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Equity Release

Tamires Criscio
Tamires Criscio
  | Edited by Tom Church
Updated 13th August 2021

Are you curious about equity release and wondering if it’s a good option for you? Latest Deals is here to help you understand what equity release is and how to use it. If you are over 55 years old and already own your house but are struggling financially and are worried about your retirement, equity release could be for you. Learn more about it.

What is equity release?

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First, you need to understand what equity is. Equity is the difference between your property's value and what is left to pay on your mortgage if you have any. 

If you have paid off most of your mortgage, you can consider an equity release plan. Equity release allows you to release money from your house without having to sell it or move to another property. 

IMPORTANT NOTE: Before going through the equity release process, it's essential to talk to a professional financial advisor because this is a big decision that comes with risks. Only a professional financial advisor will advise you if equity release is for you.

How does equity release work?

An equity release plan will give you access to one lump sum, or monthly payments in exchange for part of your property. 

What are the different types of equity release?

There are many types of equity release plans. The two most used are: 

Lifetime mortgage

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This is the most common type of equity release plan. In this plan, you raise money by remortgaging around 20 to 50% of your property. The older you are, the more you can release in this case. 

IMPORTANT NOTE: Lifetime mortgages come with compound interest, which means that interest is applied over interest, increasing your debt much quicker, which usually can end up to a maximum of the property's value. 

Therefore, for example, you can get a lifetime mortgage for 50% of your house, but when you die or move to permanent residential care, your mortgage could have increased to 100%, leaving you with nothing when they sell the property to pay off the mortgage. In this case, if you die, you won’t leave an inheritance. If you move to permanent residential care, you need to make sure you will be able to afford it because you won’t make a penny from your property’s sale. 

To avoid that, you can make repayments of both mortgage and interest. A lifetime mortgage is more expensive than other types of mortgage. Learn more about them here. 

How do I repay a lifetime mortgage?

You don't have to repay a lifetime mortgage until you die or move to permanent residential care. The loan is usually repaid by selling the property. 

If you want, you can repay some of the money you borrowed before you die or move to permanent residential care. This reduces your debt and will increase your equity. 

There are different ways you can make the repayments, you can make partial payments, monthly interest payments or pay back the full loan and interest, but in this case, you also need to pay an early repayment charge. 

Home reversion plan

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Another popular type of equity release plan is the home reversion plan. In this plan, you raise money by selling part or all of your house while you continue living there until you die or until you move to permanent residential care.

How do I repay a home reversion plan?

You don't have to repay a home reversion plan because you have sold part of your property instead of borrowing money. 

IMPORTANT NOTE: In this case, the equity release firm will buy your property for much cheaper than the market value of your property, something around 60 to 30% of its market value. The older you are, the more money you can get, and the same applies if you have poor health. 

Who can get equity release?

Only certain people can get equity release, and they need to meet certain criteria. Some points of this criteria are: 

  • To be at least 55 years old for a lifetime mortgage. 
  • To be at least 65 years old for a home reversion plan. 
  • Own a residential property in the UK and live in it. 
  • The property needs to be in good condition and over a certain value. 
  • Ideally, you should not have dependents living in the property, or if there are dependents, they need to sign a waiver confirming that they don't have the right to reside there if you die or move to permanent residential care. If you have a partner, the best option is to have both names on the equity release plan. 

Finding an adviser for equity release 

As mentioned before, it is essential to look for advice before starting the equity release process. You can find help with the Money Advice Service, the Equity Release Council and the Personal Financial Society. 

IMPORTANT NOTE: We recommend that you talk to more than one professional financial adviser before making a decision. 

What are the advantages and disadvantages of equity release?

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Latest Deals has separated some of the advantages and disadvantages of equity release. Please keep in mind that you still need to talk to a professional financial adviser before deciding.

