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What is equity release and how does it work?

Written By:
Myles Robinson - Expert Finance Advisor

Posted: Oct 24, 2022

Equity release explained – What is equity release?

Releasing equity is a way to unlock a cash lump sum from your property if you are over 55 and have your own home.

How does equity release work? What are the pitfalls? What are the alternatives?

Depending on your personal circumstances, an equity release product could be available under the age of 55. Get equity release advice below:

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This comprehensive guide to equity-release mortgages provides information on these topics. Our FAQ section addresses the most common questions about releasing equity.

What’s an equity release mortgage?

Equity release mortgages enable homeowners over 55 to access and release cash in their homes.

Equity release is borrowing equity that you have built up through your mortgage and it can be released in cash lump sums, small instalments, or a combination.

A lifetime mortgage is the most popular form of equity release.

What does it mean?

You can take equity release via a lifetime mortgage. This would allow you to borrow the equity in your home by securing a loan against it.

The property will remain yours, and interest will accrue over the term. However, the debt plus interest are mostly repaid when you die or enter care. The property is usually sold to pay off the loan.

Get in touch if you want to discuss whether this might be a good option, as we can help you determine if it is the right course of action based on your specific circumstances and needs.

Borrowers’ obligations

You have the option to pay interest or not, but certain things must be done.

These include…

  • The property must be insured.
  • It must be kept
  • It is not allowed to be left empty
  • It shouldn’t be rented.

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Types of equity release

Lifetime mortgages are the primary type of equity release, of which they come in many forms and are not the only equity-release product.

The differences between the different types of lifetime mortgages are determined mainly by how easy you can access your cash and how much interest is paid.

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Lifetime Mortgages

These are the main types of life mortgages:

  • Roll up: Withdraw money in one lump sum with no monthly payments. The term will see interest accrue, but it will be paid at the end. This is usually when either the borrower or their partner (if it’s a jointly applied loan) dies or moves into long-term care.
  • Drawdown This works the same way as a roll-up plan but allows you to withdraw money in monthly instalments. Only capital that you have drawn down is subject to interest.
  • Flexible: While you can withdraw your equity in a lump sum, you are allowed to make voluntary repayments during the term to reduce the amount due at its end.
  • Enhanced Only for customers with particular health conditions. This allows you to borrow more equity, often at a lower rate.
  • Interest only: There are two options. One, you can pay off a portion of the accrued interest each month and have a smaller bill at the term’s end.

Home reversion plan

Home reversion plans are another form of equity release.

These products allow you to sell a portion or all of your home to a home-reversion provider and usually charge between 20-60% and monthly instalments or a lump sum.

The property would be your co-owner, but you won’t have to rent any of the homes that are no longer yours. The reversion company receives its share of the proceeds when the property is sold.

The UK’s home reversion market is smaller than that of interest-only mortgages.

Most retirement experts don’t recommend these products as you would have to sell your primary asset and settle for less money than what your home is worth.

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How can you release equity from your house?

This is a step-by-step guide to how to apply for equity releases.

  1. Get professional advice. Equity release is not something to take lightly. It’s also a serious decision that you need to make. We will match you with an equity release specialist for a no-obligation, free chat about your circumstances and needs.
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  1. Fill out your application: Your equity release advisor will closely work with you to complete your application and offer bespoke advice before submitting it to the equity release provider. You will need to submit documents as proof of identity and proof of address at this stage.
  2. Legal, due diligence and valuation: Your advisor will contact your solicitor (they may recommend one if they don’t have one) to arrange a property valuation. After a successful valuation, your solicitor will start the legal paperwork.

Once these steps are completed, your solicitor will assign a completion date and make arrangements for you to claim equity release funds.

How long does it take to complete the process?

You can expect to have your funds available within eight weeks for lifetime mortgages. Home reversion plans typically take 10 to 12 weeks before equity release.

Eligibility criteria

You must be at least 55 years old or 65 if you have a home reversion program. Providers prefer that you have paid off your mortgage and retain 100% equity in the property.

It is possible to get an equity release for existing mortgage debt. However, you will have to settle the outstanding mortgage balance as part of the agreement.

The equity would typically be used to pay off the mortgage debt, and any money remaining would be deposited into your bank account.

What equity release are you eligible for?

Many equity release providers limit the amount they offer to the property at between 20% and 50% of its market value. Some offer more than others, while others go lower.

Based on the following factors, they will determine the exact amount that you are eligible for.

  • Your age The more equity that you can typically release, the older you will be.
  • Your health: Those with serious health problems may be eligible to receive more equity. You can qualify for more equity if you meet over 100 conditions. Talk to an expert to get a complete list.
  • The value of your property: Providers will base their loan amount on the market value of your home. As people with homes built differently than the property type won’t be eligible for equity release, this might also play a role.
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Minimum equity release amounts

Lenders will approve equity release applications only if the deal is valued at a specific amount.

