In This Article
Introduction
The reason this guide has been put together is because I feel an obligation as an Equity Release adviser to create a fully comprehensive document so any person considering this type of transaction can gain a deeper understanding of what’s involved including the pros and the cons of equity release in the UK. I always want any clients of mine to have a full understanding to mitigate disappointment and issues in the future.
In recent years the number of people using their home to create an income, release a lump sum, pay off their term mortgage switching to lifetime mortgage and so on has increased, this does not mean that it’s a perfect solution for everybody that qualifies.
Taking an equity release product is a big decision and once it has been made you can’t reverse the process therefore knowing what’s involved is of the highest importance. This may be a decision you want your family involved in and if that’s the case, I would encourage you do so. Let them read the documents, know the charges, terms, penalties, etc so there are no surprises later on.
I hope the pros and cons of equity release is useful in providing you with an increased understanding before putting anything in motion.
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Important – Please Read
The important thing to stress here is although I have put this together as a qualified adviser, everything in this document is for guidance purposes only and not to be taken as advice.
The reason for this is during the process, it’s an advisers job to learn your individual circumstances, needs and priorities and then if possible, to match them to one of the many products available. Please also bear in mind that although the information is true of today, changes are happening constantly in this industry so what is accurate today may not be in the future.
It is not possible to ethically make recommendations without going the fact finding process so although there is a lot of information contained within this book, to receive bespoke advice tailored to you as individuals, you need to get in touch with a qualified and regulated adviser that can talk you though the process.
What is equity release?
Equity release involves releasing some of the value of your property (or possibly all of it with a home reversion scheme) turning the equity into cash. This can be used for a variety of things.
The history dates back to the 1960’s when the first of the products were launched. As you may imagine, they have progressed hugely over the years with the number of lenders, products, advisers and regulation increasing.
Regulation of the equity release schemes begun in the 1990’s through SHIP (Safe Home Income Plans) which became the Equity Release Council who regulate them today. Regulation around this subject is extremely important due to irreversible commitments and often vulnerable customers.
Schemes are available to people over the age of 55 who own their own property. Different providers have different criteria meaning some properties, applicants, situations etc may not be acceptable so taking advice on the subject is key.
Money can be released in one lump sum (for example if someone required £60,000 for improvements to their home they may do so by applying for just this amount) or in several amounts over the years (for example, if someone required £20,000 for a new car now and £30,000 for home improvements in 2 years, £5,000 for a holiday in 3 years and so on).
There are two types of equity release schemes, one is the lifetime mortgage (retaining ownership) which is the most popular and the other is the home reversion scheme (available to people aged 65 and over).
This guide contains more detail about lifetime mortgages compared with home reversion plans as it is a much more popular product with most applicants wishing to retain ownership of their home.
What’s happening in the equity release market?
Equity release sales are much higher today than 5 years ago with more lenders entering the market in recent years, more products becoming available and more borrowers choosing to use their home to give them a better quality of life.
Some high street lenders have begun to travel over to this marketplace and new products such as the RIO (Retirement Interest Only) have also arrived recently.
The equity release interest rates on many of the products are lower than they have been in the past making products that may not have been very attractive to borrowers in the past perhaps more appealing today.
As a result, the ‘stigma’ of equity release seems to be decreasing with more and more people seeing the number of solutions that now exist in this area.
Informed people are now viewing some equity release products as financial tools to get their desired outcome rather than just a ‘last resort’.
Sales are expected to continue growing over time with people living longer, their pensions being lower than needed, costs rising and still the desire to enjoy their lifestyles.
Equity release in the press
It’s fair to say that over the years equity release has received a high amount of negative press. This isn’t to say it hasn’t been deserved and at times and likely there will be occasions where it was well justified.
In the past many people have taken mortgages with high percentage rates which have rolled up eating away equity in the home. Also, when the borrower has gone to redeem the mortgage there have been large penalties (early redemption charges) in doing so. Many people’s families believed they did not know the terms involved, what the balance would be after a certain amount of years, what the costs would be to redeem and so on. Perhaps some advisers didn’t do enough to show what was being signed up for.
Fortunately the industry is now more regulated than it has ever been so there are stricter procedures in place for giving advice, although you still need to be careful.
Although generally rates are lower than what they were in the past, a mortgage rolling up will still eat away at equity over the years and significant early redemption charges still exist if you decide you don’t want the mortgage any more or want to move to a property which doesn’t meet the lender’s criteria.
