What is Equity Release and How Does it Work?

The equity release industry has changed dramatically since the Financial Services Authority (FSA) now the Financial Conduct Authority (FCA) regulated the equity release market in 2007. Below is a brief history of how the equity release market has developed since the mid 60’s.

  • First plans were released in 1965
  • The 1980s and 90’s were the troubled years for Home Improvement plans. Rising interest rates plus falling house prices resulted in negative equity for some
  • The need for consumer protection led to the formation of Safe Home Income Plans (SHIP) in 1991, which set down various product safeguards such as the “no negative equity guarantee” meaning the customer will never owe more than their home is worth and no debt will ever be left to the estate.
  • In 2012 SHIP was re-launched as the Equity Release Council, broadening its membership from providers only, to include; advisers, solicitors and surveyors ensuring equity release products continued to be safe and reliable for consumers. ERS as members of the Equity Release Council, are required to offer products and services which conform to the best practices of the sector meaning customers like you are kept fully informed and increasingly protected
  • 2000’s: with a changing market and FSA (now FCA) improves regulations, more SHIP products became available to the consumer, providing a safe and easy way to release equity fro their homes
  • £1.38 billion of equity release loans were made in 2014 – this was the largest amount of equity release lending ever recorded*
  • 77% of home owners believe their home is their biggest financial asset in retirement (research carried out in December 2013 with 1511 homeowners aged 55 and over)*
  • Over 60’s have nearly £1.3 trillion of equity in their houses (Top of the Ladder Housing report by DEMOS)
  • *Source: Equity Release Council

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What is Equity?

The value of your home, minus any outstanding mortgage or secured loan you may owe, can be described as your “equity”. For example: if you own a property worth £150K and you have have a small mortgage of £30K then the equity in your home is £120K, which is 80% of its total value.

The good news is that house prices continue to rise in the UK. According to the UK House Price Index (HPI) for June 2017, it shows an annual price increase of 4.9% with an actual increase since May of 2017 of 0.8% alone.
(source UK Gov House Price Index (HPI) for June 2017).

Currently the average cost of a home in the UK is approximately £223,257. Our example diagram below gives you an idea of what a house valued at £223,257 will be worth in 5, 10 and 20 years time assuming house prices continue to row at the annual rate of 4.9%.

what is equity in your propertyEquity release is the process of unlocking some of this value, turning it into a tax-free lump sum of cash. You could then use this released equity to pay off any other debt; a mortgage, credit cards, for a one-off purchase such as a badly needed new car to improve your lifestyle or to help loved ones, such as a child or grandchild with their own house purchase.

If you are a homeowner aged 55 or over, you could be eligible to take advantage of releasing equity from your property by securing a Lifetime Mortgage. Equity release could improve your financial situation, giving you a more comfortable retirement.

Please be aware that all plans will reduce the value of your estate and may affect your entitlement to state benefits. This will be checked for you during the advice process.

How it Works

The lender gives you a tax-free lump sum (the equity released from your home) which can be used by you for any legal purpose. You can, with some products, make a monthly or sometimes yearly payment to keep the amount borrowed at the same level, or pay nothing at all as the interest is ‘rolled up’ into the loan.

There are some Lifetime Mortgage products available where you make no payment at all, some where you ,ake the interest only monthly payment in full, others allow flexible ‘ad hoc’ payments when you’re able or wish to. The amount borrowed plus any interest accrued during the lifetime mortgage is repaid out of the proceeds from the sale of the property after you die or o into long term care.

How much you can borrow depends on the value of your home and your age. The older you are the higher the percentage of your property’s value you can borrow. Generally, you will not be advanced more than 50% of the value of the property. Most loans are fixed interest for the life of the loan, thus reducing the risk to you of rates rising.

The Different Types of Equity Release

Lifetime Mortgages are currently the most popular type of equity release scheme. The information below is an overview including the advantages and disadvantages.

These plans enable you to raise a lump sum at a fixed rate of interest. There can be no monthly payments required to the loan if you so choose. Interest is charged monthly and added to the loan increasing the overall debt owed. This type of equity release Lifetime Mortgage is also known as a ‘roll up’ scheme. The total amount owed including interest ‘rolls up’ and will be repaid when the last home owner on the deeds dies or moves into long term care. The estate will usually have 12 months to sell the property once the last home owner on the deeds dies or moves into long term care.

There are flexible plans with monthly payments, sometimes called
‘interest only’ options. Some plans allow voluntary overpayments to be made to the capital owed without incurring any early repayment charges.