Advantages of Equity ReleaseDisadvantages of Equity Release
You can get a lump sum or monthly payments to increase your monthly income while still living in your home. If most of your assets are invested in your property or if your property is your only asset, this can be an excellent way to improve your lifestyle and use some of the money you have instead of leaving it as an inheritance.Getting this extra money can reduce your entitlement to benefits. 
You can still sell your house and buy a new one as equity release is transferable, as long as the new property meets the criteria. If you get care at home funded by the local council, you might be charged more or even have to pay if you didn't pay in the past. 
Depending on the equity release plan, you could get a tailored interest rate. Even though you could get a tailored interest rate, this build-ups with time because you will pay interest over interest. 
You can release equity of only a percentage of your house. The means you can leave the rest as an inheritance. Keep in mind that this will reduce the amount you can borrow. Even though you can leave a part of your property as an inheritance, you are still reducing the amount available to your beneficiaries. 
You'll remain a homeowner, retaining full legal ownership of your home until you die or move to permanent residential care. Equity release is a lifetime commitment. If you get a lifetime mortgage or a home reversion plan, you will be in “debt” until you die or move to permanent residential care, and reversing this process can be time consuming and expensive. 
There is a “no negative equity guarantee”, meaning that you won’t owe more than your property’s value. If you want to pay back the entire loan and interest, you must pay an early repayment charge. 
Your money will be better off invested in a property than sitting in a bank account. Properties tend to value more over time and money the opposite due to inflation. Only get an equity release plan if you need cash in hand, otherwise, you could be losing money.
You will need to keep your property in good condition, pay for all its maintenance and get insurance. 

IMPORTANT NOTE: These advantages and disadvantages apply mainly to lifetime mortgages. 

What to do before considering equity release

Downsize first 

If you already own your house but are struggling financially, you can sell your house and buy a cheaper one in cash. You can use the difference to afford a better retirement plan and increase your monthly income. 

Work part-time

If your retirement income is not what you expected, you can still keep working but part-time to supplement your income. It's probably not what you had in mind, but it can be an option. Learn here how to plan for retirement and here about pension credit. 

Maximise your savings

Are your savings working for you? Make sure you have your money invested correctly. If you are not sure, ask for advice from a professional financial advisor. 

How do I set up an equity release plan?

To set up an equity release plan, you need first to talk to a professional financial adviser. A mortgage broker can also help you to decide if equity release is for you. 

What does it cost to set up an equity release plan?

There are some costs related to setting up an equity release plan. They are valuation fees, legal fees, financial advice fees, mortgage broker fees, mortgage arrangement fees, conveyancing fees and completion fees. 

How equity release works - Step by step process 

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If you are thinking about applying for an equity release plan, follow this easy step by step process: 

Step 1: Get advice

The most important step is to get advice. We recommend talking to a professional financial adviser and also a mortgage broker. These professionals will be able to help you understand how equity release will affect your financial situation. 

You can find help with the Money Advice Service, the Equity Release Council and the Personal Financial Society. 

Step 2: Valuation and offer

If you conclude that equity release is for you, your adviser will help you with your equity release application with the best equity release firm available for your case. This firm will need to be accredited by the Financial Conduct Authority (FCA) and the Equity Release Council

The equity release firm will arrange a valuation of your property. Once this is done, they will make you an offer. 

IMPORTANT NOTE: You will need the help of a conveyancer solicitor to make sure all the paperwork is done correctly. 

Step 3: Receiving the money and repayments

If you accept the offer, your conveyancer solicitor will first pay any mortgage that is left to pay and then transfer you the rest of the money. You can receive the money as one payment or as monthly payments. 

Equity release tips

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TIP#1 Always take advice first

Before starting an equity release process, always take advice first. You should talk to a professional financial advisor. 

Check these websites to find advice: 

TIP#2 Always use an accredited provider

To avoid any problems in the future, use an accredited provider. 

Check these websites to find an accredited provider: 

TIP#3 Choose the right equity release plan for you: Lifetime Mortgage X Home Reversion Plan 

Depending on how much money you want to leave as an inheritance, you should choose the best option for you. Only a professional financial adviser can tell you with certainty what is the best plan for your circumstances. 

TIP#4 If you are using a lifetime mortgage, be careful with the compound interest

With the lifetime mortgage, you need to be very careful with the compound interest. To avoid paying too much interest, you can either take out smaller loans over time or pay the interest off as you go. 

TIP#5 Check how equity release can affect your benefits 

If you are receiving benefits, they can be affected. Make sure you check this first, especially if you receive pension credit. 

TIP#6 Choose a product with a "no negative equity guarantee"

In this case, you will know for sure that you won't be able to owe more than your property's value and will be debt-free when the property is sold. 

FAQ 

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