Equity Release is the term used to describe a financial solution that is available in the UK for those who are 55 or over. The term itself covers the financial sector, with Equity Release Schemes, Lifetime Mortgages and Home Reversion Plans being the actual products that are available.
The first thing to note is that equity release schemes, equity release mortgages and lifetime mortgage are all one in the same thing, with the terms being used interchangeably. Each of these products refers to a financial product that releases money for homeowners aged 55 or over. The money is released from the equity in their property, with the amount being based on the property value and the age of the youngest applicant. The amount that can be released starts at around 21% for those aged 55, and increases at approximately 1% per annum up to a maximum of 56% at age 90. The maximum amount available for drawdown will change between providers.
Essentially all equity release schemes operate by releasing a lump sum that can be spent however you wish. Now this may be for home improvements, to supplement ongoing pension income and state benefits, for the holiday of a lifetime, or simply to assist your loved ones such as children or grandchildren.
The options available when releasing equity are either as a maximum lump sum as per the previous percentages, or as a minimum lump sum around £10,000 with the balance being made available as an equity release drawdown facility. Equity release drawdown is usually set to a minimum release of between £2000 and £2500.
After you have released funds, interest is rolled up against the borrowing, generally at a fixed rate of interest for life. This means that you know from outset exactly how the debt will increase over time. For example a lump sum of £10,000 at a fixed rate of 7% will grow to £19672 after 10 years, and £38697 after 20 years once the rolled up interest is added to the original borrowing. Compare this to a lump sum of say £30,000 which would grow to £59,000 over 10 years at a fixed rate of 7%, and the benefit of equity release drawdown option is clear to see.
It is worth noting that different providers offer the option to protect a portion of the property for those wishing to protect an amount for inheritance, i.e. protecting 50% of the property value. This certainly provides peace of mind, but will reduce the maximum amount that can be released from the property as the aforementioned percentages would be based on the reduced amount of the unprotected portion of the property.
Equity Release Lifetime Mortgages really can provide a solution for those that are asset rich but cash poor, and can make the difference between just getting by, or actually living and enjoying retirement and old age.
They’re not for everyone though, and obtaining advice from one of the many equity release advisers in the market is to be recommended. This will help provide you with an appreciation of both the pros and cons associated with Equity Release. For example: –
You can remain living in your property for the rest of your life
There are no monthly payments to be made
The debt is repaid only when the last surviving applicant passes away, the property is sold, or a move into long term care.
No negative equity guarantees ensure you can never owe more than the property is worth
Releasing equity can affect entitlements to means tested benefits.
As interest rolls up over time, the reduction in equity could make it difficult to move home, or downsize.
As the interest rolls up the amount that can be left to your beneficiaries reduces.
Home Reversion Plans
Unlike Lifetime Mortgages where you retain complete ownership of the property, Home Reversion Schemes work on the basis that you can sell anything from 20% to 100% of your property to the Home Reversion Company, with any amount not sold, being held in trust. Home Reversion is only a small part of the Equity Release market, as many people view them as being poor value. With other equity release schemes you benefit from any capital growth in the property as you retain ownership, whereas once you have sold a percentage of your home to a reversion company, any increase in the value of that portion belongs to them alone.