My suggestion to avoid being one of these customers is to take thorough advice at the outset from a firm you have researched (look at customer reviews, check the amount they have and if their feedback is positive), understand how the schemes work and perhaps involve family members too. The advice should be tailored to your individual needs and the illustration given to you during the process will document the rates of the mortgage, the financial effects of it rolling up each year and the early redemption penalties involved.
There are of course other things to consider but making sure you and your family understand the product that is being taken is vital to avoid disappointment later down the line.
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Why do people take an equity release loan?
There are lots of reasons that people take equity release products but the main one is to give them a better standard of living in retirement.
This will mean different things to different people but examples of this may be improving their home so it’s either a more enjoyable living space or adapted to their needs, having money available to enjoy family holidays hobbies or hobbies, buying new cars or using the funds to purchase a holiday property.
Some borrowers choose to release equity to help members of their family. For example, someone aged 70 wanting to see their son or daughter buy their first home may choose to release equity now so they can see them get on the housing ladder as if they lived to age 90 it may be another 20 years before they could leave them the money in their inheritance. If the son or daughter had to rent for another 20 years rather than buy, this could have a costly outcome too.
The attitude many borrowers have is that they have worked hard for a long time and if there’s now money that can be released from their home to improve their day to day life with no better alternative methods, they will do just that. Often family members will encourage their decision too wanting to see their Parents, Grandparents etc enjoy one of the most important parts of their life, their retirement.
Even so, it’s still a hard decision to make as most people feel an emotional attachment to their home and leaving an inheritance is important to many people.
The above are just some of the examples but there are plenty more not listed.
Is equity release a suitable solution to anyone that qualifies? What are the pros and cons?
The short answer is no. There are advantages and disadvantages of equity release. Many people question “is equity release safe?”
Equity release schemes can be a solution for the right people and that is why the amount of plans being arranged has been growing year on year but that doesn’t mean it’s a decision to be taken lightly.
There will be situations where an equity release scheme would not be suitable. For example, if you had a large amount of savings, it would likely not be a good idea to release money on a roll up mortgage to use to fund your lifestyle if the mortgage was at a much higher interest rate than the savings.
Also, if you planned to move house in the near future or wanted to leave as much money behind as an inheritance to your beneficiaries, again, an equity release scheme may not be a good solution.
Speaking with an adviser and letting them understand your concerns and priorities will allow them to make a recommendation for a suitable product or advise that you do not go forward.
Lifetime mortgage
As the name suggests, a lifetime mortgage is a mortgage intended for the remainder of your lifetime. This allows you the right to remain in your property until the last borrower passes away or moves in to care as long as the property remains your main residence and you have adhered to the terms of the mortgage. The most significant difference between a lifetime mortgage and a home reversion scheme is that the borrowers remain the legal owner of the home rather than selling all or part of it to a third party.
The maximum amount you can borrow is usually 60% but this will depend on your age and the value of the property when you apply. With lifetime mortgages, the older the borrowers are, the more they can be lent. This is based on the youngest of the two borrowers if the mortgage is on a joint basis. You have to be at least 55 to qualify for a lifetime mortgage.
Other factors may affect the amount that can be borrowed including medical history. For example, borrowers with certain conditions or a lower life expectancy may be offered more borrowing than others.
You can have the money paid to you in one amount or in stages as per the example before. You only pay interest on what’s outstanding so it’s much cheaper to draw the money down in stages unless you have a need for it all now. When you draw down the initial amount your adviser will tell you the amount left in the reserve facility so you know what you can apply for in the future. There is usually a minimum amount you need to draw down if you are taking the money this way.
If you already have a mortgage on your home, you can use equity release to repay this mortgage with any surplus being paid to you for your desired use (subject to criteria). For example, if you are 70 years old and you have come to the end of your interest only mortgage and the lender wants their money back, if the amount you owe is £50,000 and you qualify for £80,000, you could apply to release this amount, pay back your current lender and the £30,000 minus any costs would go to you as borrowers. Any mortgages or debts against the property would need to be repaid on completion as the equity release lender would need ‘first charge against the property’.
Most people opt for a fixed rate mortgage so they know that for the duration of the loan, the interest rate can not raise which helps to calculate at what amount the loan would roll up by if taken on that basis or what the monthly payments would be if servicing the interest. If they are on a variable basis, there must be a cap set at the outset at which the loan is not able to go above.
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The interest methods of equity release:
Rolled up interest
This is the most common type of lifetime mortgage. With this route, no monthly payments are made. This may sound great in principle because your outgoings are not increasing as a result but this means that the interest is added to the mortgage which then increases the balance every month. In doing this, over time your equity in the property decreases and as a result, the value of your estate is reducing so any potential beneficiaries will receive a smaller inheritance depending on what property values do.
