For homeowners who don’t have a lot of cash on hand but hold significant equity in their home, equity release can be a useful way to access a tax free lump sum that offers some financial security, although there are risks involved.
In this guide we’ll explore equity release in depth, including what it is, the different kinds of equity release products, how equity release works, and whether it’s a good idea for you.
The ‘equity’ you carry in your home is another way of describing the proportion of the property you own outright – your home’s market value, minus any loans you have secured against the property.
Equity release is the name for the process of turning that equity into a cash lump sum that you can use as you see fit, most commonly to pay off your mortgage or secure your retirement in later life.
Equity release enables you to recover money in the value of your property. There are two main kinds of equity release products: a lifetime mortgage, and a home reversion plan.
Lifetime mortgages are the most popular form of equity release. A lifetime mortgage involves you taking out a loan which is only repaid when you enter into long-term care or pass away.
This type of equity release is only available to people over 55, and allows you to access tax free cash against your home without having to move out. You will usually need to pay interest on the loan, but it is often at a fixed rate, so the level of interest you pay will never increase.
Reversion is less common than lifetime mortgages, and helps people sell part of their home for a tax free lump sum payment or regular income. It is aimed at homeowners aged 65 and over.
Once the homeowner dies or goes into care, the property in question will go to market and the equity release providers will receive their share of the proceeds from the sale.
The process of applying for an equity release loan varies in length, and depends on the types of equity release product you’re using.
It can take somewhere in the region of 4 to 6 weeks to get lifetime mortgages set up, whereas a home reversion scheme may take a little longer to organise – it could be 6 to 8 weeks before you have your loan secured, if it’s clear to the equity release provider who the stated owner of the property is.
You don’t repay a lifetime mortgage in the way you would a normal mortgage. You’re not obligated to make monthly payments. Instead, interest is added each year – this increases your balance, which will need to be repaid should you enter into long-term care or pass away.
If the holder dies or goes into care and the mortgage is held jointly, your spouse or partner can continue to live in the home until they either die or go into long-term care, but the holder’s loan – plus interest – will need to be repaid in full.
If you’re in a debt repayment programme like a Individual Voluntary Arrangement (IVA), the chances are the contract for the agreeement will contain what’s known as an ‘equity release clause’.
An IVA is a legally binding debt solution that allows people to repay debts to creditors through a series of monthly payments over a timeframe of five or six years. The equity release clause allows homeowners to end their agreement early.
It works like this. If you are in an IVA and have a significant equity in your home (over £5,000) you may be asked to release some of that equity to pay towards your debts.
Equity release enables you to end your arrangement after five years, whereas those in an IVA without significant equity will make debt repayments for a further year.
Many forms of benefits can be disrupted by sudden changes in your income or savings, which could push you above the threshold needed to qualify for certain forms of financial support.
If you are releasing equity and using the lump sum to pay off your mortgage or another loan, you will not repay the mortgage provider or lender through your personal bank account. Instead, the money is taken straight from your mortgage provider and sent to the lender you’re repaying, via a solicitor.
Because the money will never land in your bank account, an equity release scheme will not affect your benefits in any way, even means tested benefits like pension credit or universal credit.
Equity withdrawal offers the ability to make large amounts of money to spend which may allow you to take important financial steps in your life, such as paying off an outstanding loan or outstanding mortgage, or even just being able to afford to remain in your home.
It could also be useful to release money for cover major financial expenses later in the life, such as long-term care, or to supplement your retirement income when you no longer have a regular income to rely on.
That said, there are plenty of downsides to equity release schemes. With a lifetime mortgage, you could end up in negative equity (owing more on your home than you borrowed), whereas the home reversion scheme means you’ll never receive money to the market value of your home when it’s time to sell.
That’s why you should always seek professional advice or speak to a specialist equity release adviser, and consider all your equity release options before making a decision.
Since being established in 1991, the Equity Release Council has worked to promote safe equity release products in the UK.
They work with the support of some of the biggest equity release providers, and can offer equity release advice to anyone considering using equity release as a means to access cash. You can find out more here.
If you’re struggling to manage your finances and aren’t sure which way to turn, you can talk to IVA Plan.
We’re one of the UK’s foremost providers of money advice and debt repayment plans, and our team of independent advisers has years of experience helping people find solutions to financial problems.
For free initial financial advice and guidance on how to repay debts, speak to an independent financial adviser at IVA Plan today.