Equity releases can help you access tax-free cash from your home, but there are a few things to think about before applying.
Our mortgage partner doesn't offer equity release products - this guide is just for information.
Regulations require that providers of equity release products offer advice before arranging. You can also seek independent financial advice.
What is an equity release mortgage?
Equity release allows you to free up some of the cash tied up in your home.
Designed for older borrowers (over 55s), you can use the money for health care, home renovations, or to support your family.
But there are risks associated with securing debt against your home so you should always speak to an equity release specialist before making any decisions.
What are the different types of equity release?
There are 2 main types of equity release products:
- Lifetime mortgages
- Home reversion plans
Lifetime mortgages
Lifetime mortgages are the most common type of equity release. You can get the money either as one lump sum or smaller sums.
To apply for a lifetime mortgage, you need to be over 55 and be a homeowner.
There may also be a minimum loan amount, ranging from £10,000 to £45,000 depending on the lender.
With a lifetime mortgage there’s a fixed interest rate on the loan. You don't have to pay the interest amount - you can let this build up. But you may be able to pay some of it during the loan.
The money that you owe is normally repaid when you die or move into long-term care.
If there's any money left from the sale of your house, it should go to your family or main benefactor. Many lifetime mortgages also offer a no negative equity guarantee. This means the lender promises that you don't have to pay back more than the value of the home, even if the mortgage debt is larger.
Home reversion
Home reversion is when you sell a part, or all of your home to a company for a lump sum or regular income payments.
Normally only available to those over 65, you usually get less than the market value of your home when you do this.
This is because the provider can’t get the money until the house is sold, which can only be done if you go into permanent care or after you die.
Companies also don’t know how much they’ll get back. This makes it a higher risk, which is another reason why they buy a portion of your home for far less than its current market value.
If you choose to move home after you've done this, you'll also need to buy the property back from the company at market value, which will likely be more than you sold it for.
How does equity release work?
You have to first get advice from an equity release specialist. They’ll be able to lay out the benefits and risks for your personal situation.
If you decide to proceed, then you can apply for an equity release and see what options you get back from a lender.
You’ll then go through these terms with a solicitor in great detail before signing or agreeing to anything.
Who qualifies for equity release?
For lifetime mortgages, you normally need to be over 55, while for home reversion products, you need to be over 65.
If you haven't repaid your current mortgage, you may still be eligible for equity release. But normally you must use the money you get through equity release to repay it.
What costs are involved in equity release?
Like with a standard mortgage, there are expenses to factor in when getting an equity release:
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Arrangement fee for the product you pick
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Legal fees to cover the cost of your solicitor
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Valuation fees
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Interest rate which determines how much will need to be repaid
What are the pros and cons of equity release?
Pros
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Tax free money to spend as you want
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You can still live in your home until you die or move into long-term care
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No negative equity guarantees with lifetime mortgages
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Option to ring-fence some of your home value to leave as inheritance
Cons
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Less money for your benefactors when you die
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If you have benefits or financial support, it could affect the amount you get
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It may be tricky to move home if you opt for home reversion
How do equity release interest rates work?
With a lifetime mortgage, there's a fixed interest fee applied to the loan.
You can let the interest build up, to be repaid when the loan is. Or you can choose to pay off some of the interest earlier.
You may want to pay off some of it earlier, to limit the amount owed when the loan is repaid.
What alternatives are there to an equity release?
An equity release isn’t the only way for you get a lump sum of money. And what’s key is that you take the time to weigh up your options before making any decision.
Here are some other options that exist that you might want to consider:
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Downsizing your home
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Retirement interest-only mortgages
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Borrowing from a credit card or a personal loan
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Renting out a room in your home
Who are the best equity release companies?
There are lots of companies that offer equity release but some of the most well-known are:
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Age Partnership
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Legal & General
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Aviva
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SunLife
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LV
Speaking to a specialist equity release broker who can compare options from several companies is usually the best way to get a product that matches your needs.
Is equity release safe?
There are risks associated with equity release. You are securing a debt against your home, so you should make sure to get advice from an equity release specialist.
They can make sure to look at your financial circumstances and recommend the right product for your circumstances.
Can I sell my home if I have equity release?
If you have a lifetime mortgage, then yes you can sell your property to repay off the loan. However, be aware of any early repayment charges (ERCs) that may apply.
However, if you've opted for a home reversion plan, this isn't the case. You've already sold your property (or part of it) to a company in exchange for cash. So you would need to buy this back, and it's usually more than what you sold it for.
Can I end a lifetime mortgage early?
Yes, you can choose to repay the loan early, but be aware of any early repayment fees that apply. This would normally be done by selling your home and paying off the loan and any interest due.
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