You can take an initial lump sum with potentially a reserve account giving further funds available to drawdown as you need them. Interest does not accrue on the money until you release it from the reserve account, which allows you to minimise the interest charged and have a safety net to fall back on.

There are many flexible schemes and our professional advisers can provide you with a free consultation and fully discuss all the options before making a recommendation based on what best suits your individual needs.

In summary; you can have no monthly payments at all or make monthly payments. There is the security of knowing you continue to have ownership of your home. You have the right to remain in the property for the rest of your lives and the plan is repaid when the property is sold which usually occurs when you die or enter long term care. You can of course sell the property at any time and downsize if you choose, you can pay off the mortgage completely or take it with you.

Example of:

(i) £170K House Value – Lifetime Mortgage Loan –

lifetime mortgage interest only option

(The approximate figures above are based on a 65 year old couple, releasing £35K in equity with an annual projected house price increase of 4.90% and a fixed annual interest rate charged on the loan for life of 4.36% which is a typical interest rate available on a moderate LTV plan at the time of writing (June 2017) and paying approximately £129.67 per month.)

(ii) £170K House Value – Lifetime Mortgage Loan –

lifetime mortgage no monthly payment option

(The approximate figures above are based on a 65 year old couple, releasing £35K in equity with a fixed annual interest rate charged at 4.36% and paying no monthly payment, allowing the loan to “roll up”.)

Advantages and Disadvantages of Equity Release

Advantages of Lifetime Mortgages

  • Plans are available from age 55 to age 95
  • You will benefit fully from any future increase in property value
  • Option of fixed interest rates for the lifetime of the plan
  • Flexibility of making monthly payments or not, depending on the recommended product
  • Optional guarantees to protect a portion of your estate for your family

Disadvantages of Lifetime Mortgages

  • The Lifetime Mortgage balance will increase significantly over time if you make no payment to the mortgage
  • Your tax position and eligibility for means-tested benefits may be affected
  • Lifetime Mortgages usually cannot raise as much money as a home reversion plan
  • Early repayment charges may apply
  • Your beneficiaries may receive a reduced inheritance

The above described a “Lifetime Mortgage” product. To understand the features and risks, ask for a personalised illustration from one of our professional advisers.

Home Reversion Plan

This less popular plan, regulated by the Financial Conduct Authority, currently accounts for only about 10% of all equity release sales. Despite this, Home Reversion Plans are still an important consideration in the overall decision making process.

In return for selling part or all of your property to the reversion company, you receive a tax-free limp sum or you can opt for a lifetime income.

You also receive a lifetime lease, which guarantees residence in the property for the rest of your life.

Advantages

  • Plans are available from age 65, or if poor health exists, from age 55
  • A guaranteed percentage of the property will pass to your beneficiaries
  • You will benefit from the increase in value on your share of the property
  • There is no accumulation of interest, hence no growing debt
  • The older you are, the more cash you can release
  • It raises more money than a Lifetime Mortgage

Disadvantages

  • You will no longer completely own your own home
  • if you sell all your property, your estate will not receive any inheritance
  • You will not retain any property price escalation on the proportion of the property sold
  • Reversion companies are more selective about the properties they release on
  • If you die shortly after taking out the plan, there could be a disproportionately high loss to your estate

The above describes a “Home Reversion Plan“. To understand the features and risks ask for a personalised illustration.

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Our Success Stories

What our Customers say About Us

“We just wanted to be able to stay in our home for some years to come and the local advisor from Equity Release Scotland was very helpful and understanding. We now feel very comfortable that we can afford stay in our home for the foreseeable future and have options further down the road.”

Mr & Mrs Davidson

Glasgow

“What a relief, our mortgage and debts repaid, one easy monthly payment which we can afford and the option to stop paying that in the future if we choose’ . The process was smooth and everything was clearly explained to us. We had lots of questions but our adviser was always available to answer any concerns we had....thanks a million”

Mr & Mrs Curran

Edinburgh

Our Guarantees

Why You should always choose a product from a lender approved by the Equity Release Council

Guarantee 1

equity release council logo approvedYou have the Right to Remain in your Home for as long as you choose

Guarantee 2

equity release council logo approvedYou will NEVER owe more than the value of your home due to the "no negative equity" guarantee.

Guarantee 3

equity release council logo approvedYou have the freedom to move to another property without financial penalty (subject to provider criteria)

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