets a credit limit, and you can choose to take a smaller amount initially and then take more funds when you need them, up to the cap.
Drawdown lifetime mortgages are beneficial because you won't incur any interest on the facility you haven't used, and interest is only charged on the cash drawn down.
How Do Equity Release Companies Receive Payment?
An equity release loan doesn't have a fixed term, and the lender is only paid when you go into long-term residential care or die.
If there are two applicants, this applies to the second surviving partner or the partner still living at home.
When you die, the lender sells the property to clear the debt. Anything left over is passed to your estate to share between your beneficiaries per the instructions in your will.
Many lenders offer rate caps or fixed interest rates - lenders registered with the Equity Release Council must offer lifetime fixed interest charges or variable rates accompanied by an upper limit.
Am I Eligible for Equity Release Rates?
If you meet the following eligibility terms, you are very likely to qualify for an equity release product:
- Age 55 or above
- Own a property outright (or have a minimal mortgage)
- Have a home in the UK
- Live there as your primary residence
The age cap applies to the younger applicant if you apply with a partner. If one person is under 55 and still wants to apply, you need to conduct an equity share transfer to the older person.
Some lenders implement a maximum age limit of 85 or 90 on applicants, but others have no upper restriction and will consider any applicant in a position to make an informed decision.
There isn't usually any maximum age at the term-end because this type of mortgage is open-ended and stays active until you no longer require the property.
What Can I Borrow According to Equity Release Advice?
Normal mortgages consider your income, expenses and deposit value, but a lifetime mortgage affordability assessment works differently.
The lender isn't concerned about your other income because they aren't reliant on you to make repayments, so factors such as your credit score become much less relevant.
Rather, they will look at your health, age and property value.
In essence, an older applicant can borrow more. Maximum LTV caps depend on the lender, but you can usually borrow up to 50% or 55% of your property's value.
What Property Can I Use as Security to Release Equity in House Under 55?
The property, and its perceived potential sale value, are key metrics in an equity release mortgage.
It must be in the UK and your main home and be maintained in a reasonable condition suitable for sale at a later date.
Lenders will, therefore, look closely at the type of property and the materials used during construction before they offer an equity release product.
The minimum value is normally £70,000, and you're less likely to be approved by a mainstream lender if your property is considered non-standard.
A specialist provider may be more suitable if you have a timber-framed house or a property built from concrete rather than bricks and mortar.
Can I Get Equity Release Advice if I Have Bad Credit?
Bad credit isn't nearly as serious an issue for an equity release mortgage - if you're not making regular repayments, a lender won't be concerned about adverse credit.
However, you must still declare this on your application and might potentially pay higher interest rates.
Expert Advice on Equity Release Lenders and the Alternatives to Equity Release
We always recommend seeking independent advice from a broker with equity release expertise before you take out any equity release financing or pick a product to apply for.
As a whole-of-market broker, Revolution can guide you through the options, provide like-for-like cost comparisons, and negotiate rates to ensure you get the best possible deal.