When releasing equity the interest is compounded so like an investment that can appreciate at an impressive rate with compound interest built in, the same is happening on the mortgage, rising quicker due to compounding interest.
When going through the advice process, the illustration given to you by your adviser will show the affects on the roll up of the loan over time. For example, what it will look like after year 1, year 5, year 10 etc.
There is an argument based on historic data that the value of your property increases over time too which may soften the effects of a rolled up loan however this can not be guaranteed whereas a loan increasing if you are not making the repayments is guaranteed.
Interest only
Interest only is available on some lifetime mortgages and this means that every month you are required to pay a mortgage payment. These are underwritten at the outset and offered to customers who’s income meets criteria for the lender to offer this method. As the monthly payment is mandatory on this type of scheme, this will only be offered to borrowers that pass this test.
For example, if you had a pension income that was above a certain amount which passed the affordability testing of the lender and you qualified for the mortgage on interest only, you would be charged by direct debit the interest amount. If the mortgage was £100,000 and the annual interest rate was 3.5%, a monthly payment of £292 would be taken.
Some borrowers much prefer this as they know the cost from the outset and are more comfortable knowing that as long as they are making their payments, the level of debt on the mortgage is not rising and eating in to the equity in their home. Any increase in value can benefit the borrowers or their beneficiaries later down the line.
The negative of this payment method is that this monthly interest is an obligation therefore failure to pay may result in the property being repossessed. Always make sure you speak to a financial adviser.
Voluntary interest only
These schemes seem to be increasing and can be a good solution for the right people. These allow you the flexibility to pay some or all of your monthly interest so that the mortgage balance rolls up at a lesser amount or not at all if making the full payment each month.
The difference between this and the interest only scheme is that the monthly payment is not mandatory and is at the choice of the borrower. If the payment is not made, the mortgage will revert to a roll up basis however it would not a be a breach of the mortgage conditions.
Another difference is the flexibility to only pay some of the interest. For example, if you owed £100,000 and your interest rate was 4%, equating to £333pm, you could choose to pay £200pm with the remaining £133 being added to the balance each month. The mortgage would then rise accordingly with compound interest.
With this route, underwriting of income is not usually needed as it’s the customers choice to make the payment or not. These can be a good solution for a borrower that wishes to pay the mortgage in full avoiding the loan increasing but was not able to pass criteria for a strict interest only product. Also it allows flexibility to cancel the monthly payment in the future should it be needed.
Overpayments
On some products, overpayments are permitted on the equity released which is a way of reducing the amount the loan rolls up by or even decreasing the borrowing on an interest only/ voluntary interest only basis. Not all products allow this and the products that do generally allow different amounts to be repaid (for example, 10% per annum) so if this is a preference, ask your adviser to explain what the overpayment terms are. This will also be on the illustration given to you by your adviser.
No negative equity guarantee
The Equity Release Council’s product standards require all products to feature a “no negative equity guarantee”.
In the past, in occasions where people took out roll up mortgages, the balance of the mortgages could exceed the value of the property if property prices dropped. This meant that the borrower (if still alive) or estate would be responsible for paying the shortfall between the value of the property and the loan owed.
Now, if this was to happen, under the ‘no negative equity guarantee’ this shortfall would be written off by the provider and not the responsibility of the borrower or estate to pay.
Downsizing in the future
Peoples circumstances change and sometimes borrowers may need to move to another property. The lenders that are members of the Equity Release Council must include the provision to allow you to move the mortgage across to a new property when you move.
This will be subject to the property that you are moving to meeting the criteria of the lender and there may be rules around the value of property you wish to move the mortgage across to. For example, if you wanted to move in to a retirement property with an age restriction on it, many lenders would not be willing to accept this and would charge you the early redemption charge when you sold forcing you to look for another lender.
As different lenders have different rules regarding this, it is best to ask your adviser to gain a full idea of what is and isn’t acceptable.
Mortgage penalties (early repayment charges)
Lifetime mortgages are designed to be just that so it’s extremely important for the borrower to be certain that this is a commitment they are happy to take on and not just a short term finance solution to be redeemed in the near future. There are exceptions such as death and going in to care where the property must be sold. Downsizing also often means waiving of a penalty but just redeeming the mortgage as you don’t want it any more can prove very costly.
Lenders charge penalties on their mortgages to make up for the interest lost by the mortgage being redeemed. These penalties are usually substantial so reviewing them at the outset is important. This is one of the largest factors to consider when considering a product.
