What is Equity Release and how does it work?

IF YOU'RE a homeowner and want to enhance your finances, equity release may be an option. You can spend some of your property’s value while still living there – but you’ll need to be 55 or over to apply.

What is equity release?

To put it simply, equity release is the process of accessing some of the money tied up in your home without having to move.

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In order to do this, you need to be a homeowner and aged 55 or above. You can choose to release the money as either a lump sum or smaller chunks over time, both of which are tax-free.

There are plenty of reasons you might want to . According to equity release broker Age Partnership, in 2023 over 28% of people choose equity release to make home improvements, while almost 25% repaid their existing mortgage, which is a requirement of equity release.

How does equity release work?

Essentially, you can unlock cash from your home through equity release without the need to move home. The money you release, plus accrued interest, would be repaid when you pass away or move into long-term care. Whatever is left is passed on to your beneficiaries, but there will be less for your loved ones to inherit if you take equity release. Whether you qualify for equity release, the amount of money you can access and the interest rate you’ll pay all depend on your personal circumstances, such as age and health, and the value of your property.

What are the different types of equity release?

There are two main types of equity release - a lifetime mortgage and a home reversion plan:

1. Lifetime Mortgage

A Lifetime Mortgage is the most popular . It allows you to take out a loan which is secured against your property in return for a cash lump sum or a regular income, whilst allowing you to continue owning 100 per cent of your home. The loan is secured against your property and will reduce the value of your estate and impact funding long-term care. If you decide to sell and move property before then, you may be able to take the lifetime mortgage with you, depending on if your new property meets the lender’s criteria, or you can settle the debt. However, you may have to watch out for any early-repayment charges. There are lifetime mortgage plans available for a wide range of personal situations. You can choose to take the money you release as a lump sum, or access smaller amounts as and when you need it, this will keep the cost of borrowing lower. Interest is rolled up from the point you take the loan, as there are no requirements to make repayments, and any unpaid interest will be added to the loan amount. There are plans that allow you to make voluntary payments on the loan subject to certain limits, as repayments can help to offset the roll up of interest. Early repayment charges may apply above a set value.

All lifetime mortgages that meet the Equity Release Council (ERC) standards come with a no negative equity guarantee, which means your estate will never owe more than your property is worth when it is sold.

This means you won’t pass on any debt to your loved ones. You may also choose to protect a proportion of your property value to pass on as an inheritance for your family. This is something you can discuss with an equity release advisor.

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How do I repay a lifetime mortgage?

There are two kinds of lifetime mortgage.

One means you don’t pay back a penny until the property is sold. This interest-roll up approach means the interest will continue to increase as it rolls up and can build up fast.

The interest will continue to roll up across the lifetime of the plan until you pass away or move in to long term care. If this is much longer than you anticipated, it could end up costing far more by the time the property is sold than you might have expected. The other option is to make repayments towards your lifetime mortgage. You can choose to pay back the interest (and sometimes the loan too) on a monthly or ad hoc basis when you can, subject to certain limits. Paying back some of the interest, or even a bit of the loan itself, will save you money on interest charges, but look out for early repayment charges which will apply above a set value. Whichever way you deal with the interest, drawing down your money in small chunks over a longer period as a regular income rather than one big lump sum can help keep a lid on the interest charges.

2. Home Reversion Plan

A home reversion plan is less common because it involves you selling all or part of your property at less than its market value to a home reversion provider, in return for a tax-free lump sum or smaller regular payments. Similar to a lifetime mortgage, it is secured against your property and will reduce the value of your estate and impact funding long-term care Some plans allow you to stay in your home rent-free for as long as you live, subject to certain terms and conditions. When your home is sold, the proceeds are divided depending on the percentage you and the home reversion provider own. Remember that equity release isn’t suitable for everyone, and home reversions plans are only an option for homeowners aged 65 or over.

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What percentage of money can you access with equity release?

With a lifetime mortgage the minimum loan amount you can access from your home is £10,000. The maximum you can borrow will depend on your age,the value of your property, and your needs for the money. Generally, the older you are, the more you can usually get. You may also be able to borrow more if you’ve got a medical condition. An can give you an estimate of how much equity you can access from your home based on your individual needs and circumstances.

Is equity release right for me?

Advice is required before proceeding with equity release, it’s vital to check the fine print and seek advice from a qualified equity release advisor who will provide you with a personalised illustration to help you understand the features and risks. It’s important to get the right equity release advice. There are hundreds of equity release products available which is why a broker, such as Age Partnership, will search a range of plans to ensure that the plan they recommend is the most suitable for your needs. To ensure you get advice from an authorised company you should use a company that is a member of the Equity Release Council. They have a list of all of their members on their website. Equity release isn’t a decision to be taken lightly, and it’s worth considering other alternatives, such as downsizing your property, before proceeding.

Equity release may involve a home reversion plan or a lifetime mortgage, which is secured against your property and will reduce the value of your estate and impact funding long-term care.

• What is equity release and how does it work?
• What are the pros and cons of equity release?
• How can I fund my retirement?
• Equity release for home improvements
• 4 Little known truths about equity release
• Could equity release be right for you?
• Drawdown equity release plans
• Understanding equity release

Through Age Partnership, initial advice is provided for free and without obligation. Only if your case completes would an advice fee of £1,895 be payable. Other lender and solicitor fees may apply. Age Partnership is a trading name of Age Partnership Limited, which is authorised and regulated by the Financial Conduct Authority. FCA registered number 425432. Company registered in England and Wales No. 5265969. VAT registration number 162 9355 92. Registered address, 2200 Century Way, Thorpe Park, Leeds, LS15 8ZB.