Equity Release including Lifetime Mortgages and Home Reversion Plans will reduce the value of your estate and can affect your eligibility for means tested benefits.

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Equity Release

What is Equity Release?

Equity Release is a way of releasing the value tied up in your home to generate a tax-free lump sum, or income, without selling or downsizing. In most cases, you continue to own the 100% of the property, so keep the deeds in your name, and have the right to remain in your property for life.

There is, one case, when you would not continue to own the property and that is a home reversion plan. However, there is also a scheme called ‘Home Reversion’ where you sell some, or all, of your home and therefore lose ownership of the property.

Many people who have retired have seen their savings dwindle from a combination of low interest rates and inflation. While others might have failed to make suitable provisions for their income in retirement.

While getting a mortgage, in most cases, for those in retirement, or over the age of 70, can also be very difficult.

An Equity Release plan is a possible solution that makes use of your most highly asset.

How Can Equity Release help?

There are many myths surrounding Equity Release. People are often scared off by stories that you could lose your home, saddle your children with debts, won’t be able to move or it’s unsafe and unregulated, but it has come a long way since regulation came into force in 2007.

If you are 55+ you can safely take advantage of your greatest asset to fund your lifestyle, provide much needed funds to help your children, help with healthcare or just supplement your pension income. For all these reasons, and more, it can be well worth considering.

How does Equity Release work?

There are two types available:

You take out a mortgage secured on your property provided it’s your main residence, while retaining ownership. You might be able to ring-fence some of the value of your property as an inheritance for your family.

You can choose to make repayments or let the interest roll-up. The loan amount and any built-up interest is paid back by selling the property when the last borrower dies or when they move into long-term care. You remain the owner of your home.

You sell part, or all, of your home to a home reversion provider in return for a lump sum or regular payments. You have the right to continue living in the property until you die, but you must agree to maintain and insure it. You can ring-fence a percentage of your property for later use, possibly for inheritance by only selling part of your property.

The percentage you retain will always remain the same regardless of the change in property values, unless you decide to take further cash releases. When the last borrower dies, or moves into long-term care, your property is sold, and the sale proceeds are shared according to the remaining proportions of ownership.

How does a Lifetime mortgage work?

A lifetime mortgage is when you borrow money secured against your home, provided it’s your main residence, while retaining ownership.

  • You might be able to ring-fence some of the value of your property as an inheritance for your family.
  • Also, some providers might be able to offer larger sums if you have certain medical conditions, or even ‘lifestyle factors’ such as a smoking habit.
  • The home still belongs to you and you’re responsible for maintaining it.
  • Interest is charged on what you have borrowed, which can be repaid or added on to the total loan amount.
  • When the last borrower dies or moves into long-term care, the home is sold and the money from the sale is used to pay off the loan.
  • Anything left goes to your beneficiaries. If your estate can pay off the mortgage without having to sell the property, they can do so.
  • If there’s not enough money left from the sale to repay the mortgage, your beneficiaries might have to repay any extra above the value of your home from your estate.
  • To guard against this, most lifetime mortgages offer a no-negative-equity guarantee (Equity Release Council standard). With this guarantee the lender promises that you (or your beneficiaries) will never have to pay back more than the value of your home. This is the case even if the debt has become larger than the property value.

Types of lifetime mortgages

There are two different types with different costs you can choose from.

You get a lump sum or are paid a regular amount and get charged interest which is added to the loan. This means you don’t have to make any regular payments. The amount you borrowed, including the rolled-up interest, is repaid when your home is sold.

With, roll-up it is important to understand the impact of compound interest. Each year the mortgage amount rises by an agreed annual rate of interest. In the first year this interest is based only on the original amount borrowed but in subsequent years there is also interest on the previous years’ interest. This ‘compounds’ the interest meaning each year the amount of interest is higher than the previous year.

You get a lump sum and make either monthly or ad-hoc payments. This reduces, or stops, the impact of interest roll-up. Some plans also allow you to pay off some of the capital if you so wish. The amount you borrowed is repaid when your home is sold.

Is it right for me?

It depends on your age and personal circumstances.

There are a few factors to consider before you take out a lifetime mortgage.

  • It will reduce the amount you leave as an inheritance.
  • With an interest roll-up mortgage, the total amount you owe can grow quickly. Eventually this might mean you owe more than the value of your home unless your mortgage has a no-negative-equity guarantee (Equity Release Council standard). Make sure your mortgage includes such a guarantee.
  • A mortgage with variable interest rates might not be suitable because the interest rate might rise significantly. But this is capped for mortgages meeting the Equity Release Council standards.
  • It might affect your tax position and entitlement to means-tested benefits. Lenders will expect you to keep your home in good condition within the framework of reasonable maintenance. You might need to set aside some money to do this.

If any of these might be a problem, an equity release scheme might not be suitable for you.

Raising income from your home is a big decision and might not be your right or only solution. It’s important to discuss it with your family so they understand how it works and how it may affect them.

It’s also essential to get professional financial advice to ensure that it would be right for you, meets your needs and to explore other options that may be available.

As One Stop Finance does not hold the appropriate license for Equity Release mortgages we tap into our affiliate company, Lifetime Mortgages, to offer a referral to a known party who have years of experience which enables them to provide the right advice for our clients.

For more information about Equity Release,
please call us on 020 8441 2605 or 01442 232 272.

Alternatively, for our enquiry form,

Equity Release including Lifetime Mortgages and Home Reversion Plans will reduce the value of your estate and can affect your eligibility for means tested benefits.