If for example, a borrower took out a lifetime mortgage on the basis of paying for desired items and planned to repay it a year later from some money received such as an inheritance, the chances are that the money lost from setting up the mortgage, paying the professionals, paying the interest and then the early repayment penalty would be very substantial far outweighing the gain in borrowing it. That said, every person has a different situation so speak with your adviser.
The subject of early repayment charges on lifetime mortgages is complicated. The reason for this is different lenders or different products carry a completely different method of calculating the charge. Some may have a fixed penalty (e.g. 3% throughout), some may have one that scales down (e.g. 5% in first 5 years, 3% in next 5 years) or some may be a lot more complicated working off the GILTS (government issued long term stocks) index where the yield of the GILTS on redemption dictates whether a penalty would be payable and what amount.
The details of the penalty will be documented in your illustration so you should make sure you are comfortable with this and all is understood prior to putting anything in place.
There are usually products available with much lower fees to leave but having this flexibility may result in paying a premium elsewhere, for example on the product arrangement fee or the annual interest rate may be higher.
Once your adviser knows your long term plans and priorities, they can advise accordingly.
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Inheritance protection
This is a facility that some lenders offer to make sure a certain amount of equity is always remaining in the property. If you wanted to guarantee an inheritance for your beneficiaries you may look to take this.
If for example, you wanted there to be at least 30% of the property value remaining when you were to pass away or go in to care, the lender can calculate a maximum loan at the beginning to ensure the equity is left at the end. Using this facility would reduce the amount you could release from the property.
Adverse credit history
Some lenders are very flexible on an adverse credit history as the interest roll up mortgage and voluntary interest only mortgage don’t rely on a borrowers obligation to make monthly mortgage payments. That said, some lenders have a criteria where they do not accept certain levels of adverse history.
The subject itself is a large one. Adverse credit can include missed payments, defaults, county court judgements, debt management plans, bankruptcies, repossessions, arrangements with creditors and so my advise will be to give your adviser as much information as you can on the subject (or even better a credit file) so they can match you up with a suitable lender.
A history of adverse credit may have affect an interest only application as there is a strict requirement to make the monthly payment so any adverse history will need to be considered.
To search out your credit history, you can use sites such as Experian, Equifax or Transunion.
Check My File shows data from all three of these credit reference agencies.
Uses of money raised
Everyone has a different reason to release equity so the use of the money ranges but some common ones are as follows:
- Refurbishment of a home
- Adapting a home to be more suitable for later life living
- Paying for holidays and hobbies
- Helping loved ones to get married or on to the property ladder
- Paying for home care and funerals
- Repayment of a term mortgage
- Paying off unsecured debts
Those are just some examples of releasing equity but the use of money is endless considering the number of people taking equity release.
If considering releasing money on a lifetime mortgage to put into other investments (for example, the stock market) be very careful. Take advice from a qualified investments adviser before making decisions of this sort as values of investments can go down as well as up.
Tax on the money and state benefits
Releasing money from your home does not incur tax although having the money in your bank account may mean you are no longer eligible for certain benefits if you were before, for example pension credit and council tax benefit.
During the process, your adviser should be looking to see whether you are entitled to any government benefits in your current situation and explaining the impact the transaction may have on this. You then can decide whether you want to proceed.
A good resource for finding out your benefit entitlement is Entitledto.
Home reversion scheme
Home reversion plans are a completely different concept to a lifetime mortgage. A home reversion scheme involves selling part or all of your property to a provider in return of a tax free sum, an income or the combination of the two.
In addition to the money you receive, you get a lifetime tenancy agreement meaning you can stay living in the property for the remainder of your life. You need to be at least 65 years old to qualify for this scheme.
If the property is sold in the future, you would share the proceeds with the provider based on the share that you each own.
For example, you may own a house worth £250,000. You agree to sell 50% of your home to a provider (50% share worth £125,000) for £62,500 on the basis you can remain living there and the provider may have to wait a long time to get their money.
If the property was then worth £400,000 when it finally sells, each party would get £200,000 as they both own 50%. In this instance, the scheme applicant who sold half of there house would have received £262,500 in total and the right to remain in the house.
The provider is likely to make a person aged 80 a better offer for the share of the property that they are buying than to a person aged 70. The reason for this is they get their money back when the property is sold in the future so a shorter life expectancy usually reflects in the amount you receive.
The main benefit of this type of transaction is that there is no mortgage involved so no loan that can roll up or payments that can be missed.