Although there is no standard limit, most providers will approve an equity release application if the deal is worth between £10,000 to £15,000. However, more prestigious schemes may set it at £100,000.

Another area where your home’s value can play a role is this: Most equity release providers won’t consider your application unless your home is worth at least £70,000.

Equity Release Calculator

Using our equity release calculator here, you can find out how much equity you might be eligible for.

What can you do to get out of an equity-release plan?

It is possible to withdraw from an equity release plan. While some lenders may impose early repayment fees, others may levy different charges.

A lump sum, such as an inheritance, could be used to pay an equity release loan early, whereas another option is downsizing the property you live in.

What lenders offer equity release?

The Equity Release Council restricts the number of lenders allowed to operate in this market, but the market is large and has many choices.

The most prominent equity release providers are…

Be aware that not all equity release providers offer the same level of flexibility. Some providers provide greater flexibility than others, while some have strict restrictions about the capital you can release from your house.

Talking to an independent equity release advisor is the best way to avoid lender-related pitfalls and find the best provider to offer you a deal.

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What will it cost?

Equity release rates may be higher than for standard residential mortgages.

The average interest rate for equity release is 5% at the time of writing; however, if you shop around, you may find a better deal.

You won’t usually have to pay interest or settle debt until the end, but additional costs and fees could be added.

  • Valuation fees
  • Application and administration fees
  • Broker fees
  • Legal costs

These may vary between providers, but you can contact us to get a breakdown of the deals you are eligible for.

Match with an equity release advisor today

Equity release is a way to unlock capital that you have in your home to pay essential living expenses or to make your retirement more comfortable. However, it is not something you should take lightly.

Our expert brokers are all trained in equity release and we are regulated by the Financial Conduct Authority. Start your application online below:

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What are the chances of me losing my home?

No, your home will remain secure until your death or long-term care.

Your home is yours to keep as long as you are alive. If you are married and one of your partners dies or is taken into care of, the other partner may remain in the home.

Can I still move into my house if I have taken equity release?

Yes, if you are already in an equity release program, you might be able to “port” it with you after you sell your current home.

Providers must approve you lending the same amount on the property of equal value. You can still move into your new home, but you may need to repay some of the borrowed capital.

What tax implications should you be aware of?

Yes, however, the equity you get from your home is exempted from tax. It may have implications depending on how you plan to use it.

If you choose to invest the equity in a savings account or make a purchase, you may be subject to tax on any income, gains, or interest you earn.

If you don’t want to spend your equity release funds immediately, there are many ways to save them or invest them. You can also place the funds in personal savings or an IISA account to benefit from a tax-free allowance.

Another tax impact of equity release is the possibility of reducing your inheritance tax liability if your estate decreases in value.

While your beneficiaries may not inherit as much via your assets, you might be able to pass on your pension savings outside your estate if equity release was taken during retirement.

What do I need to be able to make a last will and testament?

It’s possible. It is possible. Most lenders will recommend you have a lasting power of attorney (LPA), if you are taking equity release. In some cases, they may even insist that it be in place.

An LPA (Living Powers Agreement) is a legal document that allows you to name one or more trusted individuals to take your decisions if you cannot do so due to illness or decline in your mental capacity.

What happens to my benefits?

A rise in savings due to equity release could affect means-tested benefits like pension credit, savings credit, or council tax benefit. There are limitations on the amount of savings you can make before your benefits stop being available.

Can equity release be used to purchase a property overseas?

Some lenders will allow you to release equity from your home to purchase an overseas property.

If you have taken equity release, certain rules dictate how long you can stay in your UK home.

While it’s impossible to finance a move abroad entirely, you can use a lifetime mortgage to purchase an overseas property you frequent.

Can equity be released on more than one property at once?

Yes, however, selling the second property might be more financially beneficial than using equity release again. For more information, speak to an expert.

If I have equity release, can I rent my house?

Some lenders will let you release equity on your property if there is a lodger or tenant. However, it is essential to talk to an equity release specialist to determine which lenders will be willing to accept equity release in these cases.

Is equity release secure?

Equity release is a highly-regulated type of borrowing. The Equity Release Council has implemented several safeguards to protect those accessing it.

You could end up with significant debts that must be paid off once you can no longer use the house, and if you intend to leave anything behind, it might be impossible to pass the property on to your beneficiaries.

Also, be aware of the possibility that your means-tested benefits claims may be affected by moving money from your equity into your savings. This could impact your eligibility for council tax benefits and pension credit.

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