The disadvantage of equity release if you are taking a home reversion plan is that you no longer own all or part of your home so if it increases in value, you will only see the increase on your share (or not at all if you have sold 100% of it).
As a result, lifetime mortgages are a lot more popular with people in general wanting to keep the property in their name.
Again, a very big decision to make if you were looking to do this so speaking with a qualified adviser and taking legal advice are essential. I would also highly recommend telling your family about your decision so they too can inspect the proposal and there are no surprises later down the line.
The alternatives to equity release
Although it’s an advisers job to match you with a suitable product, whether that’s a lifetime mortgage or a home reversion plan, it’s also their job to point out any possible alternatives and to explore these too. Often there may not be any and that is why the transaction goes ahead but not considering other routes is not acceptable.
Some alternatives may be as follows:
- Moving to a smaller property or a cheaper area
- Choosing to continue working to bring in an income
- Taking in a lodger to increase household income
- Choosing a standard mortgage product if you qualify
- Borrowing money on an unsecured basis
- Asking a relative to support you financially
Again, everybody has a different situation so expecting all people to downsize at this time, relocate or ask their family for money is perhaps not possible or something they may not want to do.
Moving a lodger in to your home may also not be appealing for everybody. For someone wanting to explore this, SpareRoom may give you an idea of the rent that would be attracted from the room.
You can find out more here about the Rent A Room Scheme from the government.
The adviser will look at their clients situation by asking questions and may advise that equity release is completely unsuitable and they would benefit from a different solution. This may even be a standard mortgage if the applicants still qualify.
Involving your family
It is completely down to you whether you involve your family in this decision. Many advisers feel more comfortable knowing the family were aware of the transaction taking place, had seen the costs, early repayment charges and terms etc to reduce the chance of a future complaint to say their loved one did not understand the terms of the transaction.
That said, it is some borrowers preference to keep their financial affairs away from their family but an adviser should always encourage you to think carefully about the decision you make.
If you don’t want to tell your family, you may prefer to tell a trusted friend or the executor of your estate. If you have a life insurance policy you should let your family know.
Getting the correct advice – Talking to an equity release specialist
Talking to an equity release specialist is probably the most important part and will impact a lot of the above. They will have access to an equity release calculator and other useful mortgage tools. Many brokers will offer a free equity release consultation to explain your options.
Although significant time has gone in to putting this guide together, due to the number of products and lenders in the market, receiving quality advice is fundamental rather than reading any publication or consulting with anybody that isn’t qualified in the subject.
It is not possible for any adviser to make a quality recommendation until they know the reasons behind why you are considering a scheme, your income at home, your outgoings, your family, future plans etc so make sure when you go to apply, you look for an adviser you feel comfortable with.
The qualification to give equity release advice (Certificate of Regulated Equity Release) is in addition to a standard mortgage qualification (Certificate of Mortgages and Practice) so you will need an adviser with this qualification. The company giving the advice must also be regulated either directly by the Financial Conduct Authority (FCA) or as an appointed representative of a firm that is directly authorised.
I would recommend a mortgage and life insurance adviser with access to the whole of the market rather than a smaller panel of lenders as this will allow a larger range of products increasing the chances of matching you with the most suitable one. The adviser should be recommending providers that are members of the Equity Release Council.
In addition to your lifetime mortgage they should also be able to give you advice on life insurance.
Make sure you disclose all information to your adviser as anything important that’s held back may lead to the wrong product being recommenced.
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Solicitors
All Equity Release Council approved providers require you to seek independent legal advice. It is best to make sure your chosen solicitor has equity release experience and ideally agree a fixed legal fee before proceeding. Some solicitors may charge a premium for the equity release work carried out.
You may not know a firm who you would like to work with and if not, it’s likely your adviser can recommend a company. Be aware though, you are under no obligation to take their recommendation and the choice is completely yours.
Whoever you do choose to work with though must be acceptable to the lender which will mean authorised in the legal side of equity release and on the legal panel of the lender.
Fees involved, equity release interest and understanding the equity release products
There can be various fees involved with equity release so the best advice is ask your adviser and solicitor to quote once they know what’s involved.
Examples can vary largely but fees may be payable for the following areas:
- Valuation of your property
- Lender fee for the product
- Adviser fee for giving advice and arranging the transaction
- Solicitors fee for legal work
- Bank fees for sending money
Thank you for taking the time to read this guide and learning about the key equity release points. I hope the information throughout has been useful to you and given you a better understanding of what’s involved, the equity release pros and the cons and whether or not it’s something you wish to explore further.
They are experienced, which can boost your chances of being approved.
